The man behind TARP

Washington Post ran this story over the weekend on the man who managed the historic $700bn Troubled Asset Relief Program.  An excerpt:

It was October 2008 when Hank Paulson announced that the government rescue operation, the Troubled Asset Relief Program (TARP), would be run by his aide, Neel Kashkari. The choice was met with considerable surprise. Who was Neel Kashkari? He was too young, too inexperienced and had ties to Wall Street, detractors said. To some, the appointment seemed all wrong. Critics described Paulson as a “Dr. Evil” figure who brainwashed Congress into giving him unprecedented financial authority so that Kashkari, his “Mini-Me,” could distribute it to Wall Street friends.

Overnight, Kashkari became the face of the biggest, and one of the most controversial, market interventions in American history. Even he questioned their chances of success.

The Friday evening he was named, he slumped over a bowl of chips in Bethesda with a childhood friend. He held his head in hands and said: “Dude, tell me something funny.”

“Man, what’s going on, Neel?”

“I’ve been tapped to put TARP together. I gotta set up these seven teams and build this thing from scratch — by Monday morning.”

 It wasn’t a stellar story but I think I’d always be interested in stories of and about people who were part of the whole financial debacle.

Link to the whole WaPo story here.

New bosses don’t mean much

An excellent article from WSJ:

If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology’s Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn’t much better than the flip of a coin.

…
Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.

…
The real force in corporate performance isn’t the boss, but regression to the mean: Periods of good returns are highly likely to be followed by poor results, and vice versa. High returns attract fierce new competition, driving down future profits; low returns leave the survivors with fewer rivals, leading to better results down the road.

Most researchers agree that a company’s results are determined less by its CEO than by its industry and the economy—which, in turn, are shaped by a host of factors that most CEOs can’t control, like the price of raw materials, the value of the dollar, interest rates and inflation, bursts of technological innovation and so on.

Hat tip to Abnormal Returns.

Link to the article here.

The effects of World Cup: Before, during, and after

FT Alphaville has this interesting post citing a study by BofA/ML on the effects of World Cup in retail sales, consumption, tourism, and industrial production.  As expected, the first three go up during the month when the WC is being held while going back to pretty much where they were prior to the WC.  That’s when visitors leave and significantly slow down on their purchases and/or consumption.  Meanwhile, as the effect of World Cup mania spread all throughout, people become less productive as they begin to work less and talk more about what happened during the previous night’s match.

Here are the charts:

The post closes by saying this:

The analysts also argued that the World Cup “remains one of the under-researched topics in South African macro”. We agree — so please do let us know if you see any interesting research on the topic in the run-up to and aftermath of the tournament.

I second the motion.

Source: FT Alphaville

Roubini warns of worsening carry trade bubble

Roubini has another eye opener on the situation of the carry trade, with the dollar serving as the currency of choice given the zero to even negative interest rates that are in place.

Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Good stuff.

Read the rest via FT.

Krugman: More spending please!

Nobel laureate Paul Krugman is calling once again in his NYT op-ed for additional spending, saying that the stimulus that has been enacted at the moment is good but truly insufficient.

The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.

And the really bad news is that “centrists” in Congress aren’t able or willing to draw the obvious conclusion, which is that we need a lot more federal spending on job creation.

I really think additional spending spells out doom for the US. But at the same time, I am still curious to see the stimulative effects of a tax cut.  It sure puts more money in the pockets of consumers, but they don’t really create jobs. Or at least if they do, it doesn’t have the kind of job creation effect as the other option that is spending.

More from NYT.

Per capita government borrowing

With the huge amount of borrowing governments have done, it is always better to be able to put into perspective just how much borrowing there has been.  Here’s one from the FT, calculating the per capita of government borrowing:

Ireland has the biggest from among the countries while the US has the second biggest, followed closely by the UK. Notice that while Japan has debt about 170% of its GDP, it is still much smaller on a per capita basis than the US, whose debt level isn’t even 100% of its GDP.

Source: FT

When it ticks up 35, it may be a time to buy

From Vix and More:

Over the course of the 20 year history of the VIX, the volatility index has posted close-to-close four day gains of 35% on 42 occasions. If you strip out the consecutive instances of +35% days, this leaves 27 instances in which the VIX crossed above +35% in four days. I have reproduced the full table of these 27 instances below for several reasons. First, the key takeaway is that from a timing perspective, a long SPX position entered after a 35% spike will generally perform best over the course of a five day time horizon. In the graphic below, the 27 instances average a five day gain of 1.99% vs. a typical five day SPX return of 0.14%, for a 1.85% net differential. While the net differential peaks at five days, it is apparent in just one day and persists for at least fifty trading days.

