Monday, September 28, 2009
Wall Street's Growth: Like a Big Tumor
This chart from Princeton's Hyun Shin is the best illustration I've seen of the unsustainability of the boom in the securities sector:
In absolute terms, most sectors grew by a factor of 80 between since 1954. But, at its peak, the non-commercial-bank financial sector had grown by a factor of 800. From Shin:
The greater detail afforded by the chart in log scale reveals that the securities sector kept pace with the rest of the economy until around 1980, but then started a growth spurt that outstripped the other sectors. On the eve of the crisis, the securities sector had grown to around ten times its size relative to the other sectors in the economy. Clearly, such a pace of growth could not go on forever. Even on an optimstic scenario, the growth of the securities sector would have tapered off to a more sustainable pace to keep in step with the rest of the economy.
The "Real" Mega-Bears
Here is the chart that replaced my original Mega-Bear Quartet overlay. This "Real" Mega-Bear version shows the current S&P 500 from the top of the Tech Bubble in March 2000.
This series is more consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. When we adjust for inflation, the all-time high for the S&P 500 was in 2000, not 2007.
Rally in ‘toxic’ securities set to boost banks
By Aline van Duyn and Francesco Guerrera
The recent rally in the markets for “toxic” securities could deliver a significant boost to US banks’ third-quarter earnings if financial groups decide to book accounting gains on assets that caused them billions of dollars in losses during the crisis.
Wall Street executives and analysts say the significant rise in the price of mortgage-backed securities and other once-battered debt offers banks the first meaningful chance to “write up” some of the value of these distressed assets.
Distressed securities start to perk up - Sep-23Liquidation of CDOs aids banks - Sep-21In the last three months, the Markit ABX index, which tracks securities backed by home loans such as subprime mortgages issued to borrowers with weak credit, has gained more than 30 per cent, as investors rediscovered their risk appetite and the US government flooded the debt markets with liquidity.
The extent of the write-ups is difficult to predict because of banks’ complex balance sheets and uneven use of accounting rules, but some experts believe the rallying credit markets could pave the way for billions of dollars in accounting gains.
A partial reversal of the $1,000bn-plus in writedowns of securities suffered by the financial system during the crisis would strengthen bankers’ arguments that the industry is recovering its health as the global economy and capital markets improve. In addition to the writedowns, banks around the world have had to absorb $600bn of actual losses on soured loans.
Senior US bankers say the size of the write-ups to be revealed in the third quarter, which ends on Wednesday, will depend on how aggressively financial institutions take advantage of the rallying credit markets.
Some executives believe that auditors and boards will advise banks to take a cautious stance. They point out the market for toxic assets has been fairly thin, suggesting that the price increases could be short-lived – a reversal that would force banks to take further write-downs.
“From an accounting point of view the firms have no choice but to mark up positions if an active market develops. The question is: ‘what is an active market?’” a banking analyst said. “Chief financial officers will be very reluctant to mark up the assets based on simply a few trades.”
Bankers say many institutions, especially weaker ones, have sold their bad assets as prices have risen, reducing the scope for write-ups, or have hedges on those positions, making it more difficult and expensive to book a gain.
Even the riskiest kinds of bonds have rallied strongly in recent months, as investors have scrambled to find higher-yielding assets to boost returns on their portfolios.
In addition, the imminent launch of US government-backed investment funds targeting assets hit most by the financial crisis such as securities backed by residential and commercial mortgages have also pumped up the rally in these distressed securities.
Copyright The Financial Times
Spain tips into depression
Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days.