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Dangers detailed for banks in Europe

  
Analysis, Economy, Education
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Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs in the next couple of years, the European Central Bank said.

Its report cataloged in detail the problems facing the region’s financial institutions.

The challenges for banks in the 16-nation euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the central bank said.

In its twice-yearly review of risks facing the nations that use the euro currency, the central bank expressed particular concern about banks’ need to refinance long-term debt of an estimated 800 billion euros, or $984 billion, by the end of 2012.

European banks will need to set aside an estimated 123 billion euros in 2010 for bad loans, and an additional 105 billion euros in 2011, the report said. That would be in addition to the 238 billion euros they set aside from 2007 to 2009.

Top 10 Lessons from the Lehman Collapse

  
  Education
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Sunday is the five year anniversary of the bankruptcy of Lehman.  So what have we learnt?

1 – Bank executives lie…

…they also got paid huge amounts, weren’t as smart as they thought they were and those that ended up at the top tended to be deeply flawed individuals…

On Sept 10 in a conference call with investors, days before Lehman collapsed, Dick Fuld clearly stated to his shareholders that “no new capital was needed” and that “real estate and investments were properly valued”. Yet only five days later, Lehman filed for bankruptcy.

 

At a congressional Committee just a few weeks later, Dick Fuld was defiant. He stood by his “no new capital was needed” statement: “no sir, we did not mislead investors”. And he added that “we (made) disclosures that we believed were accurate”. If no new capital was needed why did Lehman go bust five days later? And if he didn’t know the financial position of Lehman what was he doing as CEO?

As part of the Congressional Committee hearings, Dick Fuld was allowed to make a presentation before he was questioned. These are his exact words as to the cause of Lehman’s demise:

“Naked short sellers targeted financial institutions and spread rumours and false information. The impact of this market manipulation became self-fulfilling as short sellers drove down the stock prices of financial firms. The ratings agencies lowered their ratings because lower stock prices made it harder to raise capital and (it) reduced financial flexibility. The downgrades in turn caused lenders and counter parties to reduce credit lines and then demand more collateral which increased liquidity pressures. At Lehman Bros the crisis in confidence that permeated the markets lead to an extraordinary run on the bank. In the end despite all of our efforts we were overwhelmed.” (more…)

John Bogle’s 10 Rules of Investing

  
  Education
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“1. Remember reversion to the mean. What’s hot today isn’t likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don’t follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk.

6. Minimize the “croupier’s” take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don’t pay for. (more…)

The perils of Paulson

  
Analysis, Education
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The crown may be slipping fast from billionaire trader John Paulson’s head.

The hedge fund manager became an overnight sensation in 2007 by betting big and early on the collapse of the U.S. housing market, and then doing much of the same on a surge in gold prices. But he is now emerging as one of this year’s big losers in the $2 trillion hedge fund industry.

His Paulson & Co. hedge fund firm, which managed $38 billion as recently as this past March, is down to about $35 billion as of the first week of August, and it shrinks a little bit more with every big drop in the U.S. stock market.

One of Paulson’s two main funds is now down more than 30 percent this year, the firm has reported to clients, compared to a much smaller 6.1 percent decline for the average hedge fund, according to Hedge Fund Research.

The problem for the 55-year-old manager: His equally daring bet that the U.S. economy and housing market would rebound strongly from the financial crisis — a big wager that looked prescient a year ago — isn’t panning out as planned.

Paulson’s funds have amassed huge, mutual fund-style stakes in shares of financial institutions like Bank of America, Citigroup, Hartford Financial, Popular Inc. and American Capital. But these are ringing up hefty losses.

And with fears of a double-dip recession in the United States mounting, coupled with this month’s 13 percent plunge in the S&P 500, the talk is growing on Wall Street that unless Paulson can quickly turn things around, the hedge fund king could be hit with a wave of year-end investor redemptions.

“There are many investors who have experienced great gains with John Paulson, but a lot of the money has come into his funds after those great gains were achieved, and the relative newcomers are seeing a lot of heavy losses,” said Daryl Jones, director of research at Hedgeye Risk Management, which sells investment research to institutional investors. “I would imagine it would lessen their appetite to stay with someone who is supposed to be a big superstar but is down double digits right now.”

Paulson, through a firm spokesman, declined to comment. But people close to Paulson point out that other than hedge fund guru George Soros, no one has consistently made more money for clients than the man referred to by his friends and associates as “J.P.”

LOYALTY TEST

This year, however, his investors’ loyalty is being put to the test.

Maybe no one single trade has come to symbolize Paulson’s bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lender’s shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position. (link.reuters.com/gem23s)

The picture isn’t much prettier for Paulson’s large share holdings in Citigroup, Popular (formerly Banco Popular) and SunTrust Banks. The value of Paulson’s equity stake in those three banks, assuming the funds haven’t sold any shares since March 31, would have declined by more than $800 million over the past four months.

And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month. (link.reuters.com/hem23s)

The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.

Much of the $20 billion in outside investor money Paulson manages has come from pension funds and clients who bought in after he made $15 billion for the firm in 2007 on his well-chronicled subprime mortgage trade. Paulson raised that money by making his hedge fund one of the most widely available to wealthy customers of dozens of large and small brokerage firms. (more…)

Democracy Failure Follows Market Failure

  
Economy, Education
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Some very spicy comments from the Hungarian prime minister who basically tells the world to get lost (please admire effort to remain polite on his part). In so many words it’s not his fault, it’s the previous administration’s fault. Sounds familiar? Obama has used it at will, Greece has used it, I heard Sarkozy use it, and just about everybody else! Even Republicans who campaigned to “Drill baby drill!” now blame the BP fiasco on Obama. Needless to say political courage is something that no longer exists, and populism has been the only political program offered to us for now a solid 40 years. The natural extension is for a Prime Minister to just walk in and say: “You know what screw you guys, we will default, I am not taking back tax cuts that got me elected, I am not telling people who were promised early retirement that really it’s not feasible, I’m just not going to deal with any of this. Let’s just default and keep doing what we were doing”. In the same line of thought the French PM declared this morning that there is nothing bad about EURUSD at parity.

If you think it’s bad to sell someone a mortgage they can’t pay, how about promising them a lifestyle they can’t afford! Washington has some nerve to blame the financial industry: “a house for every American” was their idea. Granted there is plenty of blame and jail time deserved at many financial institutions but it is true also for Congress. I used to think that over the past 40 years the commodity that was most devalued was human labor but I have changed my mind. A man’s word no longer has any value in most cases. Should the law be changed so that it holds our leaders accountable for their words? Why not, we would get a hell of a clean slate and something to be finally hopeful about. That is change I would believe in for sure. (more…)

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