What exactly does Goldman Sachs do?

I am not surprised to see Goldman Sachs making a profit. But certainly the amount of profits they have made has surprised me immensely. The bank bailout in US was a creation of Goldman thru their proxy Paulson. So one would have expected that their interests were safegaurded well in TARP. But seeing the vulgar amount of profits made this quarter, it appears that TARP was tailored so that all the money flows into Goldman.

I also believe this kind of profits in falling markets & highly pessimistic investment climate is only possible thru not so straight business dealings. In other words I think there was rampant misuse of insider knowledge.

Goldman might be the biggest of the scavengers feeding on the rotten capital markets. But they aren't the only one if Galleon will turn out to be the scandal it seems to be.

Obviously insider trading is rampant. How often it has happened that earnings results are preceded by share price movements which leave no surprise at all about earnings. It seems to be happening most of the time, at least, for the handful shares I track.

I bet Goldman will be safe from any insider trading investigations due to their connections in the establishment. Perhaps a key factor Warren Buffer would have considered when he invested $5 billion in Goldman.

One thing which I don't understand at all is why Governments world over are so meekly listening and doing what bankers say. Makes me think time is up for capitalism.

Pullback of EU generosity begins

EU leaders want a review of the assisance that was promised to Dell workers on the eve of Lisbon referendum.

http://www.irishexaminer.com/ireland/uncertainty-over-euro14m-package-for-dell-workers-102905.html

Only a few days ago I blogged that EU's generosity to Ireland is going to end soon. Didn't know it's going to begin so immediately...

On another note, I am shocked indeed to see the support Nama got in Green party conference. Most people are worried about the program for goverment and that it prevents required cutbacks. But that is chicken feed compared to money to be spent on Nama. Suddenly Greens as a party are looking and sounding like Fianna Fail. The same desperation to stay in power, whatever it may take.

It was heartbreaking to see Ireland leading twice against Italy but end up with a draw. Why is it that Ireland always seems to exceed expectations when playing stronger teams but underperform when playing lower rated teams?

A Moody's analyst has come out and said that over paying banks for properties is fine as we will have to shell it out anyway later as banks will need more capital.
It's like moving money from one pocket to another, he says. It is with such out of place and over simplified analogies people are being fooled. This is money from people's pockets moving to the pockets of bankers and investors.

Let's for a minute assume that Nama is going to make some profit. How will that profit get back to the tax payer who is the investor? I can't see a way. What's more likely to happen is the ministers and civil servants using this money to inflate their already substantial pay packets.

Nama and asset pricing

IMF, ECB & many world reknowned economists have been together in saying that government should not pay above market value prices for the assets in bank bailouts.

Almost everyone in the country is saying the same thing except the Fianna Fail. The two opposition figures who supported Nama have been proven to have links to banks and hence are biased in their views.

That makes me wonder how sincere is Brian Lenihan when he says his Nama proposals are in the best interest of the country.

I am certainly not convinced for following reasons:

1. Current market value is an estimate. There is no guarantee that if the asset is put up for sale , it will get sold for exactly what it's estimated value is. One may argue that the plus and minus over a big number of transactions and all the properties together will get a price close to the estimate. Well, that is correct in a normal situation. But on a situation where there is huge over supply, it is likely the difference between estimate and actual price will be negative most of the time. Those have sold their properties or have them up for sale in the past year or so will vouch for this. My own house is up for sale and the offers I have got have been less than 80% the estimate I got from estate agent. Estimates can easily vary by +/- 20% even in normal situation. In a situation like this it will be more like -20%. But let us be optimistic and assume a -10% difference i.e property valued at €48billion can as well turn out to be worth €43 billion. Remember swathes of development land worth 20% of the price paid for it and you will realize this is a very real risk. Who will be taking on this risk ? Not the banks but the public. This itself puts a big question on the assumption Nama needs just 10% increase in property values to not make losses.

2. Brian Lenihan has said that interest for ECB loan taken for this purpose will be serviced by income from the properties. He has not said that this income will cover any principal repayments. So that means at 1% interest rate, interest payments match income(€540million) What about increase in interest rates? For every 1% increase in interest rate, state will have stump up half a billion euro. Assuming interest rate averages at 1.5% over the 10 years (again optimistic), the bill for addl interest we will have to foot comes to €2.7billion.

3.Brian Lenihan has been giving himself too much power with respect to Nama. While this itself is leading to lack of transparency in Nama affairs, there is also a question mark on his competency to be holding such decision making power. He seems to have caved in to the fear mongering with the I'll thought out bank guarantee scheme. That forced us into the nationalization of Anglo-Irish . He promised a "orderly wind down" of the bank after nationalization. But is still pumping money into it from annual exchequer funds and will only result in cut backs in public services or tax increases next year. When it came to Nama he has again been overly dependent on the brainstrusts of the banks rather than economists, blundering his way into it - proposing to pay over the odds to the banks and not asking for any guarantees to lend. It was only the pressure from Greens which made him add elements which make banks share the risk, that too minimally. Being a lawyer he is very forceful and convincing at the surface. But I believe he lacks sound knowledge and reasoning in economical matters like, say, Richard Bruton and most of the time comes across as a bully. He has also not done himself any favors with his reactions & statements in the cases of Rody Molloy ("it is a normal procedure", he said) and John O'Donoghue . Such concentration of power in his hands is a worrying.

Even with an optimistic view, common sense dictates that it is likely state will have bear an additional burden of €7 billion for Nama if we go with what we have today. If things don't go as planned it will be much more.

