Archive for February, 2008

Next year’s model?

Thursday, February 28th, 2008

Risk management

Next year’s model?

Feb 28th 2008 | NEW YORK
From The Economist print edition

Some insurers reckon they can teach investment bankers a thing or two about handling risk

WITH their snappy name and flashy mathematical formulae, “quants” were the stars of the finance show before the credit crisis erupted. Now the complex models of risk that they developed are accused of misleading banks about the safety of subprime-laced securities. Small wonder that investment bankers are working overtime to fix what went wrong.

One source of wisdom they may overlook is the staid world of insurance. After all, what could the green-eyeshade brigade of actuaries possibly teach the wizards of Wall Street? Several important lessons, reckon some insurers, who point out that much of their industry has thus far avoided the worst of the credit crisis.

Although a few firms—including Swiss Re, a big reinsurer due to report its 2007 results after The Economist went to press—face billions of dollars of write-downs on ill-judged involvement in America’s mortgage crisis, much of the European industry has so far come out relatively unscathed. Announcing a record profit for 2007 on February 25th, Munich Re, another big reinsurer, boasted it had just €340m ($514m) of subprime-related exposure, or less than 0.2% of its investments.

American insurers have a slightly bigger slug of subprime holdings than the Europeans (see chart), but analysts are sanguine. Fitch, a rating agency, notes that America’s life-insurance industry could probably weather $7 billion-8 billion of unrealised losses, though damage on such a scale would harm some firms.

This is a very different story from the bursting of the dotcom bubble. Back then, returns on insurers’ equity portfolios plunged just as liabilities on everything from life policies with guaranteed pay-outs to directors-and-officers (D&O) insurance soared, almost bringing the industry to its knees. Banks fared far better.

So what can banks learn from the insurers now the boot is on the other foot? Raj Singh, a former investment banker who recently became chief risk officer of Swiss Re, points out that the banks’ risk models, which try to put a value on how much they should realistically expect to lose in the 99% of the time that passes for normality, draw on reams of historical data. But this can produce a false sense of security.

Insurers looking at, say, catastrophe risks have relatively few data points and thus tend to have a healthy scepticism of models. They more often brainstorm their own scenarios. “In insurance, we have to think the unthinkable all the time,” says Mr Singh, pointing out that the industry came up with a scenario of a multiple plane crash above a metropolitan area well before the attacks on New York’s World Trade Centre in 2001.

Scenario-building usually involves insurers’ senior managers, whereas in many banks the “stress testing” of risk models is the preserve of quants. Moreover, in banks different teams often track different risks, masking potentially catastrophic correlations between them. Smart insurers are increasingly aware of the way in which life, property, business interruption and other risks interact—a portfolio risk-management approach encouraged by both regulators and investors.

Insurers have a list of other things banks can learn too, including the idea that getting a customer to retain a part of a risk reduces moral hazard—something investment banks’ pass-the-risk-parcel approach to securitisation blithely ignored. Swiss Re’s Mr Singh notes that insurers have a respect for risk that is reflected in the status of the chief risk officer, who is treated as an equal partner in senior management. In investment banking, he claims, such people tend to get sidelined when the good times roll—though big investment banks such as Merrill Lynch and Morgan Stanley have belatedly rejigged their risk set-ups.

Pots and kettles

Yet, the insurers should not get carried away. Although many have performed better than the banks, some of them have tripped up nonetheless. Worst-hit are America’s bond insurers which, lemming-like, rushed into guaranteeing dodgy asset-backed securities that eventually threatened a further meltdown in credit markets. Such fears were partially assuaged this week when Moody’s and Standard & Poor’s (S&P), two credit-rating agencies, affirmed the top-notch ratings of MBIA, one of the biggest bond insurers. S&P also affirmed its AAA rating on Ambac, another big insurer that is trying to raise billions of dollars of capital from a group of banks.

Then there are the mortgage insurers, another obscure corner of the industry that is a financial black hole. Big mortgage underwriters such as MGIC and PMI Group may well see their credit ratings cut soon. MGIC recently revealed that it lost almost $1.5 billion in the last quarter of 2007 alone, as mortgage defaults soared.

Such problems will seep into the mainstream industry via reinsurers such as Swiss Re and XL Capital, which underwrote some of the specialists’ risks. Red lights are also flashing in the D&O market because of an expected flood of litigation linked to the credit crunch. On February 24th HSH Nordbank, a German lender, sued UBS to recover millions of dollars of losses it incurred on a portfolio of credit derivatives sold to it by the Swiss bank. Bear Stearns reckons liability insurers could lose up to $8 billion-9 billion on claims related to such lawsuits. That is a big number—until you compare it with the banks’ total subprime write-downs, already well above $100 billion.

But the biggest losers are those who tried hardest to behave like banks and sought to jettison their industry’s plodding image. A case in point is American Insurance Group (AIG), the world’s largest insurance company, which recently had to write down $4.9 billion of swaps related to collateralised-debt obligations. Swiss Re has already written down $1 billion or so on two related credit-default swaps. Such mishaps suggest insurers, too, need to remember that modelling risks is not necessarily the same thing as managing them.

http://www.economist.com/finance/displaystory.cfm?story_id=10766330

U.S. Economy Grew Less Than Forecast Last Quarter (Update2)

Thursday, February 28th, 2008

U.S. Economy Grew Less Than Forecast Last Quarter (Update2)

http://www.bloomberg.com/apps/

news?pid=20601103&sid=adA_tHnI.FXY&refer=news

By Courtney Schlisserman

Feb. 28 (Bloomberg) — The U.S. economy grew less than forecast in the fourth quarter, relying on exports as consumer spending slowed and the slump in homebuilding deepened.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington. The median estimate in a Bloomberg News survey of economists was for a 0.8 percent increase.

Excluding exports and imports, domestic spending contracted, a change from the first estimate, the department said. Combined with figures today showing claims for unemployment insurance jumped last week, the report reinforced traders’ expectations for the Federal Reserve to cut interest rates again next month.

“We have absolutely no momentum going into the first quarter,” said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. “Things are looking pretty grim for the economy. If we’re not in a recession already, we’re very close.”

Fed Chairman Ben S. Bernanke yesterday signaled he’s ready to lower interest rates again to sustain the expansion. Traders see a 100 percent chance of a half-point reduction to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.

Jobless Claims

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast.

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5127 at 8:39 a.m. in New York, after touching $1.5147 earlier.

The median GDP estimate was based on 74 economists surveyed. Projections ranged from gains of 0.5 percent to 1.3 percent.

An improvement in trade prevented the economy from contracting last quarter. The gap narrowed to an annual pace of $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since the last recession in 2001.

“One could argue that the domestic recession began” last quarter, Neal Soss, chief economist at Credit Suisse, said in a Feb. 21 note to clients. “But there would be no debating that the rest of the world kept U.S. GDP growth above water at the end of last year.”

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today’s report.

Declining sentiment is likely to continue to restrain spending in coming months. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg News survey taken from Jan. 30 to Feb. 7. The survey also projected a 0.5 percent pace of expansion from January through March.

Consumer confidence fell this month to the lowest level since the start of the Iraq war as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans’ expectations for the next six months dropped to the lowest level since January 1991.

Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today’s report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.

