Reverberations of the Mortgage-backed Securities Meltdown

 

Governments everywhere are raising taxes, cutting benefits, privatizing public resources, slashing basic services, etc., to pay the current Worldwide estimated $1.5 Quadrillion of fraudulent Derivatives (the Bubble at the heart of Financial Crisis) bailout that no one can pay....

The poster sensationalizes what is a real problem that is coming to a head in Greece at this time. Greece's problems have exposed the European Union's weakness of using a single currency - the failing economies are unable to use currency devaluation as a solution to their financial implosion tilting the balance of the whole of the European Union and forcing Germany and France to bail-out their partners.   The citizens of Germany and France do not like paying for Greece's fiscal mismanagement and the Greek citizens have no desire to be dictated to and being forced to "tighten their belts" by the cutting and slashing services and salaries in the public  sector and so on.

Traders Manipulated Key Rate, Bank Says - WSJ.com

Traders Manipulated Key Rate, Bank Says - WSJ.com

Traders Manipulated Key Rate, Bank Says

A group of traders and brokers successfully managed to manipulate an interest rate that affects loans around the world, one of the banks being investigated has told regulators.

In a court filing in Ottawa, Canada's Competition Bureau said a bank it didn't identify has told the agency's investigators that people involved in the alleged scheme "were able to move" interest rates.

People familiar with the situation said the "cooperating party" is UBS AG.

The Swiss bank has said it is assisting regulators in a sprawling interest-rate probe in North America, Europe and Asia, which has led to a score of ...

Do you remember how Enron traders manipulated the price of natural gas by causing rolling black-outs and other illegal maneuvers?  In years gone by, accusations like these might have seemed right out of the imagination of conspiracy minded wing nuts.  Now we see successful prosecutions of the manipulators engaged in these schemes and need to reconsider our opinions based on evidence of the breakdown of ethics and morality in the Capitalist System.  Capitalism is the best system but from time to time a shake-up is needed to ensure a level playing field.




 

Discipline

“Discipline is the highest of all virtues. Only so may strength and desire be counterbalanced and the endeavors of man bear fruit.”

― Nikos Kazantzakis, The Rock Garden

Memory is Dynamic

"Conventional wisdom holds that memory is like a serial recording device like a computer diskette. In reality, memory is dynamic—not static—like a paper on which new texts (or new versions of the same text) will be continuously recorded, thanks to the power of posterior information....Memory is more of a self-serving dynamic revision machine: you remember the last time you remembered the event and, without realizing it, change the story at every subsequent remembrance."

-Nassim Taleb, The Black Swan

Black Swan

 

 

"Conventional wisdom holds that memory is like a serial recording device like a computer diskette. In reality, memory is dynamic—not static—like a paper on which new texts (or new versions of the same text) will be continuously recorded, thanks to the power of posterior information....Memory is more of a self-serving dynamic revision machine: you remember the last time you remembered the event and, without realizing it, change the story at every subsequent remembrance." 

-Nassim Taleb, The Black Swan

Business Line : Features / Investment World : Overconfidence and how to fix it

Business Line : Features / Investment World : Overconfidence and how to fix it

http://www.thehindubusinessline.com/features/investment-world/article2883234.ece?ref=wl_features

Overconfidence and how to fix it

ADARSH GOPALAKRISHNAN


Investing is neither a game nor an examination to be taken. A loss resulting from bad decisions is capital lost.

Have you ever marvelled at the conviction a stock market guru or company manager's exhibit in interviews?

They spout stuff like ‘Indian GDP will grow X per cent' or ‘the company will grow by Y per cent'. Headlines scream : ‘Confidence in Euro bailout sends markets up' and ‘Euro debt worries send markets crashing'. An understanding of the ‘overconfidence bias' concept will prevent investors from getting swept away by these statements.

We all overestimate our knowledge, skill or virtue. As Malcom Gladwell writes in a New Yorker article, “One of the things that happen to us when we become overconfident is that we start to blur the line between the kind of things that we can control and the kind of things that we can't.”

DISTURBING FINDINGS

Research on American investors, particularly men holding discount brokerage accounts, reveals what overconfidence does to returns. The decade old study indicates that investors, particularly ones proffering to be very confident or with high conviction, tend to trade a lot more! Their increased trading did not produce returns.

On the contrary, they lowered returns which were to be had by staying still. Similar studies have shown that academics, students, econometric practitioners all tend to underperform relative to their perceived ability to forecast accurately or confidence to conduct research.

We tend to pump up our ego not just to boost our self-esteem but also feel more optimistic about approaching a task or taking a decision. Imagine what would happen if a professional athlete thought before a game that he was doomed. Or a student taking a test. Chances are they will mess it up.

Investing is neither a game nor an examination to be taken. A loss resulting from bad decisions is capital lost. The early humans may have worked up a frenzy to throw a spear a mammoth, but that kind of confidence does no good to an investor trying to choose a particular investment.

