Morgan Stanley: Systemic Mistrust or Bad Financials after the Financial Crisis?

"Morgan Stanley by any measure is a safe and solid investment bank. Except for one: The amount of trust people have in the whole financial and political system. It's just about zero,” according to Jesse Eisinger of The New York Times in October 2011.[1] Even as there is undoubtedly an element of hyperbole in his conclusion—for zero trust in the financial system and governments would occasion far greater problems than the world faced at the time of Eisinger’s report—his broader point that bankers would be held accountable one way or the other for not having learned their lesson on derivatives (and risk more generally) is valid. The subtext is that even though banks like Morgan Stanley were in actuality in solid financial shape, they deserved the negative repercussions from the systemic skepticism that the banks themselves brought about by virtually ignoring risk analysis in preference to a run of profits and (not coincidentally) bonuses.

The full essay is at "Morgan Stanley after the Financial Crisis."

1. Jesse Eisinger, “Between the Lines, Wall St. Banks Face a Deficit of Trust,” The New York Times, October 12, 2011. 

Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, The New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.

 Does expertise on these make one an expert on politics?  

The full essay is at "Investor Assessments."

Source:

Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012. 

The Market Mechanism: Complicit in E.U. Debt Crisis

According to The New York Times in late 2011, “How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.” In going through these culprits and how they interrelated, it should not be lost that the market mechanism itself can be held as suspect, for at the very least it enabled the furtive games to be played for far too long. Indeed, the market itself did not do a good job for years in providing accurate risk-return relationships.

The full essay is in, "Essays on the E.U. Political Economy," available at Amazon. 

The “Fiscal Cliff” in U.S.: Real or Hyped?

As the U.S. economy slogged through a recession following the credit crisis in 2008 and the E.U. was weighed down by the ballast of austerity in the most indebted states, developing economies, including those of China and India, kept the world economy afloat. As a group, those economies grew 7.4% in 2010, 6.2% in 2011, and 5.5% in 2012. In keeping with this trend, the Global Economic Outlook of the Conference Board predicted 4.7% for 2013. Fortunately, the Board also predicted a pick-up in consumer demand in the U.S. to pick up the slack. “The only really short-term positive impact that we can have is that we can see a faster return of demand, particularly in the U.S.,” the Board’s chief economist said. As of 2012, such a return was not necessarily “in the cards.” The pessimism can be seen in the projected world economic growth of 3 percent, which is lower than the 3.2% expected in 2012 and the 3.8% achieved in 2011. That the projected growth rate of only 1.8% for the U.S. in 2013 is less than the projected 2.1% for 2012 indicates that increased demand in the U.S. was not expected to fully pick up the slack for the slowing-down of the developing economies. Here I want to point to a major factor in the U.S.: the possibly impending “fiscal cliff” of cuts in the federal budget and the end of the Bush tax breaks  that were scheduled to begin on January 1, 2013 unless Congress and the White House could come to a legislative agreement beforehand on an alternative way of holding down the deficits. Presumably that way would have a less recessionary effect.

The full essay is at "The Fiscal Cliff in the U.S."

Predicting Future Events in Political Risk Analysis: On the European Debt Crisis

Political risk assessment is a nasty business in that the future has a stubborn habit of not wanting to be too predictable. Even though tomorrow displays a remarkable tendency to be similar to the world of today—the status quo enjoying the right of default—forecasting future events is notoriously difficult. To use statistics to nail down probabilities may actually involve considerable luck. Not even the stature of the person making the predictions may be decisive, after all. I have in mind the predictions of Alexei Kudrin, the former Russian finance minister, on the European debt crisis and the euro.

                                                             

The full essay is in Essays on the E.U. Political Economy, available at Amazon.

Credit Downgrades in the E.U.: Blaming the Messenger?

On January 13, 2012, “S&P stripped France and Austria of their prized triple-A credit ratings and reduced the ratings of seven other [states in the euro-zone], including Italy, Spain and Portugal. Germany, Finland, the Netherlands and Luxembourg were spared, along with Belgium, Estonia and Ireland.”[1] Italy was downgraded from single-A to triple-B-plus. "We think there are elements missing in their analysis … when it comes to the growth strategy … there is no space for maneuver for fiscal impetus but we believe that a growth strategy will have to rely mainly on structural reforms," Olivier Bailly, an E.U. Government spokesman, told reporters.[2] “Bailly also called the timing of the S&P decisions ‘very odd’ citing fiscal policies adopted to weather the crisis in the downgraded countries as well as the two successful debt auctions in Spain and Italy last week. ‘We think that there is a strange timing in this announcement considering the signals from the markets,’ Mr. Bailly said.”[3] The “very odd” and “strange timing” reference a tacit political motive behind S&P, which the European officials point out is an American company.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1. Christopher Emsden, Matina Stevis, and Bernd Radowitz, “E.U. Leaders Focuson ‘Progress’,” The Wall Street Journal, January 16, 2012.

2. Ibid.

3. Ibid.

Voluntary Greek-Debt Maturity Extensions: A Rush for the Exits?

As the E.U. was working out more loans for Greece in summer 2011, rating agencies looking at the state’s debt indicated that default would be pronounced should the decision of bond-holders to continue to hold Greek bonds be anything less than voluntary. Germany had been pushing for something less than voluntary so taxpayers would not have to bear so much of the risk and cost. France, doing the bidding of its banks, effectively used the rating agencies’ default-guidelines to insist that additional E.U. loans do not require then-current bond-holders to agree to later maturities. Given the extent of Greece’s debt-load relative to the state’s GDP, a private sector bond-holder, such as a bank, would naturally loose little time in getting out of holding Greek debt, even given the high interest rates (which reflect the risk).  

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Leadership at Lehman: On the Failure of Richard Fuld

The failure of Lehman Brother suggests that too much power may go with formal position while non-positional leadership in organizations is not given enough of a chance to check the excesses of office. Richard Fuld could take advantage of much having to do with his formal position so he would not have to lead. In contrast, a competent subordinate, Mike Gelband, faced a considerable headwind in trying to lead through persuasion without the benefit of a position trumping Fuld’s own.

The full essay is in Essays on the Financial Crisis, which is available in print and as an ebook at Amazon.

Related Essays:

 "Fuld's Arrogance at Lehmen: Systemic Risk"

"Lehman's Dick Fuld as the Antagonist in the film, 'Too Big to Fail'"

"Fraud as Fair: Lehman as Beneficiary of Society's Pro-Business Cultural Values"

"Executive Stature: Glimpses of the Man Behind the Curtain"

"Lehman Bros: Insufficient Accountability in Corporate Governance"

On the Irrational Exuberance of a Market's Bubble: The Tech Industry

I contend that the degree of uncertainty related to the expectation of future profits in the social media companies means that that industry ought to be treated by investors as if it were in a bubble, even if it turns out that the expectations were spot on. That is to say, investors should buy in lightly, and supported by a diversified portfolio. So perhaps the question of whether the industry is in a bubble is not as vital as the media may suppose; the extent of uncertainty, which was clearly evident for instance in LinkedIn's trading at 540 times its prior year's profit, is itself a factor not to take lightly. So call it bubble or not, the difference between known and expected revenues is itself worthy of consideration, and when that difference is significant, the wise and prudent investor naturally treads lightly, even if it seems that others may make out like bandits.

The full essay is at "On the Irrational Exuberance."