Job Market

Income growth may slow further in coming months as the labor market softens. The U.S. lost jobs for the first time in four years in January and weekly initial jobless for jobless benefits have risen.

Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.

Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.

Lowe’s Cos., the world’s second-largest home-improvement retailer, said this week that fourth-quarter profit fell and several “challenging” quarters remain as the worst housing slump in more than 25 years deepened.

`Tough’ Market

“It will still be a tough housing market through the balance of 2008,” Lowe’s Chief Executive Officer Robert Niblock said in a Feb. 25 interview. “It’ll probably be into 2009 before you’re seeing a recovery.”

Fed Chairman Bernanke, in testimony to Congress yesterday, referred to “downside” risks for the economy four times and noted that data since the last Fed meeting in January pointed to “sluggish” growth.

The central bank “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said. Policy makers are scheduled to next vote on interest rates on March 18.

The Fed and the administration are trying to head off a recession. President George W. Bush, on Feb. 13, signed a $168 billion stimulus package, including tax rebates to more than 130 million households.

Today’s report is the second of three estimates released by the Commerce Department. The data will be revised again next month as more information becomes available.

To contact the report on this story: Courtney Schlisserman in Washington Cschlisserma@bloomberg.net

Last Updated: February 28, 2008 09:29 EST

New York Faces Double Whammy

Thursday, February 28th, 2008

 http://www.bloomberg.com/apps/

news?pid=20601087&sid=aXbB2xpLMj0M&refer=worldwide

New York Faces Double Whammy as Swaps Compound Failed Auctions
By Michael Quint

Feb. 28 (Bloomberg) — Local government officials from New York to Houston who followed the advice of their bankers and issued auction-rate bonds in combination with interest-rate swaps are now getting squeezed by both.

States, cities and hospitals across the country expected yields on the debt to move in tandem with benchmark rates when they bought swaps to protect against rising interest costs. Instead, the bonds’ rates are up an average 3.1 percentage points since September, while the one-month London interbank offered rate — what banks charge each other for funds — has dropped 2.7 points.

“It’s a universal problem,” said Debra Sloan, director of capital markets at Boston-based Partners Healthcare System Inc., which has interest-rate swaps on $450 million of its $600 million in auction securities. “We try to structure them so that over time there is a match.”

The failure of the financial instruments compounds the pain for borrowers stuck paying record-high interest on auction-rate debt billed as a cheap alternative to traditional bonds. Investors got skittish last year, retreating from auctions that determine new rates every seven to 35 days. Now UBS AG, Goldman Sachs Group Inc., and other brokers are refusing to be bidders of last resort, and the $330 billion market is frozen.

Municipalities and their taxpayers are paying for swap agreements that haven’t worked for months.

Diverging Rates

The contracts typically require buyers to pay fixed rates in exchange for variable payments from the banks arranging them. These variable rates, based on Libor, roughly matched the cost of auction bonds for more than five years, making the fixed rates — still far lower than what borrowers would have paid on traditional bonds — well worth it.

Then, when a crisis in the subprime mortgage market began to shake investor confidence in September, they started to diverge.

The annualized rate on $63 million of auction bonds the city of Buffalo, New York, sold in 2005 jumped 7.7 percentage points when a Feb. 14 auction failed, triggering the penalty rate of 11 percent proscribed in the terms of the deal. That’s almost 9 percentage points more than the floating rate it got from a swap with New York-based Citigroup Inc. Adding in the fixed rate of 3.17 percent, the city paid more than 12 percent that week.

“It hasn’t always been like that,” said Anthony Farina, executive assistant comptroller in Buffalo.

Before rates soared, Buffalo had about $400,000 saved because the variable interest on the swap exceeded its payments on the bonds, Farina said. That cushion is shrinking because in the week after the Feb. 14 auction, it paid $134,803 in interest on the bonds and received $26,753 from the agreement. The fixed- rate payment was $38,875.

Cheap Financing

Auction-rate bonds are a way to tap short-term interest rates without having to repay principal for decades. They were one of the cheapest forms of tax-exempt municipal debt until the September change in demand coincided with the first cut in the Federal Reserve’s target rate in four years.

Securities that reset weekly yielded an average 83 basis points less than 20-year fixed-rate debt in the 16 preceding months, a comparison of indexes compiled by the Bond Buyer and Securities Industry and Financial Markets Association showed. For other variable-rate securities, it was a difference of 10 basis points. A basis point is 0.01 percentage point.

Auction Failures

Hundreds of auctions failed this month as banks that managed the bidding refused to pick up the slack for investors. After $163 billion of losses on debt holdings tied to the riskiest subprime mortgages, the world’s biggest financial firms are less willing to make purchases for their own account.

Spokespeople at New York-based Goldman and Zurich-based UBS declined to comment. Dealers used to routinely step in when needed, though they aren’t obligated to support the auctions they run.

When there are no bidders, rates revert to penalty rates spelled out when the debt is issued. Even successful auctions are producing yields more than twice that of fixed-rate borrowing benchmarks.

Since Sept. 9, the average seven-day auction rate rose to a record 6.89 percent from 3.88 percent, according to the Securities Industry and Financial Markets Association. At the same time, one-month Libor dropped to 3.12 percent from 5.82 percent as the Fed lowered its rate for overnight lending between banks 2.25 percentage points.

“Right now, the auction rates aren’t matching up very well with swaps,” said James Moncur, deputy comptroller for Houston, which has $1.9 billion of auction debt outstanding, including $653 million tied to swaps. “We are still better off than if we had done fixed-rate bonds, but the advantage is shrinking.”

Past Savings

New York state’s borrowing costs over the five years through March 2007 would have been $176.9 million higher if it had sold conventional fixed-rate bonds instead of going to the auction-rate market and entering into swaps, according to a state report.

Now New York state has $3.5 billion of swaps associated with its $4 billion of auction debt, and all of the bonds cost more than the variable rate that banks including Goldman, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. are paying on its swaps.

Among 57 auctions held on New York’s bonds between Feb. 13 and Feb. 21, 53 failed. Rates ranged from 3.30 percent to 7.19 percent, and the variable rate is 65 percent of one-month Libor, or about 2.03 percent today.

Auction-rate bonds have become less appealing as confidence in the insurers backing the securities wanes. Even fixed-rate bonds are declining amid the unprecedented failures, and long- term tax-exempt borrowing costs have risen 11 days in a row.

Switching Out

Houston, New York state and other borrowers are considering options including converting their auction-rate bonds to less expensive variable-rate debt. Laura Anglin, New York’s budget director, said state officials and advisers are studying how to shift the swaps and avoid paying fees to end the agreements.

A December report released by New York’s budget division showed the state would have to pay banks about $156.7 million to cancel swaps requiring a fixed rate. A month earlier, it would have cost $31.3 million.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net .

Last Updated: February 28, 2008 00:19 EST

Cerberus in talks to invest in Ambac-source

Thursday, February 28th, 2008

Cerberus in talks to invest in Ambac-source

Wed Feb 27, 2008 6:24pm EST

 

 

 

By Dan Wilchins

NEW YORK, Feb 27 (Reuters) - Cerberus Capital Management is among the firms in talks with banks and regulators about potentially investing in Ambac Financial Group Inc (ABK.N: Quote, Profile, Research), a person familiar with the matter said on Wednesday.

