Two years ago the S&P downgraded the credit rating of the United States sovereign debt, triggering a global equities sell-off and motivating me to write a long post called “Don’t panic”. If excessive pessimism brought on by third-party “research” was unwarranted, excessive optimism nowadays is too. There will certainly be a large number of articles saying how bad the S&P screwed up – first one right here – so, again, read them with the necessary pounds of salt. I haven’t done, and won’t do, the research on the current state of the US economy to say anything about it. I’m still qualified enough to say, again, don’t panic – but don’t believe the hype either.
I apologize for not posting in the last 9 days or so, but I’ll make it worth your while with this link to Q3 2006 and Q1 2008 letters to investors by Scion Capital’s Michael Burry. You may have read about him in a previous post here – or in Michael Lewis’ book The Big Short. Get it while it lasts.
A Goldman Sachs executive quits via an scathing editorial in the NY Times, generating all sorts of reactions – reminding us of the need to always analyze things from all sides while keeping one’s head cool. Make sure you know what level of confidence you can live with when dealing with each counterparty in your business and personal dealings, and don’t depend on anyone’s “moral fiber” in all occasions (it’s hard enough to know your own limits).
Two Dealbook articles to read over the weekend. One regards the Greek debt restructuring and what it means for CDS – a test regarding the reliability of CDSs as a hedge instrument. The other regards the ages-old conflicts of interest in LBOs, hostile takeovers and other transactions in which the safest route is the one that assumes that all advisors are biased and conflicted.
MIT economist Andrew Lo had published a paper where he reviews twenty one (yes, 21) books about the global financial crisis. In search of common explanations and themes, he found confusion instead. “After each book, I felt like I knew less. For an academic, that’s a pretty frustrating feeling.”
Researchers have not been able to find a link between banker compensation and short-term performance metrics. In their words, their finding “refutes the suggestion that incentive structures in banks could be blamed for the crisis”. As we were reading the study’s description, we were alarmed that the professor equated “short-term performance” with the short-term movements in share prices, which is not usually how compensation is set in banks. Then we found a post by the Epicurean Dealmaker that destroys the study precisely on these arguments.
Two recent stories highlight the current moral double standards regarding defaults and indebtedness in general. The first article uses American Airlines’ Chapter 11 filing, lauded as a “smart move”, and contrasts this reaction to the stigma surrounding personal bankruptcies by home owners. The second article tries to tack the same “double standards” theme onto Germany, but it doesn’t work nearly as well.
In another building block in the “Banking: Global Mess” series, the World Bank says in a report released yesterday that the Latin American financial systems still seem sound, but there are a few yellow flags. The embedded 3-min video interview (inside) is a nice summary of findings.
The IMF has recently issued a report on China’s financial system’s stability that has grabbed plenty of headlines, and yet today it seemed that there were pessimistic articles about banking all over the world. European and US banks are also the subject of stories that highlight risk, interconnectedness, poor balance sheets etc.. While the financials’ situation isn’t necessarily news, it is the trend that’s interesting. Inside we collect quite a few articles about the world’s financial system, all of them very from yesterday or today. Collectively they plant a bleak picture, one that seems very different from what we (still) observe in Brazil’s banking system. It’s very hard to separate signal from noise, especially so in the middle of a crisis, but it’s great food for thought.
According to the news, this is the line MF Global insiders used when questioned why they went along with Jon Corzine’s trades: “He was from Goldman Sachs”. Thus Mr. Corzine guided MF Global to a very public, very messy bankruptcy – and hundreds of millions of dollars of client money are missing. We wrote just days ago, regarding the “key people” aspect of a company: “Ultimately, it’s all about the key people (…) – it’s vital to understand their real motivations, aspirations, personalities and incentive/moral systems. Not what they say it is, what it really is.” Finding out about a given company’s true culture is just as difficult and time consuming, and as we can see in this example, just as important.