There are two things worth noting with the current VIX. One is that it has spiked so much within a few days, 35% as the post said in a matter of 4 days.  And two, that the rise may be seen as a contrarian bullish mean reversion buying opportunity.

The corresponding chart mentioned above is here:

If you bought when it strike 35% higher, you probably did good. Then, it is for the short-term.

Source: Vix and More

An unconstitutional ruler: Feinberg

An interesting POV from a Stanford Law Professor Michael McConnell on the constitutionality of Keith Feinberg, the pay czar’s appointment: (emphasis mine)

The Appointments clause of the Constitution, Article II, section 2, provides that all “Officers of the United States” must be appointed by the president “by and with the Advice and Consent of the Senate.” This means subject to confirmation, except that “the Congress may by Law vest the Appointment” of “inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

While somewhat more disputable, Mr. Feinberg’s is probably an “inferior” officer, defined as one subject to supervision and removal by a member of the cabinet. Although he has substantial discretion and independence, Mr. Feinberg reports to the secretary of the Treasury, who can fire him any time for any reason. This means that Congress could, if it wished, vest the appointment of the pay czar in the secretary, without any need for Senate confirmation.

But Congress has not done so. On the contrary, it vested the authority to implement TARP’s compensation provision in the secretary of the Treasury. The secretary may sub-delegate that power to someone else—but that someone must be an “officer” properly appointed “by and with the advice and consent of the Senate.”

If this is so, it tells us then that all this ruling on executive pay is similarly unconstitutional.  Sure, the Senate/Treasury could move to make this constitutional but for now, does anyone care that this isn’t?

An afterthought: Another product of the vilification of Wall Street?

Source: WSJ

Where is the LUV?

One can choose from a U-shaped recovery, an L-shaped recovery, and a V-shaped recovery.  It can also be a double dip recession, a W, or the most recent a combo of L, U, and V.  WPP chief Martin Sorrell believes it is going to be those three, in 3 different regions of course.

Sir Martin Sorrell, the chief executive of advertising giant WPP, today backed the theory that the world economy is about to experience a LUV-shaped recovery. This consists of an L-shaped recovery for western Europe, a U-shaped one for North America and a V-shaped one for Brazil, Russia, India, China and the “next 11” emerging economies.

The LUV theory appears to have first been coined by Stella Dawson of Thomson Reuters. Sorrell himself has a habit of contributing to the economic lexicon – the advertising magnate is responsible for the concept of both the bathtub and the italic L. Other unusual metaphors that have popped up to describe different ways in which countries can emerge from an economic slump including saxophone and inverted square root.

In hindsight, it kinda does make sense. Why apply the same letter to all regions with different economic policies and dissimilar depth of economic problems?

Source: Guardian

Russia hopes to emulate China

Here’s an interesting story from the NYT:

Nearly two decades after the collapse of the Communist Party, Russia’s rulers have hit upon a model for future success: the Communist Party.

Or at least, the one that reigns next door.

Like an envious underachiever, Vladimir V. Putin’s party, United Russia, is increasingly examining how it can emulate the Chinese Communist Party, especially its skill in shepherding China through the financial crisis relatively unbowed.

United Russia’s leaders even convened a special meeting this month with senior Chinese Communist Party officials to hear firsthand how they wield power.

In truth, the Russians express no desire to return to Communism as a far-reaching Marxist-Leninist ideology, whether the Soviet version or the much attenuated one in Beijing. What they admire, it seems, is the Chinese ability to use a one-party system to keep tight control over the country while still driving significant economic growth.

What China has that Russia doesn’t that is helping the former with its strong economic growth are two interrelated things: first is a strong export market and two, cheap labor that is the backbone of that successful export market.  As also mentioned in the article, Russia is a country highly dependent on oil.  Sure at times when oil prices are skyrocketing as it was back in the summer of 07, the Russians (or a few of them) take windfalls profits from the commodity like Alaska gets snow in a year.  But when prices slump like they did after the summer of 07, it spells danger for Russia’s economy.  So apart from the two success factors for China that Russia doesn’t possess, the former Soviet state also needs to have a diversified export market.  Even if China faced a slump in demand in this crisis from its highly export-driven economy, they don’t face the volatility Russia does with its commodities export.