Private equity firm Cerberus has a track record of investing in distressed assets in the financial sector. It led a group that bought 51 percent of General Motors Acceptance Corp in December 2006.

A Cerberus spokesman declined to comment.

But some of the private equity firm’s investments have stumbled lately. GMAC and its Residential Capital LLC mortgage were cut deeper into junk status on last week, hurt by factors including the mortgage slump.

Also, Scottish Re Group Ltd (SCT.N: Quote, Profile, Research), a reinsurer into which Cerberus injected $300 million last May, said it would try to sell some units and cut costs to preserve capital and liquidity. The reason: its business plan does not work.

After insuring risky repackaged subprime mortgages and other bad debt, Ambac is distressed. The second largest bond insurer, which guarantees more than $524 billion of debt, faces billions of dollars of expected losses. Its shares have fallen more than 85 percent since the start of 2007.

One rating agency has stripped Ambac’s main unit of its top ratings, and two others are considering doing so.

Ambac is in talks with banks and others to raise about $3 billion of capital, according to people familiar with the matter, and a deal could be signed soon.

Wilbur Ross has been reported in talks to invest in Ambac. Speaking on the sidelines of the Crain’s New York Business Breakfast on Wednesday, Ross declined to say with whom he was in talks, but said he expected to make an announcement in the next few days.

Among the banks in the Ambac rescue group are Barclays Plc (BARC.L: Quote, Profile, Research), BNP Paribas SA (BNPP.PA: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research), Allianz’s (ALVG.DE: Quote, Profile, Research) Dresdner, Royal Bank of Scotland Group Plc (RBS.L: Quote, Profile, Research), Societe Generale (SOGN.PA: Quote, Profile, Research), UBS AG (UBSN.VX: Quote, Profile, Research) and Wachovia Corp (WB.N: Quote, Profile, Research). (Editing by Leslie Gevirtz)

RIP William F. Buckley Jr.

Wednesday, February 27th, 2008

http://online.wsj.com/article/SB120412923043097003.html?mod=hpp_us_whats_news

William F. Buckley Jr., Author
And Conservative Icon, Dies at 82

Associated Press
February 27, 2008 12:30 p.m.

NEW YORK — William F. Buckley Jr., the erudite Ivy Leaguer and conservative herald who showered huge and scornful words on liberalism as he observed, abetted and cheered on the right’s post-World War II rise from the fringes to the White House, died Wednesday. He was 82.

His assistant Linda Bridges said Mr. Buckley was found dead by his cook at his home in Stamford, Conn. The cause of death was unknown, but he had been ill with emphysema, she said.

[William Buckley, Jr]

Editor, columnist, novelist, debater, TV talk show star of “Firing Line,” harpsichordist, trans-oceanic sailor and even a good-natured loser in a New York mayor’s race, Buckley worked at a daunting pace, taking as little as 20 minutes to write a column for his magazine, the National Review.

Yet on the platform he was all handsome, reptilian languor, flexing his imposing vocabulary ever so slowly, accenting each point with an arched brow or rolling tongue and savoring an opponent’s discomfort with wide-eyed glee.

“I am, I fully grant, a phenomenon, but not because of any speed in composition,” he wrote in The New York Times Book Review in 1986. “I asked myself the other day, ‘Who else, on so many issues, has been so right so much of the time?” I couldn’t think of anyone.”

Mr. Buckley had for years been withdrawing from public life, starting in 1990 when he stepped down as top editor of the National Review. In December 1999, he closed down “Firing Line” after a 23-year run, when guests ranged from Richard Nixon to Allen Ginsberg. “You’ve got to end sometime and I’d just as soon not die onstage,” he told the audience.

“For people of my generation, Bill Buckley was pretty much the first intelligent, witty, well-educated conservative one saw on television,” fellow conservative William Kristol, editor of the Weekly Standard, said at the time the show ended. “He legitimized conservatism as an intellectual movement and therefore as a political movement.”

Fifty years earlier, few could have imagined such a triumph. Conservatives had been marginalized by a generation of discredited stands — from opposing Franklin Roosevelt’s New Deal to the isolationism which preceded the U.S. entry into World War II. Liberals so dominated intellectual thought that the critic Lionel Trilling claimed there were “no conservative or reactionary ideas in general circulation.”

Mr. Buckley founded the biweekly magazine National Review in 1955, declaring that he proposed to stand “athwart history, yelling ‘Stop” at a time when no one is inclined to do so, or to have much patience with those who urge it.” Not only did he help revive conservative ideology, especially unbending anti-Communism and free market economics, his persona was a dynamic break from such dour right-wing predecessors as Sen. Robert Taft.

Although it perpetually lost money, the National Review built its circulation from 16,000 in 1957 to 125,000 in 1964, the year conservative Sen. Barry Goldwater was the Republican presidential candidate. The magazine claimed a circulation of 155,000 when Buckley relinquished control in 2004, citing concerns about his mortality, and over the years the National Review attracted numerous young writers, some who remained conservative (George Will, David Brooks), and some who didn’t (Joan Didion, Garry Wills).

“I was very fond of him,” Ms. Didion said Wednesday. “Everyone was, even if they didn’t agree with him.”

A Prominent Upbringing

Born Nov. 24, 1925, in New York City, William Frank Buckley Jr. was the sixth of 10 children of a multimillionaire with oil holdings in seven countries. The son spent his early childhood in France and England, in exclusive Roman Catholic schools.

His prominent family also included his brother James, who became a one-term senator from New York in the 1970s; his socialite wife, Pat, who died in April 2007; and their son, Christopher, a noted author and satirist (”Thank You for Smoking”).

A precocious controversialist, William was but 8 years old when he wrote to the king of England, demanding payment of the British war debt.

After graduating with honors from Yale in 1950, Mr. Buckley married Patricia Alden Austin Taylor, spent a “hedonistic summer” and then excoriated his alma mater for what he regarded as its anti-religious and collectivist leanings in “God and Man at Yale,” published in 1951.

Mr. Buckley spent a year as a low-level agent for the Central Intelligence Agency in Mexico, work he later dismissed as boring.

With his brother-in-law, L. Brent Bozell, Mr. Buckley wrote a defense of Sen. Joseph McCarthy in 1954, “McCarthy and His Enemies.” While condemning some of the senator’s anti-communist excesses, the book praised a “movement around which men of good will and stern morality can close ranks.”

In 1960, Mr. Buckley helped found Young Americans for Freedom, and in 1961, he was among the founders of the Conservative Party in New York. Mr. Buckley was the party’s candidate for mayor of New York in 1965, waging a campaign that was in part a lark — he proposed an elevated bikeway on Second Avenue — but that also reflected a deep distaste for the liberal Republicanism of Mayor John V. Lindsay. Asked what he would do if he won, Mr. Buckley said, “I’d demand a recount.”

He wrote the first of his successful spy thrillers, “Saving the Queen,” in 1976, introducing Ivy League hero Blackford Oakes. Oakes was permitted a dash of sex — with the Queen of England, no less — and Mr. Buckley permitted himself to take positions at odds with conservative orthodoxy. He advocated the decriminalization of marijuana, supported the treaty ceding control of the Panama Canal and came to oppose the Iraq war.

Mr. Buckley also took on the archconservative John Birch Society, a growing force in the 1950s and 1960s. “Buckley’s articles cost the Birchers their respectability with conservatives,” Richard Nixon once said. “I couldn’t have accomplished that. Liberals couldn’t have, either.”