DANGEROUS METHOD

Of course, mutual funds put out a disclaimer that past performance is not guarantee of future results. We've all sped through such disclaimers. Intuitively, that is a point we grasp quite well: No one invests money in a mutual fund without asking how the returns have been or which fund house is behind the product.

But here is a corollary: A string of successes tends to increase overconfidence levels and vice versa. Time and again, investors have grown complacent in bull markets much and fearful in bear markets. In bull markets they believe their due diligence is comprehensive and their investments secure. This is until markets pull the rug from under them.

SAME OLD SOLUTION

In a complex setting such as equity, bond or real estate markets, confidence often fosters a blind spot. In the delightful words of psychologist Ellen Langer (through Gladwell), “...This is what competition does to all of us; because ability makes a difference in competitions of skill, we make the mistake of thinking that it must also make a difference in competitions of pure chance.”

Here are a few common mistakes and quick fixes for mistakes stemming from overconfidence:

Your experience either tells you that ‘This time its different' or ‘I've seen this before' and you make a bet based on this. Avoid this tendency. Your decisions should be made based on reason.

My buy price was 20 per cent higher, so I am confident it's a buy now! Again avoid decisions made on such gut feeling. Buy because you've weighed the reasons which pushed prices down by 20 per cent and then take a call. Maintaining a log of why investment decisions were made helps your cause.

You've done a lot of homework on a mutual fund or stock you want to pick. Quickly run it by a few fellow-investors. If you have a blind spot, chances are someone could help you spot it.

Especially relevant for fundamental investors: You arrive at a price which you think an asset is worth. Apply a generous discount to that before buying. Benjamin Graham called it Margin of Safety. It is your safety net.

Into The Belly Of The Beast (Part I - How Goldman Sachs Became The Most Hated Bank On Earth) | Economy Watch

Into The Belly Of The Beast (Part I - How Goldman Sachs Became The Most Hated Bank On Earth) | Economy Watch

Goldman Sachs is the bank everyone loves to hate. In the first of our two-part investigation into the bank, we ask why they emerged as the biggest winners in the financial crisis. We also look at how they lobbied the US Government to reduce banking regulations, how they acquired massive fortunes by selling sub-prime mortgages, and how they deceived their clients by betting against the products they sold.

By: David Smith Date: 26 January 2012

An English journalist who, when he's not exploring the social consequences of political actions,

David Smith, Investigative Journalist

Goldman Sachs: A Great Vampire Squid Relentlessly Jamming Its Blood Funnel Into Anything That Smells Like Money”.
Photo Credit: DonkeyHotey

Goldman Sachs was not always the investment bank everyone affects to despise. Its bankers were once dubbed “billionaire boy scouts” because of their talent for making fortunes while maintaining a guilt-free, cherubic image.

But Goldman’s bankers are now far more likely to be compared to squids than boy scouts and have become the favourite target of anti-bank protestors. A week before Christmas, 300 protesters in the Occupy Movement dressed up in squid costumes and carried a giant puppet squid on a march to Goldman Sachs’ offices in New York.

The action was inspired by a Rolling Stone article which compared Goldman Sachs to: “a great vampire squid, wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The protesters shouted: “We fry calamari”, and “everyone pays their tax. Everyone, but Goldman Sachs.”

Public hatred of Goldman, fueled by modern mass media, has intensified, but it would be naive to believe the banks’ character has fundamentally changed.

Although there was nothing on the same scale as its nefarious role in the 2007 Financial Crisis, Goldman has been involved in controversy ever since it was founded by the German-born Jew Marcus Goldman in 1869. 

In 1929 for example, Goldman sponsored a pyramid scheme disguised as a mutual fund, which collapsed causing 42,000 investors to lose US$300 million.

Then, in 1970, came the Penn Central catastrophe in which a default on short-term paper marketed by Goldman produced damage claims exceeding the bank’s net worth.

In the late 1980s, Goldman’s head of risk arbitrage, Robert Freeman, was sent to jail for insider trading.

And during the same period, Goldman was implicated in an illegal scheme to prop up insolvent businesses operated by the corrupt Czech-born newspaper tycoon Robert Maxwell.

“The reality is that the firm has been in and out of trouble throughout its whole existence and has constantly been pushing the edge of the envelope,” said William D. Cohan, a former investment banker and the author of Money and Power: How Goldman Sachs Came to Rule The World.
Cohan marvels at the hypocrisy embedded in Goldman Sachs’ 14 Business Principles, which were codified in the 1970s and are still being drummed into brainwashed employees’ heads today.

“They make the general public think they believe in them, but the most important principle is ‘putting the client first’, whereas the reality is they are in business to make money and will do it any way they have to,” he said.