Source: NYT

Thinking MBA?

Economist is out with its list of top MBA programs in the world and the rankings are quite different from the ones I usually see in the other lists, say the one compiled by the FT, BusinessWeek or US News & World Report. I guess it’s the number one school that got me; I’m just used to seeing either UPenn or the other Ivy Leagues on top.  Here’s Economist’s top 30:

The magazine also has some sort of an accompanying article to it, which can serve as a guide to choosing which MBA program to go for.  The best part of it, for me, reads:

These differences reflect different methodologies. The Economist’s rankings rely heavily on students’ own assessment of their time at business school in general, and of whether their earning power rose and their “networks” expanded in particular. One reason why IESE did so well is that 98% of graduates found jobs within three months of graduation with an average basic salary of $125,000—a remarkable feat in the current economic climate. The FT’s list emphasises academic research as well as salaries. But the clash of rankings also has a bright side: it underlines the fact that there are different ways in which business schools can excel.

The people behind the ranking themselves admit the divergence between what they came up with and what the other publications have. Wharton, which is #1 on the Financial Times list is “only” #9 here while Spain’s IESE takes the top spot.  Also the second is not Harvard BS, nor LBS or any other US institution.  Rather the place goes to Swiss university International Institute for Management Development.

Another observation: Oxford’s Said Business School lands at the #47 spot, lower than Henley Business School (which I honestly have never heard of), Ashridge (also unheard of), and Warwick Business School.

To see The Economist’s entire list of 100, with 10 others unranked including the Philippines’ Asian Institute of Management, click here. To read the article, also from the Economist, click here.

Are the Chinese losing from their dollar holdings, the dollar weakness?

Found two articles addressing the matter, one from the WSJ’s Deal Journal and the other from NYT, courtesy of Floyd Norris.

Let’s begin with the Journal. So the dollar has been plunging against major currencies for the past few months, after it has strengthened against the same group in February when the crisis was still far from where we are at the moment. That’s point 1. Point 2 is, the Chinese hold around 70% of their reserves in dollars.  In that case, worries have been going around that the Chinese are losing/about to lose a big part of their reserves from this greenback devaluation.  Sure, the reserves have grown to $2.27 trillion but if the dollar continues to decline in value, aren’t the Chinese in a whole lot of trouble?

Some did a back-of-the-envelope calculation that “China is losing four aircraft carriers” every percentage point appreciation against the dollar, according to an article from Sohu.com, a major Chinese news portal.

Others went further to speculate, “it is an intentional espionage to weaken Chinese buying power,” says an independent scholar Wu Fei in his Sina.com blog. The post continued, “Over the years, the US has been exchanging its dollars for Chinese goods.” As a result, Americans now have all the goods and Chinese have all the greenbacks, Wu said. As the dollar weakens, the dollar value that China has made throughout all the years shrunk.

Some bloggers raised the idea of just moving China’s investments in the safer (and in some cases, more volatile) asset classes. Gold, oil, other kinds of commodities. But from Norris’ article from the Times, he seems to be saying, you know what, there’s not much the Chinese should be worried about.

There is renewed talk about the weak dollar. But don’t believe it.

Where it really counts, the dollar is not moving at all.

In February, the dollar hit a high against most currencies amid fears of worldwide recession and a desire for the safety of American investments. It was then worth 80 euro cents, and 6.82 Chinese renminbi.

This week, as the dollar neared 67 euro cents, it was still worth 6.82 renminbi.

…

The reason for this is simple, and obvious. China pegs its currency to the United States dollar.

With the peg, then China’s dollars shouldn’t really be causing Wen Jiabao and the gang to get sleepless nights, should it? If the yuan’s pegged to the greenback, then however the dollar loses value, it shouldn’t matter much, should it? Whatever the dollars are worth now would still be worth the same 1, 3, 5 years from now, if the peg persists. Then again, Norris points out what is perhaps the bigger issue here:

But while China pursues its peg, the world’s largest exporter will keep exporting and taking in cash rather than imports. The values of the major international currencies will fluctuate against each other, but the inherently stabilizing impact of changing currency values will be limited.

One lesson of the credit boom in the United States was that things that are unsustainable will eventually stop, perhaps abruptly and in highly disruptive ways. The same may yet be said of China’s peg.

Then I go back to my previous post. China’s reckoning moment, anyone?

Sources: Deal Journal, NYT, aquities