Scattershot

It's been a while since anyone other than trusty ol' Dave has posted on the blog, but in my defense, aside from keeping myself relatively busy and off a computer the last few weeks, lately nothing has really been jumping out at me as something that warrants a comment--or at the very least my comment. Bank failures and unemployment statistics and our brand new President and his brand new era of hope just seem so last winter.

And while I still don't have much to say, I do have very little to say about a few things. Hopefully one of these few things will spark a new round of discussion. Or if not, at the very least, I'll feel a bit better about finally posting something again.

Issue 1: Goldman Got to Get Paid

And you thought we were in a recession. The news is now officially out that the investment bank Goldman Sachs is reporting a $1.8 billion profit for the first quarter of the year. Perhaps all the hedge fund managers that frequent this blog, having had their standards and expectations goosed during the hey-day of the mid-oughts, wish to snicker at such a paltry sum. But compared to the reports of that same firm throughout last year and compared to the state of the rest of the economy (yeah, there's a "rest of the economy"), this is surprisingly good news.

Particularly if you're upper-management at Goldman Sachs. If not, maybe not so much. Because if you're like me, you might be wondering in a world of parched credit and sequential downgrades and a degree of so-called "animal spirits" befitting only roadkill, where does that kind of money come from? According to Barry Ritholz, quite a bit of it probably comes from Uncle Sam.

Remember when AIG got a whole chunk of cash from the U.S. Department of Treasury? The reason that was such an important and necessary thing to do was because, according to that Department, AIG had so many liabilities reaching out like oily tentacles across the financial globe, that chain of defaults (or only the perception of a chain of defaults) would cause the entire financial system of the world to seize (like Lehman, but worse). Luckily for Goldman Sachs, it happened to be at the other side of a disproportionate number of AIG's tentacles (namely CDSs as far as I understand, but maybe I don't fully). Luckier still for Goldman Sachs, is that when the United States Government saw fit to ensure AIG's liabilities, it failed to act as any lender of last resort would and protect its investment by renegotiating the terms of its (that is, AIG's debt). So Goldman Sachs got 100 cents on every dollar invested with AIG.

And perhaps even luckier still that Goldman Sachs' former CEO was the Treasury Departments former number-one man who, according to Ritholtz

oversaw the greatest transfer of wealth in the planets history — several trillion dollars from taxpayers to the management and shareholders of inept, incompetant, wildly irresponsible companies.(Source: Big Picture)

But those are his words, not mine.

Issue 2: China Makes Some More Noise

This story has already been beaten to death on this blog, but just to provide a quick reminder, China has a lot of U.S. dollars in the bank and should it ever decide to swap some of those dollars for another currency, the U.S. dollar would likely take a big hit. And now the slow down is continuing.

Is this an enormous deal? Does Hu Jintao's statement a few weeks ago auger the imminent implosion of the U.S.'s international position? I seriously doubt it. The key phrase here is "slow down." China is still a net purchaser of U.S. government debt as far as I understand it. Perhaps their demand isn't keeping up with our supply (we're spending more than their lending), but given the fact that fear is still the international currency of choice, their are plenty of eager lenders out their looking for a safe place to stuff their cash.

In any event, China wouldn't benefit from a plummeting dollar anymore than the U.S. would. Though it may try to diversify its trade position and though it may try to diversify the balance sheet of its Central Bank, the U.S. still holds primary positions in both. In short, this is a marriage that neither country can afford to break-off.

Issue 3: Re-Regulating

This story is at least two weeks old, but last month, the Treasury Department released its vague notion of its unique approach to financial regulation--presumably the first of a series. The press statement can be found here, but let me pick out the tasty bits.

First, Treasury proposes a single regulator of the entire financial system. I suppose this centralizes the functions of the chairman of the Fed, the head of the SEC, the head of the CFTC, the head of the FDIC and a litany of other mysterious-sounding acronymed institutions. In what way the duties of this new regulator would be distinct and or separated from said institutions, I do not know. It is encouraging however that this regulator in chief will be charged with evaluating "what companies do, not the form they take"--which is to say, rather than solely looking at depository banks and allowing the various other permutations of this hallmark financial institution to inhabit various other levels of regulatory purgatory, if you are a company, for instance, that happens to be selling insurance on bonds, even if the insurance on the bond isn't called insurance and even if the letters that grace the front of your granite building do not read "insurance company," you will be regulated as such. Which, as I said, is encouraging.

It is then posited that the Treasury Department will work to ensure that so-called "over the counter" derivatives are brought, if not off of the counter and into some formal exchange, than onto a new semi-official counter which will be watched by some watchdog. But, as you might expected from my wording, the details are fairly slim here.

Next, the press release discussed how "capital requirements" for all relevant financial institutions will be increased. Capital requirements, generally assumed to be around 8%, is that proportion of money a bank must own its very own self for every asset that graces its balance sheet. For example, if I loan out $100 to company x, regulation may stipulate that I have to hold at least $8 in cash or stock as a safeguard against default on my loan. Unfortunately, as it stands now, capital requirements differ based on the portfolio of a particular institution. For example, if the $100 loan I make is rated very well by an esteemed rating agency, I may have to hold much less than $8, whereas if Company X turns out to be run out of someone's basement, I may have to hold much more than $8. Unfortunately, as we've seen, the rating agencies are slightly less reliable--optimism on their part go up and down with the market (or to put it in the unnecessary parlance of economics, their ratings tend to fluctuate pro-cyclically). This aspect is not addressed at all by the Treasury brief.

Lastly (at least for me), the Treasury recommends that both large Hedge Funds and the entire Money Market be regulated.

I don't have much to say about that.

Fin

Anyway, thanks for reading this far. This has been a fairly disorganized post, but I felt like I ought to write about something or other. Perhaps one of these three topics will spark someone's interest in writing another post (or just a comment).

Or maybe we can just talk about the Obama DOJ following the lead of its predecessor on both Guantanamo and state secrecy and domestic wiretapping . This kind of analysis (that is, angry and/or political) isn't something I'm particularly good, but I'd love to hear what it is that I must be missing so that this can in any way seem justified.

Also, if anyone is up for more reading, this is really entertaining, low on financial lingo and telling as all hell.