John At The Center

I would also take issue with the authors’ assumption that oil prices are exogenous. For one thing, this assumption is at odds with the paper’s extended discussion about how the price of oil is determined by economic developments in the U.S. and other countries. Moreover, the assumption is probably not innocuous: previous research has shown that treating oil as endogenous in such models can greatly reduce the estimated effects of oil shocks.[5]

via Economist’s View: ‘Discussion of “Oil and the Macroeconomy: Lessons for Monetary Policy”‘.

More fundamentally, there is strong reason to believe that a recovery in the real economy is salutary to the financial sector. When people are employed and buying things, loan defaults fall and asset prices are likely to rise. Both of these developments would surely be helpful to stressed financial institutions. This is, I believe, a key lesson of the Great Depression. In the Depression, the end of deflation, renewed optimism, and increased employment and output were as crucial to the recovery of the financial system as the more direct actions taken to stabilize banks. Thus, real and financial recovery reinforced each other. So, fiscal policy to raise employment may help to restart lending and in that way generate a more durable recovery.

via Economist’s View: Christina Romer Answers Criticisms from Robert Barro and “The Best Man at My Wedding, Greg Mankiw”.

At the heart of the pension meltdown is the investment model. The investment managers who led the Caisse into its 2008 meltdown were simply following the dominant investment theories of our time: Equity markets theoretically will provide solid average returns over the long term. Judicious stock picking can help a fund get better-than-average returns. More recently, all fund managers also came to believe that still higher returns could be found in other fields, including asset-backed securities and private investment markets.

via Pension Pulse: The Model That’s Killing Pension Funds?.

Other than for banks with substantial trading income (or losses) the fourth quarter has been an absolute record at just about every bank I am looking at. Sure if your losses are huge then your net interest income could be going backwards (as per Corus bank). But that is the exception. If this trend continues (and I think it will) then my pre-tax, pre-provision estimate in the long note is dramatically low whereas Felix was sure it was high.

via Bronte Capital: A series of quarterly numbers.

The United States government could be giving up a big chunk of change by converting its dividend-yielding preferred shares in Citigroup to common stock, which carries no dividend. The lost income to taxpayers could total about $10 billion in today’s dollars, or even more.

via U.S. Misses Out on Citi’s Preferred Dividends – DealBook Blog – NYTimes.com.

[Geithner] is sitting there without a deputy, without any undersecretaries, without any, as far as I know, assistant secretaries responsible in substantive areas at a time of very severe crisis. He shouldn’t be sitting there alone.”

via Lonely Geithner – Finance Blog – Felix Salmon – Market Movers – Portfolio.com.

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

I dare say this might be an extreme case. The subprime loans extended in 2006 and 2007 have suffered particularly high default rates and the CDOs that have already been liquidated are presumably the very worst of the pack.

via naked capitalism: More on the Simply Dreadful Performance of CDOs.

Schwarzman makes sure to point out that mark to market is suspect in this application:

“The markdowns are disappointing, but don’t necessarily represent permanent loss of value and it’s important that you understand that,” Mr. Schwarzman said. “Right now, the world says that every private equity company is a troubled company and that’s just complete garbage.”

via Despite Loss, Blackstone Stars on Wall Street – DealBook Blog – NYTimes.com.

Based on return requirements, Citi has not been nationalized…

Citigroup Bailout Math – Finance Blog – Felix Salmon – Market Movers – Portfolio.com.

That decline of 3.2 percentage points wipes out all the productivity growth from the fourth quarter. So in fact, despite all the job cuts, companies have not gotten out ahead of the fall in the economy.

via The GDP Revision: The End of Productivity – BusinessWeek.