marți, 8 iulie 2008

moral hazard? hmmm...what was the first word?

it's just as the title says...we just forgot about "moral"

I hesitated between several definitions briefly overlooked over the web over the right choice of words (yep moral...):

" Concerned with principles of right and wrong or conforming to standards of behavior and character based on those principles"


"Arising from conscience or the sense of right and wrong"

I think, gut feeling, that I'll stick with the second one without being concerned of whatever dialectical divide this wording might generate...

As philosophical as it might seem, this post is still about economy or rather about what "solutions" might be applied in the almighty name of profit. otherwise said it's, particularly, about GSEs.

Let me go back to the definition:

GSE = "Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers and homeowners.
GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth recipients of corporate welfare.

Examples of GSEs include: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank, Resolution Funding Corporation, and The Student Loan Marketing Association.
See also: Freddie Mac, Treasury Bond"

So let me get that straight, a GSE claims to have a Government backing and gets accordingly privileges such as access to cheaper funds, more lax risk regulations and so on, all the while transferring some of these benefits to corporate entities that are on the run for profit and only profit...

I have nothing against it when these privileges go to the ones in need (individuals wanting to access a mortgage, students...) but NOT when they are siphoned or skimmed by corporations !!!

Look at the FHLB definition:

"The 12 banks of the FHLBank System are owned by over 8,100 financial institutions from all 50 states, U.S. possessions, and territories. Equity in the FHLBanks is held by these owner/members and is not publicly traded. Institutions must purchase stock in order to become a member. In return, members obtain access to low-cost funding, and also receive dividends based on their stock ownership. FHLBanks are exempt from state and local income taxes, but are subject to property taxes. The mission of the FHLBanks reflects a public purpose (increase access to housing and aid communities by extending credit to member financial institutions), but all 12 are privately capitalized and, apart from the tax privileges, do not receive taxpayer assistance."

I hope I understood it clearly (and please contradict me if I'm wrong). The private banks owning FHLB get access to cheaper funds, with the backing of the State, to offer mortgage loans indiscriminately and make profits straight into a crisis? where's the sense of right and wrong here? is it just on the surface of an argument such as the sacrosanct right of ownership on a house for Joe 6 pack?

do you really think a private corporation getting access to cheaper funds will use for the greater good or for a wider profit margin?

well let's see how Fannie Mae and Freddie Mac will fare now and what real backing they get from the Government...

Note in the paragraph above that, in theory, they should not "receive taxpayer assistance"...

6 comentarii:

Simona spunea...

....cred ca si in cazul institutiilor financiare din us functioneaza principiul "sooner rather than latter"..:); fed-ul ajuta cateva institutii ca Freddie Mac si Fannie Mae dar cu siguranta nu poate acoperi toata gaura...din bancile americane se estimeaza ca cel putin 150 vor pica in perioada urmatoare, neluand in calcul marii jucatori ca Citi si Merril Lynch unde nu cred ca sunt in pericol de faliment, dar vor suferi cu siguranta schimbari semnificative; cu Lehman e alta poveste...s-ar putea sa se repete povestea Bear eu cred ca Goldman de abia asteapta (Goldman si Lehman au fost prieteni in anii 50' - au o poveste interesanta...)
sooner rather than latter se aplica si pt Citi care au reusit sa stranga capital cand actiunea a fost 30 usd...fata de 15 acum...:(

Dragos Popa spunea...

simona, eu cred ca FEDul va avea de rezolvat cam multe dileme in scurt timp ca sa mai salveze vre-o ceva si asta oricat de mult ar vrea.
cred in continuare, cu exceptia situatiei in care toata lumea participa in mod voluntar la furatul caciulii, ca sistemul nu poate fi trucat dincolo de un anumit nivel, cel putin nu pentru o perioada prea indelungata de timp (poate ma insel...).

ramane de vazut ce se intampla pana in Septembrie, si prin prisma rezultatelor pe Q2.

Simona spunea...

Uite ca rezultatele pe Q2 incep sa apara si trendul se reverseaza big time...(cresteri de 12-25% pe lehman, citi, ge)
...saptamana asta anunta mari jucatori rezultatele si inca se anunta huge amounts of write-downs...:)

interesanta teoria vrajitorului din final..finnancial innovation & greed au fost key drivers pt situatia in care s-a ajuns

Dragos Popa spunea...

multumesc de comentatiu simona.
eu zic ca acest "fool's rally" pe financials de astazi, datorat lui Wells Fargo se va topi precum zapada in soare. mi se pare ca dimpotriva, o astfel de miscare este simptomatica pentru cat de dezorientate sunt pietele, decuplate de realitate si cum o veste proasta dar care nu este catastrofica echivaleaza cu o veste buna.

cum adica sa creasca actiunile pe Financial Institutions pentru ca profitul lui Wells Fargo a scazut DOAR cu 23% (53 centi/share fata de 49 centi/share cum era consensusul analistilor)?

asta iti spune multe...

din nefericire "financial innovation" a devenit doar joaca cu focul in goana dupa profit...

Simona spunea...

indeed...informatiile misca piata fara legatura directa cu underlying tot vorbeam de financial inovation
US treasury yield curve rates au crescut very short term- 1m si au scazut pe maturitati peste 3 luni...asta pt ca ma gandesc ca expectatiile vis-a-vis de inflatie nu sunt prea imbucuratoare short term, Fed injecteaza banii prin open market operationss.....fed funds rate a crescut.. connection cu ce discutam dar facem un research pe tema ma gandeam ce parere ai..:)

Dragos Popa spunea...

simona, dupa cum am mai, spus nu sunt expert dar uite niste comentarii interesante aici (carl) apropo de US treasuries vs risk insurance si disconnect-ul dintre stock&credit market.
cat despre injectiile FED eu vad altceva aici... dar mai vorbim pe tema asta.