Although he boasted he would never debate a Communist “because there isn’t much to say to someone who believes the moon is made of green cheese,” Mr. Buckley got on well with political foes. His friends included such liberals as John Kenneth Galbraith and Arthur M. Schlesinger, Jr., who despised Buckley’s “wrathful conservatism,” but came to admire him for his “wit, his passion for the harpsichord, his human decency, even for his compulsion to epater the liberals.”

Buckley was also capable of deep and genuine dislikes. In a 1968 television debate, when left-wing novelist and critic Gore Vidal called him a “pro-war-crypto-Nazi,” Mr. Buckley snarled an anti-gay slur and threatened to “sock you in your … face and you’ll stay plastered.” Their feud continued in print, leading to mutual libel suits that were either dismissed (Mr. Vidal’s) or settled out of court (Mr. Buckley’s).

The National Review defended the Vietnam War, opposed civil rights legislation and once declared that “the White community in the South is entitled to take such measures as are necessary to prevail.” Mr. Buckley also had little use for the music of the counterculture, once calling the Beatles “so unbelievably horrible, so appallingly unmusical, so dogmatically insensitive to the magic of the art, that they qualify as crowned heads of antimusic.”

The National Review could do little to prevent Goldwater’s landslide defeat in 1964, but as conservatives gained influence so did Mr. Buckley and his magazine. The long rise would culminate in 1980 when Mr. Buckley’s good friend Ronald Reagan was elected president. The outsiders were now in, a development Mr. Buckley accepted with a touch of rue.

“It’s true. I had much more fun criticizing than praising,” he told the Washington Post in 1985. “I criticize Reagan from time to time, but it’s nothing like Carter or Johnson.”

Mr. Buckley’s memoir about Mr. Goldwater, “Flying High,” was coming out this spring, and his son said he was working on a book about Reagan.

Mr. Buckley so loved a good argument — especially when he won — that he compiled a book of bickering in “Cancel Your Own Goddam Subscription,” published in 2007 and featuring correspondence with the famous (Nixon, Reagan) and the merely annoyed.

“Mr. Buckley,” one non-fan wrote in 1967, “you are the mouthpiece of that evil rabble that depends on fraud, perjury, dirty tricks, anything at all that suits their purposes. I would trust a snake before I would trust you or anybody you support.”

Responded Mr. Buckley: “What would you do if I supported the snake?”

Copyright © 2008 Associated Press

 

………………………………………………………………………………………..

………………………………………………………………………………………..

Op-Ed Columnist

Remembering the Mentor

Article Tools Sponsored By

Published: February 29, 2008

When I was in college, William F. Buckley Jr. wrote a book called “Overdrive” in which he described his glamorous lifestyle. Since I was young and a smart-aleck, I wrote a parody of it for the school paper.

Skip to next paragraph

Go to Columnist Page »

“Buckley spent most of his infancy working on his memoirs,” I wrote in my faux-biography. “By the time he had learned to talk, he had finished three volumes: ‘The World Before Buckley,’ which traced the history of the world prior to his conception; ‘The Seeds of Utopia,’ which outlined his effect on world events during the nine months of his gestation; and ‘The Glorious Dawn,’ which described the profound ramifications of his birth on the social order.”

The piece went on in this way. I noted that his ability to turn water into wine added to his popularity at prep school. I described his college memoirs: “God and Me at Yale,” “God and Me at Home” and “God at Me at the Movies.” I recounted that after college he had founded two magazines, one called The National Buckley and the other called The Buckley Review, which merged to form The Buckley Buckley.

I wrote that his hobbies included extended bouts of name-dropping and going into rooms to make everyone else feel inferior.

Buckley came to the University of Chicago, delivered a lecture and said: “David Brooks, if you’re in the audience, I’d like to offer you a job.”

That was the big break of my professional life. A few years later, I went to National Review and joined the hundreds of others who have been Buckley protégés.

I don’t know if I can communicate the grandeur of his life or how overwhelming it was to be admitted into it. Buckley was not only a giant celebrity, he lived in a manner of the haut monde. To enter Buckley’s world was to enter the world of yachts, limousines, finger bowls at dinner, celebrities like David Niven and tales of skiing at Gstaad.

Buckley’s greatest talent was friendship. The historian George Nash once postulated that he wrote more personal letters than any other American, and that is entirely believable. He showered affection on his friends, and he had an endless stream of them, old and young. He took me sailing, invited me to concerts and included me at dinners with the great and the good.

He asked my opinion about things, as he did with all his young associates, and he worked hard on polishing my writing. My short editorials would come back covered with his red ink, and if I’d written one especially badly there might be an exasperated comment, “Come on, David!”

His second great talent was leadership. As a young man, he had corralled the famously disputatious band of elders who made up the editorial board of National Review. He changed the personality of modern conservatism, created a national movement and expelled the crackpots from it.

He led through charisma and merit. He was capable of intellectual pyrotechnics none of us could match. But he also exemplified a delicious way of living.

Magazines are aspirational. National Review’s readers no doubt shared a hatred for Communism, but many of them simply wanted to be like Buckley. He had a Tory gratitude for the pleasures of life: for music, conversation, technology and adventure.

Days at the magazine were filled with rituals. And through all the fun, I don’t recall him talking about politics much. He talked about literature, history, theology, philosophy and the charms of the peculiar people he had known. I don’t recall politicians at his home, but I do recall literary critics like Anatole Broyard and social thinkers like James Burnham, even after his stroke.

Buckley contained all the intellectual tensions of conservatism, the pessimism of Albert Jay Nock and Whittaker Chambers, as well as the optimism of Ronald Reagan. He loved liberty and felt it must be constrained by the invisible bonds of the transcendent order.

One night we were at his home, and his wife, Pat, at the height of her glamour, swept in from an evening on the town and took one look at the little group of us debating some point. You could feel her inner thought: “Why does he spend his time with those people?” But Buckley loved ideas, swept us along as his companions, and sent us out into the world.

And years later, I asked if he’d ever reached a moment of contentment. He’d changed history and accomplished all that any man could be expected to accomplish. After you’ve done all that, I asked, do you feel peace? Can you kick back and relax?

He looked at me with a confused expression. He had no idea what I could possibly be talking about.

Paul Krugman is off today.

http://www.nytimes.com/2008/02/29/opinion/29brooks.html?hp

 

Thoughts on MBIA, S&P and what AAA really means

Wednesday, February 27th, 2008

http://boombustblog.com/

A few more thoughts on MBIA, S&P and what AAA really means





Written by Reggie Middleton
Tuesday, 26 February 2008
Observation: MBIA is forced to borrow at deep junk rates (14%) in a 7% environment (surplus notes have a slight premium). These notes then go on to trade at an immediate discount, yielding 20%.Observation: MBIA had to reduce, then cut its dividend to preserve capital (they didn’t even have a chance to pay out the reduced dividend).Observation: MBIA has diluted there current shareholders by considerably over 50%, raising discounted equity capital in amounts that approach what was thier extant market capitalization. This was on top of the record cost of the debt offering, at least for a “AAA” company!Obervation: MBIA has lost more then 80% of its equity value in less than a year.Observation: MBIA has recorded two historic and unprecedented losses, back to back, and foresee several more to come.Observation: MBIA has written down to zero the interests in its captive reinsurer.Observation: MBIA’s captive reinsurer lost its AAA rating, cut to A-, thus forcing it swallow those risks.