Cohan believes the 14 principles are at the heart of what he calls Goldman’s ‘holier-than-thou attitude’.

“At Merrill Lynch, we had principles scratched into the wall, but never gave them a moment’s thought.

But at Goldman they write them down, distribute them and reinforce them regularly. There’s an element of ‘drinking the Kool-Aid’ when you join Goldman and most of them fall for the brainwashing. They get people young so they can mould their thinking. “

“To give an example of the Goldman mindset, I was giving a talk recently to 250 New Yorkers and a Goldman Sachs banker stood up and loudly berated me for daring to suggest they were not all saints.”

Suzanne McGee, a journalist and author of Chasing Goldman Sachs, believes there was a change in the bank’s status in the 1970s.

“For most of its 200-year history Goldman wasn’t the force it is today. It transformed itself in the 1970s, which was a turbulent period when some firms thrived and others withered on the vine. Goldman was one of the most innovative banks and by the mid-1980s it was positioned to be a power house,” she said.

“What interests me historically is how Goldman changed from being the firm everyone might not like, but admires, to the firm everyone affects to despise. Up to the 1990s, their reputation was very high.

In that period, if an IPO was underwritten by Goldman Sachs that was akin to Good Housekeeping’s sales approval. They were believed to have the X-factor, which meant they could outperform everyone else in every way.

This reputation was so strong that in the late 1990s their bankers were banned from carrying bags with Goldman Sachs logos on when they took flights to conferences. The bosses were afraid they’d tip off rival traders.”

“But that mainly positive reputation has gone since the financial crisis. Goldman Sachs’ workers still don’t carry bags with logos, but now it’s because they might get beers poured on their heads, or someone might pick a fight with them!”

While McGee expresses a grudging admiration for the financial acumen of the Goldman elite, she is under no illusion that they follow the ‘do what’s best for the client’ principle to the letter.

“Someone at another bank said that when Goldman comes with a deal the first question you ask should not be ‘will they screw me’? It should be ‘in which way will they try to screw me’? Other banks are the same, but Goldman is far better at it than anyone else”.

Just how much better became evident in 2007, when the US housing bubble burst and the nation was plunged into its biggest financial crisis since the Great Depression. The fall-out for America’s financial sector was huge. Lehman Brothers filed for bankruptcy, IndyMac bank collapsed, Bear Stearns was acquired by JP Morgan Chase, Merrill Lynch was sold to Bank of America, and mortgage giants Fannie Mae and Freddie Mac were put under government control. Meanwhile, although Goldman helped to provoke the crisis, it made billions of dollars out of it by taking out huge bets that the mortgage market was about to crash. The firm went on to earn US$11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns and Citigroup combined. Merrill Lynch lost US$7.8 billion that year.
The United States Senate’s 2011 Levin–Coburn Report found:

“The crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

Goldman Sachs CEO Lloyd Blankfein even apologized in 2008 for his bank’s role. “We participated in things that were clearly wrong and have reason to regret,” he confessed.
But the apology was meaningless, according to William K. Black, an American lawyer, author and former bank regulator, who has testified against the banks. Black believes Goldman knew precisely what it was doing and was operating according to a well-known formula in the financial world. If he had his way, Black says he would send Goldman’s bankers into the fourth circle of Hell – which is reserved for the avaricious - in Dante’s inferno.
“Goldman, and other investment banks, behaved fraudulently in order to earn massive amounts of money,” Black said. “There were four ingredients in their foolproof fraud recipe. 1. Grow like crazy. 2. Make really crappy loans at a premium yield. 3. Have extraordinary leverage. 4. Make virtually no allowances for future losses.”

“If you do those four things, you are virtually guaranteed to report record off-the-chart short-term profits. We’ve known this in economics since a 1993 paper by Akerlof and Rohmer called Looting The Economic Underworld of Bankruptcy for Profit. Even if a firm fails, the CEO and all the other folks will walk away wealthy. It’s maths; a sure thing!”

The first two elements of the formula, Black says, are related. A bank grows like crazy by making “crappy loans”. Good loans would not work because a bank would have to buy market share, cutting its yields.

“But there are tens of millions in the US who cannot afford to repay a loan to buy a house. Precisely because they can’t, the bankers can charge a premium yield and can grow like crazy. Into the teeth of this glut, they created the largest bubble in the history of the world.”

• 
  

Into The Belly Of The Beast (Part II – Goldman Sachs & The European Crisis)

Date: 2 Feb 2012

In part two of our feature on Goldman Sachs, we look at Goldman’s networks of power in Europe and consider the ways in which Goldman is using the same dangerous financial products, which caused the 2007 crisis, to bet against Europe’s floundering economies whilst governing, or advising those countries. Finally, we ask what can be done to reduce Goldman’s power.

