See here for the introduction to the ZBI.
Important anniversary while the zombie bears were sleeping. I always measure the crisis as starting on the date of the crazy Jim Kramer video where some of us went “oh yeah, this is a bit of a different crisis than the Mexico/Russia/LTCM/Asia/SARS crisis, isn’t it?” and forwarded our mates a link to the Kramer video instead of the usual lolcat pushing a watermelon out of a lake. Some people measure the crisis kickoff to the (earlier) collapse of those Banque Paribas funds instead. So either way, happy 5th anniversary! Cake later. But we’re doomed anyway, so maybe cake in the bunker? In the meantime, zombie municipalities sue zombie banks. Who will win and will it make any difference?
1. Bank provisioning. Various folks are talking about the LIBOR scandal being huge, but I’m not so sure. Yes, all the securities in the world, and probably in several universes in other dimensions, are priced off LIBOR, but that’s not quite the point. I think it may be difficult to establish securities law liability on the LIBOR fixing issues because (a) LIBOR’s an estimate of what someone thinks they could borrow at and (b) all the securities priced off LIBOR usually don’t say anything about how LIBOR is set, which they would kinda need to if you were going to sue, and (c) to sue the folks who fixed LIBOR, they’d need to be either the ones selling the securities or acting in some “primary” capacity in that sale, which they aren’t. Let’s revisit how LIBOR is set. This is a transcript of the setting meeting one day back in early 2009:
London, late morning:
Rate-setting dude at BBA: OK, let’s go. Giles at Colonial Bank, what you got?
Giles (Colonial): .20005676757576. Roughly.
Miles (Taxibank): Zzzzzzz. Huh? .200045. [Falls asleep again.]
Piers (Takasushi Bank): .199996. Maybe.
Simon (Posh & Becks): Two pairs and a king. Oh sorry, .200056.
Nigel (US Heartland Bank): One meeelion percent. [Giggles.] [Texts "naildit" to trading desk.]
Etienne (Banque du Jenesaisquoi): [Sound of champagne cork.] .200045.
Myron (Home Counties Bank): To be honest I don’t know because really we’re never going to be able to borrow again, are we? It’s all over, isn’t it? [Sobs.] [Gunshot heard in background.]
And so forth. Now of course this is pure fantasy because it’s really done these days on some super-secure electronic system, otherwise Giles and Nigel would have called each other to arrange the price beforehand. [Oh. Never mind.] Point is though, that suing people for selling securities priced by reference to a rate set by other people on the basis of subjective estimates by still other people is always going to be a bit of a long shot. Maybe it’s common law fraud, wire fraud and who knows, there may even be a RICO case in there somewhere, and for sure the various states are getting their lawsuits lined up but in the end I see all these lawsuits as essentially expensive nuisance suits. By the time they get sorted, the banks will have gone under because of earlier suits (see my earlier posts), and the only people benefiting will be the defense lawyers. Yay defense lawyers, especially my friends. Current rating: 9 zombie bears.
2. Europe. I loved the Economist article about breaking up the Euro, which took a somewhat breezy approach to the possibility of bank runs, bank holidays, and needing to eat roadkill for the next century. (“Well, GDP will drop a trifle [like, all of it] and there may be actual blood in the streets for a weekend but with a stiff upper lip or whatever you Jerries like to stiffen, it’ll all come right in the end and by the way, all the money and all the rich people should come to London.” I paraphrase. Slightly.) Fiscal union, Angela. Banking regs, Eurozone-bonds, the lot. It’s the only way. If the mittelstand had had to export stuff denominated in deutschemarks, nothing would have been exported, so it’s not like Germany hasn’t benefited from one-sided fiscal union. Now you have to address the other side. And leave off that stupid FTT because it will never work. France introduced its limited FTT this month and if it produces $210m in revenues I will eat your chapeau. (Ooh look, I found this lovely anti-FTT website.) Meanwhile, “no end in sight,” last year we were on the edge of total collapse (and has anything improved?) and wow, I didn’t realize I was supposed to be that worried about France. Current rating: 10 zombie bears.
3. Actuaries and pensions. Zombie municipalities suing zombie banks on the basis of LIBOR manipulation? Zombie cagefight! More on this next time. Current rating: 5 zombie bears.
4. Populist rage and financial illiteracy. This category used to be called “Congress”. This time last year Congress was trying to renege on the nation’s debts. This cost us $1.3 billion in extra borrowing costs, according to a GAO study. We’ll take that from your paychecks, Representatives. Well played. Current rating: 4 zombie bears.
5. Math/Algorithms. While I was away Knight Capital tried to break the markets, ironically while the SEC was on the premises. Is the solution speed limits? The SEC is going to have another roundtable on HFT. Because at the last SEC roundtable on HFT people were still saying that everything was fine. Which they will presumably say again. There are even rumors that the SEC might require firms to TEST their code before unleashing it on the world. Heavens, whatever next? Germany’s even proposing new HFT rules. One of my crowdfunding buddies says “We can no longer afford to allow machines to dominate the financial markets.” Current rating: somewhere between one and an infinite number of zombie bears; variable but trending to chaos.
6. Hackers. Current rating: 8 sleeping (?) zombie bears; stable.
7. Cross-border equity custody. Current rating: one lonely zombie bear.
8. Bitcoin or something like it. The GOP wants to look into returning the US dollar to the
wampum gold standard. Bless. They’ll be thinking about giving ladypeople the vote next. But Bitcoin is going to make monies irrelevant because instead of digging gold or seashells out of the ground it monetizes numbers dug out of computers (where there are lots of numbers). Now you can maybe get a Bitcoin-backed credit card. Oh those intertubes. Making life easier for purveyors of porno, cats in boxes and money launderers everywhere. But why bother laundering dirty old money when you can just create shiny new clean money instead? Especially if you are a gangster in Siberia, say, with access to lots and lots of computers. Possibly some of them even belonging to you. Current rating: if this is true, we are entering a whole new era of financial instability. If someone can figure out how to do HFT on Bitcoin-backed credit cards we are fracked to the power of a truly infinite number of zombie bears.
9. Megabank’s Boring Transactions Division. Current rating: no zombie bears for now.
10. Commercial Real Estate. My little start-up rents temporary space in a sad half-empty office strip that was built in the 90s. The landscaping is mostly dead trees and weeds and there are “for sale” and “for rent” signs outside most of the units. Also one of the presidential campaigns has an office there, which is a sure sign of a moribund office complex. I don’t mind the state of it as it’s cheap and I want to be able to stay on a month-to-month rent until the company gets to proof of concept. But we are in a prosperous area just outside DC. And we still have this massive overhang of commercial property. How long will it take to clear this backlog? Current rating: no zombie bears; we are still pretending they aren’t there. The fact that I pay rent is permitting someone, somewhere, to keep our building on their books as current.