Observation: MBIA as insured securities and structures with minimal loss history and nearly no legal precedent in how to handle conflicts during losses and liquidations, on an underlying of that is going through the biggest correction/bust in the history of this country’s financial system.

Observation: MBIA now has competition from a better capitalized, cleaner, and arguably better managed competitor that is eating into its business at a rate as fast as 60 clients per day.

Observation: MBIA reinsures, and is reinsured by very small circle of entities whom concentrate very highly correlated risks using more than 80x leverage.

Observation: MBIA’s insurance of leveraged loans and junk bond CDOs has not surfaced yet, but I’m pretty sure its there.

Final Observation and Conclusion: S&P has just affirmed the highest credit rating available to this company. This is a damn shame! This does not confirm the creditworthiness of MBIA, it devalues the meaning and worth of the AAA moniker. Shame on you S&P.

I know who’s holding the $119 billion dollar bag!





Written by Reggie Middleton
Monday, 25 February 2008
This is post is primarily to document my assertions of self insurance by the banks in their alleged efforts to prop up the monoline (or should I say multilines?). Below you will find a chart with links that provide, in extreme detail, the insured holdings of a handful of banks and one homebuilder with a large mortgage operation (I do mean extreme detail, including asset name, CUSIP #, ratings by all major agencies, vintage, etc.). Let me add that I don’t know how much of this is actually bank inventory versus what was sold off, but my guess is that the banks got stuck with the vast majority of everything from the last year or so. In addition, most of the underwriting banks can get stuck with the stuff that was found to violate the agreed upon underwriting guidelines (which is potentially a lot) for a certain period, even if it was sold off. This is something that can sink the smaller equity base banks such as First Franklin.This is $120 billion dollars right here, and it is nowhere near comprehensive. These are RMBS, CMBS, and a smattering of consumer finance ABS insured by MBIA and Ambac. I know everybody thinks that we may be coming to the end of the writedowns from real estate related devaulations, but if that is what everybody thinks then everybody is wrong. This bubble took at least 6 years to build, it is not going to dissipate in 1 year. We are about 50% through the subprime crisis, but since this problem was never a subprime issue to begin with, we have lot more to go. There are all of the other classes of mortgages, the commercial real estate market, which I went over in detail , there is the consumer finance markets (recession, anyone?), then the big grand daddy of them all, the leveraged loan, junk bond CDO and CDS market - crashing at a financial institution near you. I am 50% through a forensic analysis that will expose the junk bond CDOs held by monolines that will probably knock your socks off. Alas, I digress…This credit problem and real asset bubble is a result of combining very cheap money with the lax, “other people’s money”, moral hazard to be had whenyou don’t need to be responsible for your own underwriting - otherwise known as the natural consequence of asset securitization. Why fret over due diligence when we’re just going to sell the stuff off. The following are a sampling of whose holding the bag…http://boombustblog.com/content/view/182/2/

I know who’s holding the $119 billion dollar bag!




The Partial Cost of Monoline ABS Failure

First Frankin appears to have significantly more exposure than equity (a lot more, so much so that it actually through my Excel charts out of whack): icon First Franklin Monoline ABS Inventory

Written by Reggie Middleton
Monday, 25 February 2008

This is post is primarily to document my assertions of self insurance by the banks in their alleged efforts to prop up the monoline (or should I say multilines?). Below you will find a chart with links that provide, in extreme detail, the insured holdings of a handful of banks and one homebuilder with a large mortgage operation (I do mean extreme detail, including asset name, CUSIP #, ratings by all major agencies, vintage, etc.). Let me add that I don’t know how much of this is actually bank inventory versus what was sold off, but my guess is that the banks got stuck with the vast majority of everything from the last year or so. In addition, most of the underwriting banks can get stuck with the stuff that was found to violate the agreed upon underwriting guidelines (which is potentially a lot) for a certain period, even if it was sold off. This is something that can sink the smaller equity base banks such as First Franklin.

This is $120 billion dollars right here, and it is nowhere near comprehensive. These are RMBS, CMBS, and a smattering of consumer finance ABS insured by MBIA and Ambac. I know everybody thinks that we may be coming to the end of the writedowns from real estate related devaulations, but if that is what everybody thinks then everybody is wrong. This bubble took at least 6 years to build, it is not going to dissipate in 1 year. We are about 50% through the subprime crisis, but since this problem was never a subprime issue to begin with, we have lot more to go. There are all of the other classes of mortgages, the commercial real estate market, which I went over in detail , there is the consumer finance markets (recession, anyone?), then the big grand daddy of them all, the leveraged loan, junk bond CDO and CDS market - crashing at a financial institution near you. I am 50% through a forensic analysis that will expose the junk bond CDOs held by monolines that will probably knock your socks off. Alas, I digress…

This credit problem and real asset bubble is a result of combining very cheap money with the lax, “other people’s money”, moral hazard to be had whenyou don’t need to be responsible for your own underwriting - otherwise known as the natural consequence of asset securitization. Why fret over due diligence when we’re just going to sell the stuff off. The following are a sampling of whose holding the bag…

image004.gif


   

The Partial Cost of Monoline ABS Failure

First Frankin appears to have significantly more exposure than equity (a lot more, so much so that it actually through my Excel charts out of whack): icon First Franklin Monoline ABS Inventory

This chart is using gross equity as reported, not tangible equity or foresnically scrubbed equity which is bound to be a lower number. For examples of how we use forensic analysis to reconstruct reported numbers and financial statements, see the Lennar and General Growth Properties (with conference call update ) analyses.

I am short Morgan Stanley and Bear Stearns, for the very same reasons that they are numbers one and two on this list (excluding Countrywide, whose short position was covered a while back, although I still have a bear position on WaMu). To see my take on these two banks, read my overview on the industry: Banks, Brokers, & Bullsh1+ part and Banks, Brokers, & Bullsh1+ part 2 then read or download the full analyses: “The Riskiest Bank on the Street” and “Is this the Breaking of the Bear?“.

image002.gif

http://boombustblog.com/content/view/182/2/

Banks, Brokers, & Bullsh1+ part 1




Written by Reggie Middleton
Wednesday, 19 December 2007

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered…

Last week, Morgan Stanley called Citibank the “short play of the year for 2008”. That is rather rare – an investment bank not only issuing a plainly worded sell recommendation, but an actual short recommendation? And on a fellow bank??? I read it and said, “Hmmm!” Morgan Stanley has some damn nerve calling another bank a short. They are the RISKIEST bank on the street. Let’s take a quick visual overview, and then let’s go over how I came to that conclusion.

 

In just about every major category of risk bloggable, Morgan Stanley leads the pack! Those who live in glass houses shouldn’t throw stones…

Quick Definitions:

Before we go on, let’s make sure we are all on the same page as to what is in this inflammatory graph I just posted. I know it may not be fun if you are not into GAAP, FAS, financial engineering, or any of that other sexy stuff - but if you think education is expensive (in terms of time), then you definitely wouldn’t want to try ignorance – especially if you buy banking and brokerage stocks. I’ll try to make it as funs as possible without offending anyone too much. The following asset classifications have been in the financial rags quite often lately.

