As I roll through the day, i often make comments on the blogs and websites of others. I suppose I could gang them up, and post them here only. I don’t do that. Other sites deserve good comments. Today, though, I reprint them here, with a little more commentary.
1) First, I want to thank a commenter at my own blog, Ryan, who brought this article to my attention. I’ve written about all of the issues he has, but he has integrated them better. It is a long read at 74 pages, but in my opinion, if you have 90 minutes to burn, worth it. I will be commenting on the ideas of this article in the future.
3) Tom Petruno at the LA Times Money & Company blog is underappreciated. He writes well. But when he wrote Fannie and Freddie shares soar, but for no good reason. I wrote the following:
6) Then we have CFO.com. The editor there said they want to publish my comment in their next magazine. Nice! Here is the article. Here is my comment:
- Time Horizon is Critical
- Yes, Wheeler did a good job, as did MetLife, including their bright Chief Investment Officer.
What I would like to add is the the insurance industry generally did a good job regarding the financial crisis, excluding AIG, the financial guarantors, and the mortgage insurers.
Why did the insurance industry do well? 1) They avoided complex investments with embedded credit leverage. They did not trust the concept that a securitized or guaranteed AAA was the same as a native AAA. Even a native AAA like GE Capital many insurers knew to avoid, because the materially higher spread indicated high risk.
2) They focused on the long term. The housing bubble was easy to see with long-term perception — where one does stress tests, and looks at the long term likelihood of loss, rather than risk measures that derive from short-term price changes. Actuarial risk analysis beats financial risk analysis in the long run.
3) The state insurance regulators did a better job than the Federal banking regulators — the state regulators did not get captured by those that they regulated, and were more natively risk averse, which is the way regulators should be.
4) Having long term funding, rather than short term funding is critical to surviving crises. The banks were only prepared to maximize ROE during fair weather.
I know of some banks that prepared for the crisis, but they were an extreme minority, and regarded by their peers as curmudgeonly. I write this to give credit to the insurance industry that I used to for, and still analyze. By and large, you all did a good job maneuvering through the crisis so far. Keep it up.
7) Then we have Evan Newmark, who is a real piece of work, and I mean that mostly positively. His article: My comment:
Good job, Evan. I don’t do predictions, except at extremes, but what you have written seems likely to happen — at least it fits with the recent past.
But S&P 1300? 15% up? Wow, hope it is not all due to inflation. 😉
8 ) Felix Salmon. Bright guy. Prolific. His article on residential mortgage servicers. My response:
Hi Felix, here’s my two cents:
I think the servicers are incompetent, not evil, though some of the actions of their employees are evil. Why?
RMBS servicing was designed to fail in an environment like this. They were paid a low percentage on the assets, adequate to service payments, but not payments and defaults above a 0.10% threshold.
Contrast CMBS servicing, in which the servicer kicks dud loans over to the special servicer who gets a much higher charge (over 1%/yr) on the loans that he works out. He can be directed by the junior certificateholder (usually one of the originators) on whether to modify or foreclose, but generally, these parties are expert at workouts, and tend to conserve value. The higher cost of this arrangement comes out of the interest paid to the junior certificateholder. Pretty equitable.
Here’s my easy solution to the RMBS problem, then. Mimic the CMBS structure for special servicing. An RMBS special servicer would have to be paid a higher percentage on assets than a CMBS special servicer, because he would deal with a lot of small loans. The pain of an arrangement like this would get delivered where it deserves to go: to those who took too much risk, and bought the riskiest currently surviving portions of the RMBS deal.
The underfunded RMBS servicers may be doing the best they can. They certainly aren’t making a bundle off this. As a former mortgage bond manager, I always found the RMBS structures to be weaker than the CMBS structures, and wondered what would happen if a crisis ever hit. Now we know.
1) Sniffs out bad management teams.
2) Sniffs out bad accounting.
3) Adds liquidity.
4) Defrays the costs of the margin account for retail investors. Institutional longs get a rebate. Securities lending programs provide real money to long term investors, with additional fun because when you want to sell, you can move the securities to the cash account if the borrow is tight, have a short squeeze, and sell even higher.
5) Provides useful data for longs who don’t short. (High short interest ratio is a yellow flag in the long run, leaving aside short squeeze games.)
6) Allows for paired trades.
7) Useful in deal arbitrage for those who want to take and eliminate risk.
8) Other market neutral trading is enabled.
9) Lowers implied volatility on put options. (and call options)
10) And more, see:
http://alephblog.com/2008/09/19/governme nt-policy-created-too-hastily/Short selling is a good thing, and useful to society, as long as a hard locate is enforced.
That is what my commentary elsewhere is like. I haven’t published it here in the past, and am not likely to do it in the future, but I write a lot. Amid the chaos and economic destruction of the present, the actions are certainly amazing, but consistent with the greed that is ordinary to man.