How about doing this instead of Nama:
- Banks revalue their books and write down losses due to non performing loans
- State will step in and assist banks in two ways 1) recapitalize to the extent that they will still remain private 2) provide additional finding through soft loans on the same terms as ECB lending.

I am hoping Greens will bring more diligence into Nama exercise.

If not then I hope ECB will step in and block over payment to the banks.

It is sickening...

It is sickening to hear politician after politician express sympathy for John O'Donoghue, saying he was a scapegoat and hasn't been given a fair chance to explain. Have they just woken up from months of sleep. It has been months since this man's cavaliar wanderings have been made known to the public. Was that not enough time?

One of them went on to say it was not right to follow the lead of Sinn Fein in demanding resignation as they themselves claimed millions in expenses and are down to robbing banks. Fair enough. But if Fianna Fail etc. have to be told by Sinn Fein what's the right thing to do, that really shows the depth at which Irish politics is at.

Enda Kenny is not the cleanest hand. But I was surprised to see him so pleased a couple of weeks ago when declaring the issue as closed just based on a grudging apology from John O'Donoghue.

If Bertie Ahern sympathizes with a guy that is the surest proof that this person cannot be straight ;)

On another note, it was equally sickening to hear people from south Kerry say how great a person he was and how much he worked for their development. It reminds me of the selfishness with which Irish public voted Bertie back to power a couple of years ago, weeks after tribunal revealations which left no one in doubt that he is corrupt. It's the same thinking - I am doing well and that's because of him. So whatever else he is, it doesn't matter.

It is the same attitude which made the government splurge money at whoever wanted it, leaving the nation in tatters that it is now.

After fifteen years of boom, we have nothing to show except some roads in terms of development. But economy is on it's knees just after one year of downturn. Why? Just about everyone has been busy taking care of themselves. That is why!!!

And we blame Bankers & developers!

Amazon introduces free shipping to Ireland

Amazon has announced today free shipping on orders worth more than £25, to Ireland.

This must come as a big shock to the overcharging Irish retailers. Let's see how they will react.

Recently I walked into a HMV store to look at some Wii accesories and games. I was surprised to see prices were only about 20% higher than what I could find online. One year ago the margin would have been more like 50%.

Premium I would pay for looking and feeling a product before buying is no more than 10%. Anything above that is overpricing.

Does Lisbon 'yes' brings to an end a golden era for Ireland.

So the Irish and EU politicians have got what they want from Irish people. Moot point is if Irish people will be getting anything in return.

EU has been quite generous with Ireland recently. ECB has been bending over backwards assisting Irish banks & Government with billions of Euros in loans. I for one believe all this unconditional support has been only due to the Lisbon referendum which was upcoming.

I imagine soon EU bosses will begin to see Ireland as a bottomless pit where good money is thrown after bad. Decades of development funding from EU has made Irish citizens rich but Ireland has remained poor in terms of development, mainly in infrastructure.

All the money made in Celtic tiger era has only served to increase the costs. An amazingly shortsighted government has splurged money as if tomorrow does not exist. And now it is borrowing money as if, again, tomorrow does not exist. This perhaps is the only government in the developed world where the priority is government expenditure rather than stimulating economy, as evidenced by VAT and other tax increases, while governments world over were reducing tax burdens and funding stimulus packages.

Twenty years ago, Ireland was perhaps like a kid brother in EU. Underdeveloped and needing help. Today there are plenty of other EU members who are worse off. Expect EU to look favorably at these countries (Dell got in excess of €50 million for moving to Poland) .

Ireland is now a big lad on it's own. The government needs to show maturity like that of a developed country if we need to pull ourselves out of this mess. But all we seem to be getting is cronyism and weakness to face up.

What is wrong with Bank bailouts

 

Governments world over have been too anxious and naive in bailing out the banks. Like some commentators have already said, the banks are making the governments run in circles. The bank managements have been cooking books and hiding facts with impunity. Unless the bank managements are replaced wholesale, there is no guarantee the taxpayer funds going to the banks will be directed at improving financial markets as intended. Current managements are the cause of the problem. Their greedy policies that have created the mess the whole world is in. These are the people who have bet the future of their organizations for short term personal benefits. There is no way that these people will now start thinking about doing some social good with the support they are getting from the governments. We can see all indications that the are not learning from their mistakes and their past habits are not going to change.

In US, Merrill Lynch management dumped the exceedingly high bad debts BoA, by hiding them at the time of buyout and also awarded themselves huge bonuses in the process. Not even if one member of the management team had the morals to blow the whistle.

In the UK, Royal Bank of Scotland is now awarding their staff bonuses exceeding one billion GBP. That is after selling 70% of itself to the Government in return for bail out money.

In Ireland, Bank of Ireland has awarded its employees a raise while still waiting with a begging bowl for government funding. This, in spite of the whole country reeling with unemployment  – More than 1% of workforce lost jobs in January alone. And when unemployment rate is growing 5 to 6 times faster than either US or UK.

Contrast this with Barclays Bank, one of the very few banks which has resisted going to the government for funding. That by itself is an indicator of the quality of the management. By sacrificing their bonuses, they have shown how much they care for the company they manage.

A wholesale change in the top management should be a precondition any government funding of the banks. It is too much of a risk to the taxpayer otherwise. Yet none of the governments seem to be really concerned in letting the current managements continue their merry ways.  This way, I bet bank managements will use most of the money to boost the bottom lines and fill their pockets with bonuses.

Personally, I think governments should use the bailout money to create a new clean bank and let Citi, BoA et al. solve their problems themselves.