FAS 157 Asset Classifications

Level 1 represent assets that have observable free market prices. An example would be a stock traded on the NYSE or NASDAQ.

Level 2 assets don’t have an observable price, but they are calculated/modeled using inputs that are based on assets with observable prices. An example could be a plain vanilla interest-rate swap whose components are observable data points such as the price of a 10-year Treasury bond. This can get very tricky, very quickly since the inputs are market based but the calculations/models can be highly subjective and quite theoretical. This is where the financial engineering of many banks can come back to bite them in the ass. Let’s take the example just mentioned, and turn it into swaption: A swaption is an option granting its owner the right, but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term “swaption” typically refers to options on interest rate swaps. This list can get more extensive and complicated: variance swap , barrier option, Quanto swaps, etc. In addition to getting complicated, they can get increasingly difficult to unwind. The kicker is, the more you need to unwind them in a crunch, the harder they are to unwind. Thus good times are good, but bad times can get very bad. This is what happened to Long Term Capital Management. LTCM had lots of leverage, lots of complicated instruments, and even more models (model risk, see below). The problem was that reality hit theory, and it hit it very hard. Don’t worry, funds and prop desks will not make those old mistakes again. There is a whole crop of new mistakes for us to make.

Okay, so what is the value of the swaption cum swap, or anything else mentioned above in a sharply trending market? What is the value of a portfolio of barrier options if the optionality portion is deeply out of the money? You don’t know the answers to these questions? Well, guess what? I bet the CEO of Citibank, Bear Stearns, Morgan Stanley and Goldman Sachs don’t know either. There are probably a lot of institutional counterparties (hey don’t GS and MS have large prime brokerage arms?) of the big banks who trade these things and corporate owners of these level 2 instruments that don’t know either. Thus, you are in good company. For those who don’t know, prime brokerage is the extremely lucrative business of being the full service broker to hedge funds. You know those unrated (as if that really means anything with Moody’s et. al.), unregulated investment pools who, through the prime brokerage arms of the big banks yield often unwieldy leverage of 20x or more… Much more. There many counterparties to these transactions that don’t have the capital to pay up in the case of an outlier even, ala LTCM. Hey, I have a hedge fund, so I am not the pot trying to call the kettle black, here. I am just trying to point out the amount of risk and exposure that sits on these balance sheets that are not picked up by the average investor. Level 2 assets pose much more of a liquidity risk and valuation liability than I have been reading about, and almost no one has harped on the counterparty credit risk we have in our financial system.

Theoretically, these esoteric level 2 assets should be moved into a level 3 category, but because they have observable market inputs they can be classified as level 2, and it appears as if they certainly are. Look at the bank chart above to see.

Level 3 is for assets where one or more of those inputs don’t have observable prices. This is group of assets that are no more than management’s best guesstimate. It literally is reliant on management estimates and opinions. I wish these banks would allow me to shift my assets into the level three category for the purposes of credit evaluation. I’ll take a 50 LTV cash out refinance loan on my house, because the dog house outback is worth $125 million, in my opinion J. Level 3 assets are measured using management’s opinion of value due to a lack significant unobservable inputs that could be used to plug into the valuation model used for level 2 assets above (and as we have pointed out, that in and of itself, can get pretty hairy). So, we have bullsh1t, that won’t fit into other bullsh1t (excuse me, financial models). In simpler, and far less crass words (for my more sensitive readers) - stuff that absolutely nobody wants to buy. If someone was willing to buy, and someone else was willing to sell, there would be a market and observable inputs in the form of a market price, right??? These unobservable inputs are actually quite observable; management just doesn’t like what they observed! That’s funny, isn’t it? Why don’t they ask me my opinion of the value? And while we’re at it, I don’t like what I observed in my brokerage account’s P&L statement the other day, so I am going to unobserve it (you know, consider it unobservable), and value it at $4,300 gazillionJ

Level 4 – This not in FAS 157 or any fancy accounting rule book. This is just where I will classify off balance sheet assets. Oh yeah, that’s right I can’t classify, value, or even identify them because they are off balance sheet. That is most likely the reason they are off balance sheet. It is here, in level 4 where most of the risk lies. Props go out to Vikram Pandit, the new CEO of Citibank for bringing the bullshit (SIVs) back to the balance sheet where it belonged in the first place. Everybody derided you the first 12 hours of your new position, but you did the right thing. Now its time for everyone else to follow suit.

When will the bullsh1t cease??? Well, it doesn’t cease here because we have more to review as represented in the introductory charts above.

Leverage explained

Morgan Stanley has about $35 billion in equity, but wields about $1,120 billion in assets. This means that the difference is leverage (or borrowed monies). This is the business model for the street, in general, but that doesn’t make it a good one, per se. Take MSs 34x leverage and apply it to the inherent leverage contained in the instruments it trades as well as the counterparties it deals with, and you have a recipe for disaster if the right sequence of events occur. For instance, looking into the exchange traded futures markets, you have the opportunity to more than quintuple your leverage, thus your return. But… is the risk worth the return? I mean, what is the risk adjusted reward here?

Go on to Banks, Brokers, & Bullsh1+ part 2

http://boombustblog.com/content/view/29/34/

….

Written by Reggie Middleton
Wednesday, 19 December 2007

Counterparty risk – why isn’t this in the media? Don’t these guys read my blog:-)

All futures contracts offer extreme leverage over the physical commodity for which they represent a forward price. I will make a representative sampling of Morgan Stanley’s asset holdings to illustrate a point:

 

  • US Government and agency securities 1,000:1
  • Foreign currency $1 million:1
  • Equity indices are 250:1
  • real estate indices, the multiplier is $250:1
  • 1 month LIBOR is 2,500:1
  • Interest rate swaps are 10,000:1
  • Gold 50:1
  • Coffee 37,500:1

 

Now, Morgan Stanley has a large and lucrative prime brokerage business. This is the business where the banks provide infrastructure and research for hedge funds (wouldn’t it be funny if I got this research from Citibank or Morgan Stanley?) and loan them money on margin. They regularly give up to 20:1 margin to their good customers, with many customers receiving much more. They also enter into OTC arrangements with these clients, basically accepting credit risk (and market risk, hedged or unhedged) with the funds as a counterparty. These funds are not banks, and do not carry statutory capital requirements or minimum credit ratings. They are just pools of private capital. Hey, you know I’m cool with that. The issue is, how do you quantify the amount of credit risk assumed? Every bank does it differently. It is not standardized, and it possibly not even done very well. Nominally, as reported by MS, this counterparty exposure is 112% of capital. That is a lot. But wait!!!! Let’s look at the anatomy of a relationship.