Into The Belly Of The Beast (Part II – Goldman Sachs & The European Crisis) | Economy Watch

Into The Belly Of The Beast (Part II – Goldman Sachs & The European Crisis) | Economy Watch

In part two of our feature on Goldman Sachs, we look at Goldman’s networks of power in Europe and consider the ways in which Goldman is using the same dangerous financial products, which caused the 2007 crisis, to bet against Europe’s floundering economies whilst governing, or advising those countries. Finally, we ask what can be done to reduce Goldman’s power.

Goldman Sachs: Masters of the Universe?
Photo Credit: duke.roul

Missed The First Part Of Our Story? Read: Into The Belly Of The Beast (Part I - How Goldman Sachs Became The Most Hated Bank On Earth)

The secret of Goldman Sachs’ power over the global financial system can be summed up in one word: Alumni. In his book, 13 Bankers, the former International Monetary Fund economist Simon Johnson argued that the relationship between Goldman Sachs and the US Government was so close in the run-up to the 2007 crisis, that the country was effectively “an oligarchy”.

Although European nations are not bought off by the banks in the same way as in the US, Johnson says that European financiers and politicians have formed alliances to perpetuate their mutual interests. Often, today’s European politicians have backgrounds in the financial sector, and more often than not connections to Goldman Sachs. The new prime ministers of Greece and Italy, for example, as well as the president of the European Central Bank, are all former investment bankers.

Germany Will Make An Example Of Greece: George Friedman

Germany Will Make An Example Of Greece: George Friedman | Economy Watch

Germany is caught in a dilemma. On the one hand, while the Germans cannot afford austerity in troubled states due to the resulting decline in demand for German goods, cannot simply tolerate Greek-style indifference to fiscal prudence as well. In dealing with other countries such as Spain or Italy, Germany must now show with Greece that there are consequences to not complying with the orderly handling of debt without default.
Bankruptcy

The Germans don't trust the Greeks to keep any bargain, which is not unreasonable given that the Greeks haven't been willing to enforce past agreements. Given this lack of trust, Germany proposed suspending Greek sovereignty by transferring it to a European receiver. This would be a fairly normal process if Greece were a corporation or an individual. In such cases, someone is appointed after bankruptcy or debt restructuring to ensure that a corporation or individual will behave prudently in the future.

The Germans thus are proposing that Greece, a sovereign country, transfer its right to national self-determination to an overseer. The Germans argue that given the failure of the Greek state, and by extension the Greek public, creditors have the power and moral right to suspend the principle of national self-determination. Given that this argument is being made in Europe, this is a profoundly radical concept. It is important to understand how we got here.

Germany's Part in the Debt Crisis

There were two causes. The first was that Greek democracy, like many democracies, demands benefits for the people from the state, and politicians wishing to be elected must grant these benefits.
There is accordingly an inherent pressure on the system to spend excessively. 

The second cause relates to Germany's status as the world's second-largest exporter.  

About 40 percent of German gross domestic product comes from exports, much of them to the European Union.

For all their discussion of fiscal prudence and care, the Germans have an interest in facilitating consumption and demand for their exports across Europe. 

Without these exports, Germany would plunge into depression.

Therefore, the Germans have used the institutions and practices of the European Union to maintain demand for their products. 

Through the currency union, Germany has enabled other eurozone states to access credit at rates their economies didn't merit in their own right. 
In this sense, Germany encouraged demand for its exports by facilitating irresponsible lending practices across Europe.

The degree to which German actions encouraged such imprudent practices -- since German industrial production vastly outstrips its domestic market, making sustained consumption in markets outside Germany critical to German economic prosperity -- is not fully realized.

True austerity within the European Union would have been disastrous for the German economy, since declines in consumption would have come at the expense of German exports. While demand from Greece is only a small portion of these exports, Greece is part of the larger system -- and the proper functioning of that system is very much in Germany's strategic interests. 

The Germans claim the Greeks deceived their creditors and the European Union. A more comprehensive explanation would include the fact that the Germans willingly turned a blind eye. Though Greece is an extreme case, Germany's overall interest has been to maintain European demand -- and thus avoid prudent austerity -- as long as possible.

Germany certainly was complicit in the lending practices that led to Greece's predicament. It is possible that the Greeks kept the whole truth about the Greek economy from their creditors....

For Greece to have its debt restructured, it must impose significant austerity measures, which Athens has agreed to. The Germans now want a commissioner appointed to ensure the Greek government fulfills its promise.

In the process, the debt crisis will profoundly circumscribe Greek democracy by transferring fundamental elements of Greek sovereignty into the hands of commissioners whose primary interest is the repayment of debt, not Greek national interests.

Related: The European Union’s Catalogue of Failures: George Soros

FORA.tv - Paley Center's Next Big Thing

FORA.tv - Paley Center's Next Big Thing

Paley Center's Next Big Thing from The Paley Center for Media on FORA.tv