Obama Press Conference
In President Obama's first prime-time press conference, the challenges were many and the answers were long.
We suppose that coaches would have suggested more pithy lines, and brevity in response. Instead, the President chose to speak to the issues in extended extemporaneous answers. This provides great insight into his actual thinking. We'll see tomorrow how many appreciated the significance.
The Content
The best Obama position was demonstrated in his understanding that neither the stimulus plan nor the Geithner TARP plan will be perfect. As an astute politician, he understands that any plan that can actually win passage is the result of a political compromise.
The Critics
Those pontificating pundits who get ratings, viewers, web site hits, or the equivalent are enjoying a feast of opportunity. It is an easy cheap shot to find something in the stimulus package that one does not like.
This sort of analysis is not really helpful to our fellow citizens, and certainly not for investors.
Our Take
We expect massive criticism of any plan. It does not matter what the plan actually is.
In sharp contrast, we expect both TARP and the new stimulus bill to pass and to be effective. Since the highly-politicized punditry and media will criticize both, there will be a buying opportunity.
This is the opportunity for investors to vote against an ill-informed market and punditry.
Bonus Point
Anything in the Geithner Plan that relieves mark-to-market accounting will create a massive rally. We do not really expect this, based upon the leaks today.
We expect a second best alternative, cordoning off illiquid assets. Whether this will work depends upon how it will be "scored" against the regulatory capital of current lenders.
Everyone will be watching this carefully.
Jeff, I seem to remember that when this crisis first hit, Newt Gingrich suggested that one of the FIRST things they should do was to deal with the mark-to-market accounting because it was a real burden on businesses. I don’t pretend to understand why yet, but I’m wondering why this hasn’t been a serious consideration before now.
When I walked into la sala he was being asked about countries in the middle east that had nuclear weapons; his answer was a hemming and hawing “extemporaneous” blah blah blah, instead of a short, concise, “Israel. They have hundreds of warheads.”
I told mi esposa to either find some cartoons or watch the rest of his “address” in the other room.
It’s much better, and less personally distasteful, to ignore the live broadcast and read commentary and transcripts afterward.
Two points:
The health care provisions in the bailout plan are an entry point to increased bureaucracy and ultimately rationing of procedures. I think this has long term implications for investors in several industries.
The speech took pains to be debasing of those economists who oppose the bailout and stimulus on “philosophical” grounds. Interesting that at least some of those economists who support the bailout and stimulus also have a philosophical grounding; a different one that leads them to support the bailout. Although in truth the lesson of Alinsky cannot be forgotten, many men, especially politicians, choose their action or preference based on other considerations and then simply use philosophy as justification.
“In sharp contrast, we expect both TARP and the new stimulus bill to pass and to be effective. Since the highly-politicized punditry and media will criticize both, there will be a buying opportunity.”
I’m not exactly sure what you’re thinking here.
If you’re saying it will be effective at giving hundreds of billions more dollars to insolvent, incompetent businesses so that they can waste that money too, then I agree.
The effect however, will be to throw us into a Japanese style “lost decade”.
I guess if you think the rest of the bad debt will be paid off by this plan then going long at this point makes sense. But all the people who got this right from the start are saying we are nowhere near done.
You might want to read up on what Roubini, Taleb and Shedlock have been saying for the past few months, that’s how I came to my conclusion.
I have not heard nor can I find a foil to their arguments.
Roubini gets credit for warning of much of the current crises. But the need for investors to find gurus is self-defeating. Roubini was 100% invested in stocks when the crises hit.
Along those lines, credit to this blog for putting up a realistic view of things. Any plan that can pass through the Senate is not going to be 100% palatable to the left or right. Since the media likes conflict, many people in the media are extremists on both sides. They will all blast this provision or that, then at the end say that it is better than nothing. Well, it would be nothing if we listened to them.
Nobody was even talking about a stimulus plan over $200 BB a month ago. Now we will get one over $750 BB. If that is not enough, we will get another next year. This is going to be a long process and I think Obama knows that. I think he knew it before many knew it. I think there are still people on Wall Street that still don’t get what’s going on. I know many in the media don’t even have the capacity to understand.
“I think he knew it before many knew it. I think there are still people on Wall Street that still don’t get what’s going on.”
Except many of those who not only do get what is going feel the plan is misguided and inadequate. They not only get it, they got it long ago and well before the downturn in either the markets or the economy became clear. Jeff didn’t and neither did Obama. Maybe we should listen to some of them who did.
