Prieur’s readings (April 29, 2010)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• Randall Forsyth (Barron’s): First-quarter GDP is history; beware a 2011 slowdown, April 27, 2010.
As economists mark up their estimates of the first quarter’s economic growth, the least relevant question for investors is what number the Commerce Department will publish Friday for gross domestic product. Three percent? Four percent? Vastly more important is whether rebound of the last two quarters is sustainable, given certain contractionary changes in fiscal and monetary policy, perhaps starting late this year and certainly in 2011.
• Tunku Varadarajan (The Daily Beast): The hearing from hell, April 27, 2010.
These distinctly un-senatorial words slopped forth repeatedly from the mouth of Carl Levin on Monday evening, and anyone tuning into the Senate subcommittee hearing on financial reform could be forgiven for wondering whether this could really be C-Span, and not HBO or Showtime. Our political rituals, usually decorous and borderline-prissy, are seldom as coarse as this, and Levin’s performance alone (while not always enlightening) was worth the price of admission.
• The Economist: Grilled squid, April 28, 2010.
“One of the worst days of my professional life” was Lloyd Blankfein’s characterisation of April 16, when the Securities and Exchange Commission (SEC) filed civil fraud charges against Goldman Sachs. The bank and an employee were accused of failing to disclose that a hedge fund that had influenced the composition of a complex mortgage-debt transaction was also shorting it. April 27 was surely not much better, either for the Wall Street firm’s boss or any of the six other current and former Goldman investment bankers who testified before the Senate Permanent Subcommittee on Investigations. The roasting, which lasted more than ten hours, was as dramatic as any hearing focused largely on synthetic collateralised-debt obligations (CDOs) could be.
• Jonathan Stempel (Reuters): Goldman puts Buffett ethical values in spotlight, April 28, 2010.
Warren Buffett’s reputation as a stickler for good business ethics has put the billionaire in an awkward spot because of an investment in Goldman Sachs.
• Richard Teitelbaum (Bloomberg): Barofsky says criminal charges possible in alleged AIG coverup, April 28, 2010.
• John Gapper (Financial Times): Time to rein in the ratings agencies, April 28, 2010.
If the crisis proves anything, it is that the agencies enjoy too much authority among investors and regulators. Any reform that would loosen their grip on bond markets deserves a shot.
• Doug Kass (TheStreet.com): Financial reform school, April 27, 2010.
On the day when Goldman Sachs executives testify in front of the Senate subcommittee in Washington, D.C., to discuss the derivative products that have been blamed for the near bankrupting of many of the world’s leading financial institutions, I have come up with some simple ideas regarding how commercial and investment banks should be allowed to operate going forward.
• Mohamed El-Erian (Financial Times): Greek crisis endangers private sector, April 28, 2010.
What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full- blown crisis for Europe.
• Jon Markman (MarketWatch): Let Greece default on its debt, April 28, 2010.
If you sense there’s a catch, you are right. The best way out of this mess is for Greece to man up to its deficit problems by defaulting on its sovereign bonds, withdrawing from the European monetary union, reviving and devaluing the drachma, and beginning the financial equivalent of a twelve-step program to cure its debt addiction. While that result might sound bad for investors, it really isn’t. As long as Greek debt holders receive some reasonable return of capital in the process, as I suspect they would, they can move on from this mistake to invest in other distressed but not doomed credits with greater potential for return.
• Daniel Gross (Slate.com): The stock market who cried wolf, April 27, 2010.
Last week, the Senate agriculture committee, led by Blanche Lambert Lincoln, sent to the floor a bill that would significantly alter derivatives trading. Should it become law – here are the highlights – the bill would require regulated banks with derivatives-trading units to spin them off. It would also require that derivatives, many of which are traded over-the-counter (i.e., not on an exchange), be traded through a central clearinghouse, with pricing and volume data made available to the public. Predictably, the industry is opposed to the mandates for greater transparency.
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