Fighting for entitlements in Greece

The left goes violent in Greece just like they may do in California when the austerity measures kick in for the Golden State.

The Greeks were told that they didn’t have to work as many hours, could retire early and could be paid benefits in Greece even though the government was simply borrowing to fulfill the entitlements.

The Greek government borrowed money that it can never pay back in full.  An entire welfare generation expected the government to pay for their “good life”.

And of course the general media is accepting of the protesters rights to express themselves and the protesters rights to their entitlements.

These programs were established decades ago and once these unsustainable entitlements were established it became politically impossible to eliminate or reduce them.  Sound familiar?  Think California, New York and New Jersey?

And even though Greece never met its promise to restrain its public debt to 3% (when it joined the euro zone) of the country’s gross domestic product it got to 120%.  Now they are recommitting to this promise to get the amount of their debt down to the 3% standard by 2014.  It’s never going to happen - think default!  The result of Germany and others lending to Greece will simply delay the default.

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What will financial reform mean to small business?

In California one can’t lend money to more than one person a year without getting a license from the state.  So if I lend $10 to my brother and $15 to my sister, a month apart I have broken the law.

And despite the fact that banks can charge (with plenty of state and federal regulation) over 20% a year on their credit cards, unless I am a favored institution (like a bank) I can only charge a maximum interest rate of 10%.  This is typical of the regulation that protects the big institutions and hurts small business.  And these kind of state usury laws exist in many states.

What will the proposed financial reform do about this kind of restriction on competition?  Not a thing.  What the legislation will do is give a bigger competitive advantage to the large financial institutions and reduce the amount of lending to small businesses by other small businesses.

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Berkshire Hathaway and the financial reform bill

CNBC article

Buffet is fine with having everyone post margin on their derivative contracts from now one - just not for contracts they have already entered into.
But if you are "in the money" on the contracts you have already entered into then you would receive money back.

My conclusion is that Berkshire Hathaway is under water on the billions of dollars of derivative contracts that it has made?  Is my logic wrong?

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Texans come to the aid of California - not

The average German citizen has no desire to bail out Greece from their excessive spending and debt. 

But would the Texans feel much different about bailing out California.  Or how about the Nebraska Cornhuskers coming to the aid of Michigan?  After all they already paid for bailing out the auto industry.  But then again perhaps the Nebraska farmers are so thankful for their ethanol subsidies that they will gladly bend over to help out Michigan.  Maybe not.

But we have more Germans in the US than there are Germans in Greece, so why don't the Germans send their financial aid here rather than to Greece.  Coincidnentally we also have more Greeks than anyplace in the world other than Greece.  So we have something for everyone that will lend us a helping hand.

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Goldman can do a better job of describing their trading business.

I think Goldman Sachs can more accurately describe their trading and market-making business model.  This is different than other parts of their business where they act as business advisors (for example in mergers and acquisitions).

Goldman executives place too much emphasis on their “risk management business”.  They help their clients manage the client’s risk as well as put on more risk when the client wants to make a directional bet.   But risk management is only a critical skill in a trading operation but it is not how they make their money.  Goldman like other traders and market makers make their money by taking a directional bet on a commodity or security and being right more often than they are wrong.

 As a market maker they offer liquidity and transparency and in exchange they see more deal flow and get a better feel for the market than if they were not a market maker.  Their trading counterparties do not expect and do not receive advice from Goldman about if the client should go long or short.

In mergers and acquisitions advisory work Goldman Sachs has an absolute duty to act in the best interest of their clients and to share far more information that Goldman’s trading operation shares.

But Goldman’s trading business is a whole different animal than its M&A advisory business.  When Goldman’s trading arm is selling oil they are trying to sell it at the highest possible price (and their counterparties are trying to buy it at the lowest possible price).  There are multiple buyers and sellers which add to the liquidity (ease in transacting) and transparency (ability to see where prices are currently at).

So the language of putting the client’s interest first does not work in the trading business.  The service that is provided is to offer competitive prices to either buy or sell a commodity or security.  The firm promises that it is easy to transact with, will honor the deal and that it will perform on what it promises to buy or sell.

Trading will not work if any market maker has to tell the world that it wants to go long or go short.  They telegraph that anyway because when they want to go short, they tend to show prices that they will sell that are very competitive but prices to buy that are less competitive.  So it is not that hard for their counterparties to figure out if Goldman is trying to buy or trying to sell and their counterparties get the advantage of this information.

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We should be calling it the dollar/euro

The relationship between the euro and the dollar is always expressed in a bass-ackwards fashion (in the media).  Today it takes about $1.32 in US dollars to get one euro.  And yet the value is always reported as euro/dollar implying that euro is the numerator and the dollar is the numerator. 

We should be calling it the dollar/euro.

The same thing goes for the pound/dollar relationship.

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"We're not that stupid" - Senator Tom Coburn

Quote from Senator Tom Coburn today in the US Senate Subcommittee on Investigations hearings about Goldman Sachs today.  But yes Senator - you are that stupid! (The Goldman guys on the advice of counsel did not to answer this way even though it was obviously the truth).

If the same idiots from the US Senate Subcommittee on Investigations are writing the financial reform bill, the new law is bound to be screwed up.  These Senators don’t listen; they don’t understand how risk is managed and they don’t understand how market-making actually functions.   Most importantly they think that Goldman Sach’s market-making function actually caused the housing crisis rather than profited from changing prices.

I know from my personal experience doing business with other market makers and managing market-making trading operations for natural gas, oil, electricity, credit derivatives and metals how these businesses operate and how they are perceived by their trading counterparties.

Hopefully Goldman Sachs does not settle with the SEC.  This has all been grandstanding by the SEC and these Senators and if it goes to trial no reasonable jury should convict Goldman.

There were many contributors to the US housing bubble, the least of which was Goldman Sachs market- making function in synthetic collateralized debt obligations.  Here were the real causes of the housing bubble:

1)       The public and our politicians thought that housing prices would go up forever and that one could never lose by buying a house.

2)      The FHA and our politicians pushed our banks to make riskier loans to families that could not afford to make the monthly payments and were literally putting no money down and risking with the house (US taxpayer) money.

3)      The banking regulators allowed the practice of “liar loans” to prevail whereby the borrowers frequently lied about their income.

4)      The rating agencies did a horrible job of recognizing the changing housing market because most of their models were based on historical trends and missed some of the changing fundamentals.

5)      Our government kept adding subsidies for home ownership and ran out of ways they could pay people to buy homes.

6)      The number of homes per family and the average size of the homes built per family kept going up to unsustainable levels.  Plus all this extra room gave plenty of space for people to move into once prices started going down and it was obvious that homeownership had its risks.

Today’s hearings were a waste.    Let’s ask the Senate to do less because when they are trying to protect us they put us at greater danger.

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