Nothing wrong with missing things, even grand canyon size whiffs like Jeff on this market, the economy, and the effectiveness of past policy responses, but it might at minimum lead to a lot less smug condescension from him. It might even lead to a few acknowledgements that those who he has in the past criticized for not getting it, got it a lot better than he did, were not being alarmists or perma bears (a particularly ridiculous epithet given that we are looking at negative returns adjusted for inflation of well over a decade in length.)
Nor were they just looking for attention (apologies owed to John Hussman in particular.)
Frankly Jeff still doesn’t seem to understand what is really ailing the sick institutions he feels these plans will aid. As someone deep into evaluating these loans and mortgages, the idea that they are deeply undervalued at the level the banks are marking them to now is ridiculous. He does have a point that the underlying loans may be a very good buy at market prices (though not at what the banks are carrying them at) but then risky assets usually do have a rather large risk premium don’t they? Shouldn’t they?
Meanwhile our financial institutions are carrying loans and other assets on their books that are destined to be marked down by at least another trillion dollars (and yes that is optimistic) regardless of whether they use mark to market accounting or not, and Jeff is still focused on people being negative about plans that try and hide that fact, or pretend that shuffling the owners of that debt is a real step forward.
Lance — I try very hard to learn a little something from every comment. I certainly appreciate feedback. I am having trouble getting some value from yours.
On this visit, and a couple of others, you have strayed pretty far from the point at hand. I think that your characterization of my viewpoints is inaccurate and unfair. It is an ill-supported laundry list of opinions that does not lend itself to a good response. There are too many points unrelated to this article.
Perhaps if you visited more frequently, you might have noticed more articles emphasizing poor economic data, various problems, and assorted bearish recommendations.
I am not really interested in your opinions about my writing style or your perception of apologies you think I should make. I am carefully analytical when engaging the work of others. That does not mean that I am always right, but it does mean that I am honest and stick to the arguments.
You need to learn the difference.
I pretty much allow any comments here as long as they are not spam, so I am leaving yours up (as I have a couple of your prior and similar rants). I think most readers can figure it out.
If you want to engage me on one of your specific points, why not write a well-organized article on your own blog, and I can reply in a civilized fashion? Since you say you are an expert on evaluating illiquid assets. Why not write something showing us all how it should be done? Provide some examples. I have made the plea for someone to do that several times.
So let us try for a little more constructive discussion. Disagreement is fine!
Jeff
On this visit, and a couple of others, you have strayed pretty far from the point at hand.
I quoted something, and everything I said was related to that quote or your general points in the post.
As for previous visits, I was on point exactly then as well. Bill of no doo dahs fame had incorrectly described John Hussman’s investment performance (easily corrected) and unfairly characterized his performance as poor (more subjective, but in reality ridiculous given his record.)
The second time I felt you had mischaracterized (I’ll refrain from claiming misrepresented) a point of Barry Ritholtz. You are free to disagree with my argument, but it was certainly on topic.
I think that your characterization of my viewpoints is inaccurate and unfair. It is an ill-supported laundry list of opinions that does not lend itself to a good response. There are too many points unrelated to this article.
They were either related to the quote or the article.
Perhaps if you visited more frequently, you might have noticed more articles emphasizing poor economic data, various problems, and assorted bearish recommendations.
I have read nearly every post over the last two years, and I never claimed you hadn’t mentioned any of those things, or never had a bearish recommendation. In fact, I read them because they are often quite good. That doesn’t excuse the point I am making.
I claimed that you had repeatedly criticized people for views which later turned out quite accurate. That is fine, we all miss things, and disagree with people who later turned out correct. However, you went further and asserted spurious motives and at times questioned their competence or “expertise.” Seems they were expert enough.
That does not mean that I am always right, but it does mean that I am honest and stick to the arguments.
You need to learn the difference.
My point is that you haven’t. I am pointing out you haven’t observed the difference, it has nothing to do with your style. As for honesty, I never questioned it. I am sure you honestly felt that the people you criticized were people you needed to warn your readers to question on the basis of their lack of expertise and likely motives. Given it turned out they were correct in both the causes and implications of the path we were headed down I think acknowledging they did know what they were talking about might be in order and we can all avoid crowing about how much you “get it.” That is good form.
Since you say you are an expert on evaluating illiquid assets.
Now Jeff, where did I claim that? One doesn’t need to be an expert on them to understand the arguments of those who are, and evaluate who amongst those experts to give credence to (regardless of their credentials.)
Still, I am deep into evaluating these mortgages, and while I don’t think I need to be an expert to understand what I am seeing, I’ll let some experts I use make a point about them. Ray Dalio (and he is certainly expert enough, and has access to a great number of specialists to aid him) pointed out that up until quite recently that mark to market prices have with a lag of a few months accurately predicted the ultimate fate of these securities. All the while bankers, credit experts and yes, you, were claiming the market prices were crippling the banks with unrealistic valuations. Now, I am not an expert, but I noticed the same thing, but I know it is important to you that even readily understood information by any diligent and reasonably financially savvy observer doesn’t count unless an expert signs off. So take Ray’s opinion instead.
