Author Archives: Stubborn Mule

Come Back Keynes, All Is Forgiven!

In current phase of the GFC* we are witnessing extraordinary Government intervention in the financial markets, with a host of countries providing enormous guarantees of bank liabilities, purchasing distressed assets or directly investing in ailing banks. Switzerland is the most recent country to follow this route, injecting around 6 billion Swiss Francs (A$8 billion) into UBS, gving the Government an estimated 9% stake in the erstwhile investment banking giant.

While the immediate aim of these moves is to save a financial system that is on the verge of collapse, there is also increasing concern that the ructions in the financial sector are a precursor to an extended global recession. This is also generating responses by Governments around the world. Here in Australia, the Rudd Government has announced a A$10.4 billion stimulus package, shelling out money to low-to-middle income families, pensioners and home-buyers.

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US Treasury: Proud New Owner of America’s Banks

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The latest moves by the US Treasury in the GFC have been hitting news headlines on the screens today:

US TO INVEST $250 BILLION DIRECTLY INTO BANKS
US TO GET PREFERRED SHARES IN BANKS
US TO INVEST IN MORGAN STANLEY, GOLDMAN, JPMORGAN, BANK OF NEW YORK, STATE STREET, CITIGROUP, BANK OF AMERICA, WELLS
US TO INVEST $10 BILLION IN GOLDMAN SACHS
US TO INVEST $25BLN EACH IN CITI, BANK OF AMERICA, JPM

This is a big shift in strategy from the original intention of the TARP bailout plan which aimed to help banks by buying up distressed assets from troubled banks rather than investing directly in them. Continue reading →

Australian Banks Get A Government Guarantee

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In the latest instalment of the Global Financial Crisis (“GFC”), following the lead of Ireland and other countries, the Australian Government has taken the extraordinary step of guaranteeing all deposits with Australian banks, building societies and credit unions as well as locally incorporated subsidiaries of foreign banks. The guarantee can also extend to wholesale debt (if banks pay an as yet undetermined guarantee fee), which allows protection of bonds issued by Australian banks offshore.

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Couch Potatoes

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A colleague has lent me a copy of Oliver James’ book “Affluenza” and, while I am not far through it yet, it is scathing in its damnation of the effects of capitalism on individuals in society. At a time when capitalism is rapidly losing it shine on a global scale, with the financial sector collapsing around us, this individual perspective is an interesting small scale counterpoint to the large scale picture we are seeing on the news each day.

The thesis of the book is that an “affluenza virus” has spread thoughout English-speaking countries. This virus leads us to be obsessively focused on shallow material pursuits. At the same time, it leaves us anxious and prone to low self-esteem, addictions and depression as there is always someone with a faster car or a bigger cigar (to quote The Beautiful South).

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Irish Government Bails Out All Irish Banks

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In the latest development in the ongoing train-wreck that is global financial markets, the Irish Government has stepped in to guarantee deposits and debt of all Irish Banks. This is an extraordinary step to take and reflects a banking system that is truly broken. Finance, particularly banking, is built on trust more than law (as described in Francis Fukuyama’s book “Trust”) and that trust has well and truly gone from the market.

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The Mathematics of NT-plus Screening

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Update: regular commenter Mark L has helpfully identified they reason behind the apparent anomaly in the statistics that motivated me to write this post. I had misinterpreted one of the statistics. While this takes the mystery out of the numbers, it does highlight how tricky it can be to get to grips with the statistics of medical tests. I have edited this post to correct that misinterpretation. I decided not to use a the strikethough editing approach popular among bloggers as the content can be confusing enough already!

Despite the fact that more banks have been failing (Bradford & Bingley, Wachovia, Hypo Real Estate, Fortis,…), in this post I will continue to stay away from the subject of the financial markets and will instead look at some mathematics, trying not to lose too many readers in the process.

Recently I was contemplating results from an “NT-plus” test, which combines ultrasound measurements of the nuchal translucency with maternal blood-tests to provide a screening test for various chromosomal abnormalities, particularly Down Syndrome. Tests of this type abound with statistics and the mathematician in me could not resist crunching the numbers a little to get a better understanding of the test.

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2042: Art on the Street

The Mother of All Bailouts

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Financial markets around the world remain extremely anxious as the US Congress ponders the Troubled Asset Relief Program (“TARP”) proposal, aka the Mother of All Bailouts (“MOAB”). Under this proposal, the US Government will spend up to US$700 billion to buy “troubled” mortgage-backed securities in the hope that this will lubricate the markets that have well and truly seized, encouraging banks to start lending once more to each other, corporates and individuals.

There has been criticism of the plan both from some Democrats who want to see curbs on executive salaries and from some Republicans who are decrying the plan as financial socialism. Nevertheless, most observers expect the plan to be passed by the end of the month particularly since Paulson seems to be conceding ground on the subject of executive compensation.

One interesting perspective on the chances of success comes from the prediction market intrade which allows bets to be placed as to whether or not the plan will be passed. At the time of writing, this market puts the chances at 77%. (The chart originally published here is no longer available).
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“Eat My Shorts” – Short Selling in Australia

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Earlier this week, Australia joined the US, the UK, France, Germany, Canada and other countries in clamping down on the practice of “short selling” shares. According to the regulator, the Australian Securities and Investments Commision (ASIC), the new restrictions were aimed at reducing “unwarranted price fluctuations”. For the moment, the restrictions are in place for a period of 30 days, at which point ASIC will decide whether to extend or lift the restrictions.

For many outside the financial markets, the practice of short selling is a mysterious one and, for some, rather worse than that. The following letter to the editor in the Sydney Morning Herald is a case in point:

Short selling can be carried out only if the buyer is misled into believing that the seller owns the stock (“ASIC in total ban on short selling“, September 22). Can short selling ever be morally justified? Surely the only beneficiaries of such activity are those with sufficient funds to manipulate the sharemarket. After all, we cannot legally “short sell” anything else we do not own, such as a neighbour’s house, business or car.

Laurie Mangan Tamworth (September 23)

So what is short selling? Contrary to Laurie’s view, there is no misleading involved but it does involve selling shares that, essentially, you do not own. There are two types of short selling: naked (which really sounds naughty) and covered (which sounds a bit better). To explain what each of these involves, I’ll first go into some of the mechanics of share trading.

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AIG: Too Big to Fail

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The phrase “too big to fail” (TBTF) has been used a lot throughout the credit crunch of the last twelve months or so. Now it seems that American International Group (AIG) was too big to fail as it was bailed out by the US Federal Reserve (the “Fed”), while Lehman Brothers was not and was allowed to collapse in ignominy. For those outside the financial markets, it probably doesn’t make a lot of sense (not that it makes much more sense for those on the inside), so what is going on here?

There is an old saying that if you owe the bank $1,000 that’s your problem, but if you owe the bank $1 million that’s their problem. Something similar is at work at the moment in the financial markets.

In theory, companies in a capitalist economy are free to stand or fall on the results of their own business decisions. If they do fall, investors who chose to buy shares or bonds will lose out, but that risk is supposed to keep everyone focused on making better decisions. Banks have always been a little bit different, for two reasons. First because they take deposits from “mums and dads” (or, as the banks call them, retail depositors) and it is in the interests of the smooth-running of the whole system that this money is put into banks rather than under the mattress. Hard experience over the years of bank runs has led to various forms of depositor protection around the world, such as Government guarantees in the US through the Federal Deposit Insurance Corporation (FDIC). Of course, banks make a decent, albeit shrinking, profit from all these protected deposits.

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