 

Let’s assume the hedge fund x is offered average leverage of 20:1 by MS Prime Brokerage services. MS is now selling that leverage and accepting the credit risk of an unrated, unregulated buyer. {For the record, I am totally against rating and regulating hedge funds. If you read my blog, you know how I feel about the big rating agencies, and regulation will just drive capital offshore - for good - while making no improvement here in the states! The solution is tighter risk management in the banks and brokerages – this is a private affair!} MS is doing this with 34x leverage itself. The buyer then buys invests in a portfolio like the one listed above in the futures and OTC markets, etc. at an average of 500:1 leverage. The hedge fund is effectively utilizing it equity leveraged (500*20=10,000) 10,000x on the physical and financial underlyings to speculate (and/or hedge – yeah, right). If things go bad, ex. Subprime debt or quantitative trading model blow ups, small moves can result in 10,000x losses to the equity, and multiply the 10,000x times the equity of MS’s equity capital multiplier, and you can have a doozy of a spell. I know, it sounds quite apocalyptic and these are just round unhedged, anecdotal numbers, but I am sure at least somebody gets my point. Admittedely, this does NOT take into consideration hedging, nor does it take into consideration applied portfolio theory, diversification, correlation management, etc. and yada, yada, yada. What it does take into consideration is reality rarely quoted. What I am trying to accomplish here is an illustration of how dangerous excessive leverage can be.

 

 


 

Now, all we need to do is multiply this exposure by about 1,500 or so hedge funds/private clients and apply hedges that were implemented as skillfully as those in the subprime mortgage markets, and voila! Instant Morgan Stanley counterparty exposure.

Now, back to the banks…

So, now that we know what these levels 1 through 4 are, how leverage can help or hurt us equity investors, and the mystery of who loans to who and how risky it can be - how does this apply to the big banks? Well, here is a rundown of who has what and where.

In US$ bn

       

Now, looking at the raw numbers can be misleading. As you may know, most financial institutions are highly leveraged. They make their money by deploying capital. The caveat is, not all of the capital deployed is really theirs. They borrow most of it. Equity capital is what I will define, for the sake of this blog, as capital that actually belongs to the institution (and thus shareholders). All other capital will be considered leverage, in some form of fashion. This is an oversimplification, but at the end of the day, this is what it boils down to.

 

Company ($ billions)

Leverage (Volatility)

Level 2 asset as a % of equity (model risk)

Level 3 asset as a % of equity (bullshit risk)

Counterparty net exposure as a % of equity (credit exposure)

Asset write Downs as a % of Equity

Reggie’s Take

 

I think Merrill has been much more forthcoming (not necessarily on purpose) than most of their competitors. The street will report more asset write downs, & they’re LEVERED UP! Here is a formula for a good short candidate: Asset write downs plus high leverage = Equity investors,”look out BELOW!” Why are O’Neil and Prince unemployed, yet the other CEO’s still working?

So, as you can see in chart above, Morgan Stanley is:

· The most leveraged on the street at about 34x equity deployed

· Has the most model risk of all of its peers here

· Has 2 and ½ more bullsh1t level 3 assets than the company they had the nerve to call the short of the year (don’t get me wrong, I’m short Citibank as well, but still…), and more than any other bank on the street

· Plenty of counterparty exposure, although they don’t lead the pack here

· And lead the pack reported (that’s the key word here) proportionate asset write downs to equity (I don’t know how long that will remain true though, I see many more impairments ahead).

 

A breakdown of MS’s assets, by class.

Morgan Stanley Asset Level Analysis

         

 

A close look at MS’s counter party credit ratings. Read the 104 basis points Halloween story in this blog for more on my take on ratings agencies. It will make you laugh.

 

…..

Vice Chairmen Goldman Sachs

Wednesday, February 27th, 2008

Goldman Sachs Appoints Michael Evans, Michael Sherwood Vice Chairmen
WELT ONLINE, Germany - 47 minutes ago
The Goldman Sachs Group, Inc. (NYSE: GS) today announced that J. Michael Evans and Michael S. Sherwood have been appointed vice chairmen of the firm, effective immediately.
Goldman Sachs Names Evans, Sherwood Vice Chairmen CNNMoney.com
Goldman Sachs downgrades M&I The Business Journal of Milwaukee Bizjournals.com
Goldman Sachs appoints two vice-chairmen Reuters

Goldman Sachs Appoints Michael Evans, Michael Sherwood Vice Chairmen

The Goldman Sachs Group, Inc. (NYSE: GS) today announced that J. Michael Evans and Michael S. Sherwood have been appointed vice chairmen of the firm, effective immediately. Both Evans and Sherwood will continue to have global oversight of the securities business. Evans will remain chairman of Goldman Sachs Asia and Sherwood will remain co-chief executive officer of Goldman Sachs International. As firm vice chairmen, they join John S. Weinberg, who was appointed to that role in 2006. “Mike and Michael have deep experience at Goldman Sachs across a range of businesses and regions,” said Lloyd Blankfein, Goldman Sachs Chairman and Chief Executive Officer. “In their new roles, they will be directly involved with firmwide management decisions related to people and strategy.”

Mike Evans joined the firm in 1993 as head of Equity Capital Markets in London. He was named a partner in 1994. In 1999 Mike became the global head of Equity Capital Markets and moved to New York and in 2001 he became the co-head of the Equities Division moving back to London. In 2003, Mike was named global co-head of the securities business based in New York. In 2004, he was named chairman of Goldman Sachs Asia and since that time has been based in Hong Kong.

Michael Sherwood joined the firm in 1986 in the Fixed Income Division in London and became a partner in 1994. He spent a year in New York as co-head of the Capital Markets Group in the Americas, head of Corporate Bond Trading and co-head of Emerging Markets Debt and in 2001 was named head of the Fixed Income Division in London. In 2003 he was named global co-head of the securities business. He has been a leading force behind the firm’s expansion into emerging markets. Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

http://newsticker.welt.de/index.php?channel=fin&module=smarthouse&id=683176

//////

Profile: Goldman Sachs – A Working University
Goldman_Sachs
Training and development the Goldman Sachs way is forward-thinking, top-down and cutting-edge. Annie Hayes talks to Thomas Osmond, vice president, Goldman Sachs university about its secrets of success.


Goldman Sachs key stats:

  • Name of Company: Goldman Sachs
  • Number of Employees: 30,000
  • Awards: The Best for Training & Development award 2007 in The Sunday Times’ annual Best Companies awards for a large company.
  • Think of Goldman Sachs and the pound signs start jumping. At an international bank where the remuneration on offer is mind-boggling and cash-pleasing you’d have thought that training and development play second fiddle as a retention tool to the financial rewards, but not so says Osmond: “Herzberg [the psychologist] was one of the first to point out that whilst paying people well is a great attraction tool it’s very weak at retention.” Goldman’s own research backs up this age-old theory.

    What keeps the Goldman workers dedicated to the job is indeed much more than the take-home pay and it’s a concept that those at the top have bought into. Such is the dedication to nurturing talent and developing staff a whole ethos, philosophy and training model has been born – the Goldman Sachs University.

    “Seven to eight years ago the learning and development function was integrated into, one and two years ago the Goldman Sachs University brand was created – it embodies our website, model, philosophy and name,” Osmond explains.
    Plethora of programmes

    Uncovering the bare-bones of this ‘university’ is a work in itself as there is a remarkable breadth to what is on offer – quantity certainly plays its part. Osmond proudly tells me that there are no less than 2,000 training programmes available delivering training that encompasses everything from products and market knowledge, leadership and management, professional skills, to diversity and inclusion awareness. It becomes apparent that the term ‘university’ is rather apt – for what is on offer is a universal education designed to ensure that Goldman staff are best of breed.