Experts I work with, consult with or read from PIMCO, TCW, MetWest, John Paulson & Co. and others feel the banks loans and securities are nowhere near being carried at their true value. So, while present marks may have finally overshot in some cases (leading them, and me, to see huge value in selective tranches, and reasonable, but still risky, value in many more) any reasonable mark would wipe most of our troubled institutions out. Europe is in much worse shape.
So mark to market accounting is a non issue. The market marks may be too low, but more realistic marks are so far below what the banks are claiming that it is similar to arguing over whether one is going to be more damaged by a 2 ton safe falling on you versus a 4 ton version. Either way you are dead.
In another post you ask about what you are missing on recovery from toxic assets. First, toxic assets are toxic if their losses threaten the institution holding them. It may be a colorful term, but it is pretty accurate. Being toxic doesn’t mean they are worth zero. They could be marked down anywhere from 10% to 100%. When you are levered 10,15, 20 or 40 to 1, even 10% is devastating, or toxic. Those marked down to single digits could be worth exactly nothing as there is no recovery for many tranches. Thus, the aggregate loans may be worth quite a bit more individually than a bundle of the same securities depending on the tranche and the risk.
Sometimes this works in perverse ways for even senior tranches. For example, in the case of an impairment of the actual principle of the loans in some securities(from say a principal modification)the cash flows may then be distributed pro-rata amongst all the tranches.
This works out in a way that junior tranches are priced for the risk they will never be paid and the senior tranches trade not only on the risk that they will be modified by government, but allowing for the risk that cash flows will be diverted to lower tranches. Thus very low valuations.
This is supplemented by the fact that very few firms, and almost none of the banks, can determine what the underlying credit risk is. Thus a risk premium exists since who knows what you are getting? The banks that do know don’t want to tell because they want mark to market suspended (or the government to pay for them) so that they can all be held (or sold) at ridiculous premiums to the market. While many of the loans may in fact be a very good value and deserve higher marks than the market is giving, they can’t afford to take the losses on the loans which are bad. So they obfuscate and delay.
Thus we get a normal market reaction. While in aggregate the loans and the securities they are bundled in may be marked too low, they carry a large risk premium (as they should) due to the grave risk that holding any particular security may be impaired through default risk, modification risk and in the case of senior tranches, diverted cash flow and recovery if they are modified.
Thus savvy investors might be able to make a very high return on them even as they prove toxic enough to kill many an institution.
For example, buying a junior subprime tranche with the aid of one of the few firms that can analyze the underlying loans at 22 cents on the dollar may make a lot of sense. If you don’t know what is in the security however you may end up with a bunch of non owner occupied condos on the Florida Coast with large doses of negative equity. Since you are junior the cash flows even from recovery never reach you. You may lose 100% of your investment. Meanwhile, the other security may already be cash flow poor, but the recovery is higher and if the government modifies it you actually get your pro rata share of the cash flow (a windfall.) Since you only paid 22 cents on the dollar any recovery is positive and the total return is quite attractive. Would I pay 50 cents for this? No. But at some price it has a high enough return to be attractive. But the potential return needs to be high.
Furthermore, a particular security might be very profitable to me at 50 cents on the dollar but death to the institution if they were priced at levels that would interest me not as way too high (such as back in August when you were arguing that FAS 157 was the problem.) https://www.dashofinsight.com/a_dash_of_insight/2008/08/evaluating-the-fed-pick-your-sources.html
August is an interesting case Jeff. It was certainly a plausible belief that these securities were already priced too low on a mark to market basis(though that has certainly been disproven.) However, that would have been a risky call given the high likelihood of a recession, likely declines of another 20-35% in housing prices, etc. Given the risk the prices were quite reasonable and Merrill’s sale is no longer considered one where the price was ridiculously low. While it may result in a high return, it could just be reasonable or even negative (except that Merrill provided the financing.) That is the way markets should work, and banks solvency that hinges on risky securitized loans should not be carried anywhere close to par. They should carry a high risk premium and be valued somewhere close to what they can fetch if they need cash.
However, one need not agree with that statement to ignore mark to market as the problem because mark to any reasonable model makes our large money center banks basket cases.
Anyway, I may not be an expert, but I can tell the difference between banks holding securities at 97 and markets valuing them at 32 as something other than a mark to market issue. Especially since the banks are not marking them to market anyway.