    “Uncovering the bare-bones of this ‘university’ is a work in itself as there is a remarkable breadth to what is on offer – quantity certainly plays its part.”Thomas Osmond, vice president, Goldman Sachs University

    The complexities continue. Osmond tells me that Goldman has recently shaken off its legacy for home-grown staff, indeed the university now also has to cater for ‘outsiders’ as the bank adapts to market conditions and its own rate of expansion: “Ten years ago it was true that we took MBA and university graduates but there’s been a shift, we’re keen to recruit in experience and that in turn has expanded the emphasis from training analysts to orientating all levels of hires.”

    At Goldman, a waltz around the building and a quick flirtation with health and safety doesn’t really cut the mustard when it comes to induction. Indeed according to Osmond it takes 100 days. “The first step is about showing new staff what it is like to work at Goldman Sachs, there are videos, case-studies etc. The second step is about ensuring staff know where they need to go for various issues and then at about the four to six month mark staff are put through a day programme, a symposium. Learning,” concludes Osmond, is “a process not an event”.

    That ‘process’ is very much a top-down event. At Goldman, senior business leaders are the teachers and professors. Osmond tells me that the chiefs and head honchos regularly take time out of their schedule to run a training event or teach a methodology – whether it relates to leadership or equity valuation. This does result, admits Osmond, in a leaning towards in-house training as the favoured method but it’s something they are proud of and Osmond believes it is important: “The Goldman focus is very contextual.”

    A unique and modern approach

    “Workers at the bank not only have to manage but produce at the same time, it’s unusual. We’ve created co-heads so two people run the business not one.” Management at Goldman clearly is unique and the best way to learn the ropes is from those on the ground that are doing it, it’s something that has intrigued clients too, so much so they are keen for a slice of the pie themselves. Client training has grown nearly 10-fold in five years as word has spread within Goldman and to its clients.

    “Senior business people feel that what we’re doing is important and both the conversations we’re having and the time they invest indicate that they see the value’”

    Unsurprisingly training delivery is thoroughly modern: e-learning, web casts, simulation to name but a few. Osmond tells me that the reliance on technology is crucial in ensuring the training is consistent across the globe: “We have to make sure we can train our people in Moscow even though we can’t always fly trainers out to them.”

    I was interested to find out what employees thought of all the university’s efforts. Last year the bank won the Best for Training & Development award in The Sunday Times’ annual Best Companies awards for a large company. Among the top 20 big companies Goldman Sachs staff returned the highest positive scores, for 34 of the 70 points that make up the employee survey. These include having pride in working for the firm (88 per cent) and having a job that is good for personal growth (84 per cent). Surely a good indicator that the university is a people-pleaser and it’s refreshing to hear that in conflict with the numbers they are so clearly able to crunch they’re not so concerned with the return on investment (ROI) the university produces.

    Osmond says: “Senior business people feel that what we’re doing is important and both the conversations we’re having and the time they invest indicate that they see the value. They’ve specifically said it isn’t worth trying to determine ROI – ‘it isn’t worth the time because we know it has impact’ said one senior partner. An attitude that has put them in pole position and raised the banking game.

    http://www.trainingzone.co.uk/cgi-bin/item.cgi?id=179461 

    Bond Index Draws Doubters

    Wednesday, February 27th, 2008

    Bond Index Draws Doubters

    Indicator Is Faulted on Call
    For Commercial Real Estate;
    Critics Seek More Disclosure

    By LINGLING WEI
    February 27, 2008; Page B13

    Complaining that a credit-market index is making a wrong call about the prospects for commercial real estate, some investors and analysts are calling for more transparency in the index, namely a disclosure of how many trades are taking place.

    The index, called the CMBX, reflects the values of bonds backed by mortgages on office towers, hotels and the like. The index has become controversial because it is trading at levels that would imply a looming collapse of the U.S. commercial real-estate market. However, that scenario has been questioned by many industry experts who say that market fundamentals remain solid, even if the market is softening. And these critics have become vocal about the possibility that the index is being abused by people looking to make a quick buck.

    [Chart]

    “Real-world events are being obscured by an index easily manipulated by investors,” says analyst Richard Bove at boutique investment firm Punk Ziegel & Co., who is in Tampa Bay, Fla.

    But the company that runs the index says it can’t meet such requests for greater transparency because of the way the index works.

    The CMBX, which began trading in March 2006, was created by a group of Wall Street firms to establish a derivatives market for commercial real estate, allowing investors to make bets on how they think the property market would perform. The CMBX is supposed to reflect the performance of commercial-mortgage-backed securities, which are pools of mortgages that are sliced up and sold to investors as bonds. But the market for these bonds has virtually shut down, making it hard to determine what these bonds are worth.

    Thus, the index has become a de facto benchmark for pricing commercial-mortgage bonds. The upshot: Issuers of these bonds have to increase the yields to higher and higher levels to sell them, making it more expensive for people to invest in commercial real estate. For instance, the safest portions of a $1.2 billion commercial-mortgage-bond deal led by Morgan Stanley two weeks ago — the first such issuance so far this year — were priced at about three percentage points over the 10-year Treasury. A year ago, yields on comparable AAA-rated bonds would have been less than one percentage point over the benchmark.

    Tighter and more costly credit amid a slowing economy, some analysts say, could become the chief reason for declining commercial-property values in the coming years. Moody’s Investors Service recently said it expects property prices to ultimately decline by 15% to 20%, reversing the gains of the past two years. As a result, people who have found their fortunes hurt by the performance of the index are getting suspicious as to who is actively trading on it and whether those traders are making a bad situation worse. “It’s troubling to us,” says Kieran Quinn, chairman of the Mortgage Bankers Association, which represents lenders. “We don’t know who’s behind this.”

    Yet, they think they have a pretty good guess. They point to hedge funds, which they believe are flocking to the index to make bets against the commercial-property market, which in turn causes the CMBX to imply a record level of perceived risk of commercial-mortgage defaults. Those short-sellers believe the commercial-property market will get worse and use the index like an insurance policy and will get paid if defaults rise.

    In theory, the index also should reflect the trading of those who want to go “long,” betting that the property market will improve. But Darrell Wheeler, global head of securitized strategy at Citigroup Inc., notes that there is a dearth of investors going long with the index in part because of the lack of disclosure of the trading volumes for the index. “Until such a volume system is implemented,” Mr. Wheeler says, “traditional real-money investors such as insurance companies and pension funds are understandably reluctant” to go long, leaving its performance purely driven by short-sellers.

    As compared with stocks in publicly traded companies and the well-established stock indexes, where investors can easily track their trading volumes, the CMBX isn’t traded in traditional exchanges but in private transactions. Market participants say the trading could be so thin sometimes that a single trade of $10 million could cause a big swing in the index.

    Markit Group Ltd., a London-based company, says on its Web site that it works with the trading desks of a consortium of Wall Street firms to calculate the index. Markit Managing Director Ben Logan says it is impossible for the company to report the trading volumes for the index because the company itself doesn’t even know. Unlike stock trades, which are usually handled by a stock exchange, CMBX trades are direct transactions between buyers and sellers. “There is no place where volumes are available,” Mr. Logan says.

    The solution to the problem, says Mr. Bove of Punk Ziegel, is for securities regulators to “require an exchange mechanism where investors can see clearly the bids and offers and trading volumes for the index.”

    Write to Lingling Wei at lingling.wei@dowjones.com

    http://online.wsj.com/article/SB120407320643195079.html?

    mod=mkts_main_news_hs_h