Wednesday, 1 April 2009

Taleb, 'Black Swan´ Author, Says U.S. Bank Plan Will Tank. We Agree.

Last night I was chatting with an old friend of mine about the U.S. plan for its lousy financial system and he was clear -- sort of felt that he was right: ''Why do people, taxpayers, have to pay for the lousy risk-assesment strategies of these idiots?´´ I agreed with him. Then I stumbled across this story on the Bloomberg News Web iste, and I decided to reproduce it. Nassim Taleb, the author of ''Black Swan,´´says removing toxis assets from balance sheets will do little to kickstart credit and revive the U.S. economy. Sorry to say this, he is right. We expected the Barack Obama administration to be as strict with Wall Street firms as it has been with companies in Main Street (check our posting early this morning about the president's reported remarks over the future of General Motors Corp. and Chrysler Corp.)

Reach your own conclusions -- we have already done that at MM. Click here to read the story (with pictures and all the gadgets.)

Nassim Taleb Says Geithner’s Bank Plan Will Fail (Update1)

By Jeff Kearns and Erik Schatzker

April 1 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s plan to remove toxic assets from bank balance sheets will fail to revitalize the financial system, “Black Swan” author Nassim Nicholas Taleb said.

“We’re heading in exactly the wrong direction,” Taleb said in a Bloomberg television interview. “I want an overhaul, I want something drastic. This is going to fail, this is not it.”

Geithner has proposed to revive banks without resorting to nationalization through the Public-Private Investment Program that will buy difficult-to-value assets. Leaders from the Group of 20 nations meeting in London this week are unprepared to fix the global financial system because they don’t grasp how markets work or the root causes of the credit crisis that has led to $1.2 trillion in losses and asset writedowns, Taleb said.

Rare and unforeseen events are known as “black swans,” after Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable.” Taleb is a professor of risk engineering at New York University and also advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner.

The Treasury’s plan is unfair to taxpayers and rewards the failure of banks that didn’t understand the risks they took when using debt to boost returns in the mortgage market, Taleb said.

Subsidize Failure

“I don’t understand why I as a taxpayer need to subsidize those who failed, by giving them options so they can rebuild their balance sheets,” he said. “Taxpayers take the downside and Wall Street as usual is going to take the upside, another classical problem of socializing the losses, privatizing the gains.”

Taleb said it’s “shocking” that the government would allow banks to estimate the value of the toxic assets that remain on their books because there is effectively no market for the securities, making them almost impossible to value.

“I don’t understand letting banks mark to market, after all this incompetence,” he said. “Why don’t we allow people to mark their house at what they think the value of their house is?"

Odebrecht Bond to Be Priced Early Tomorrow; Books Closed in America, Sources Say

The Odebrecht bond put up for sale yesterday has the bookbuilding closed in the U.S.; European investors will close orders tomorrow and pricing should be ready by midday, said sources involved in the deal. We will see current market demand and pricing trends -- whether they are supportive of indications of an improvement in risk-taking.

Check This Posting on a Reuters Blog: Debt Restructuring in Europe Being Chased Out by Distressed Debt Funds

Check this posting. We will yet see whether the same happens in Latin America. There are sectors in distressed financial situation and with grim prospects of debt refinancing in the short term: ethanol, meat, foods, farming companies.

Brazil and Some Details About the Fiscal Numbers for February

Those who read this blog regularly probably know that I am not especially a fan of Brazil's government, its very ambiguous economic policy framework and particularly its management of the fiscal situation. This time I won't defend the awful administration of public finances by Criswell, the lousy finance minister who assured his countrymen that the global crisis would only touch Brazil marginally, be just a ''marolinha´´ -- a roller, a shallow wave. What an idiot. The economy posted its worst quarterly contraction in the fourth quarter and is going straight to recession.

Well, the thing here is, yesterday the government announced that the consolidated primary budget surplus, or the excess of revenues over expenses excluding debt payments, narrowed by 66 percent in the first two months -- amounting to about 2 percent of gross domestic product in relative terms. The accumulated result is certainly bad. I listened to some radio and specialised TV programmes predicting the fallout of Brazil and some doom scenarios. The numbers are certainly worrisome, but we have to take into account some aspects in the bottom line that should keep readers cool about the (deteriorating yet far from end-of-the-world-like) fiscal position of the Brazilian government.

The primary surplus was 4.1 billion reais in February, narrowing from 5.1 billion reais in January -- and without a doubt, a couple of disappointing monthly results. The numbers were though better than the market’s average estimate surplus of about 1.2 billion reais. Furthermore, the consolidated nominal budget deficit narrowed to 6 billion reais in February from January's 9.2 billion shortfall. All in all, a whooping 10.1 billion reais in interest payments were to blame for the sizzling back-to-back deficits. Despite the fact that the primary surplus was about half the value of February 2008's 9 billion real surplus, my guess is that, once you take a look at the figures unveiled by the central bank yesterday, there is an improvement on the margin in the interest/GDP ratio. This is consistent with recent declines in domestic borrowing costs and especially, the reduced weight (sensitivity if you like it) of currency fluctuations on debt dynamics. Anyways, taking into account the awful erosion of tax collections during the past five months and the irresponsible increase in expenses sponsored by that lousy finance minister and related to the government’s economic salvage plan, the data in my view was not that worrisome.

Nonetheless, be sure that at some point the same rating agencies that were quick to see Chile's strength and especially comfortable fiscal and external position to award the nation an increase in debt ratings, will be quick enough to spot the weakest aspects of Brazilian policy making -- which we believe is erratic and desperate in our view. We believe that at some point the rating agencies that awarded Brazil investment-grade last year will begin revising their stance -- it would surprise me if they at least don't send a warning on Brazil's deteriorating fiscal numbers.

Argentina Mourns Former President Alfonsín, Who Died Yesterday

Murió Raúl Alfonsín. I am reproducing Bloomberg News reporter Eliana Raszweski's obit on the man who helped bring back democracy to Argentina.

March 31 (Bloomberg) -- Raul Alfonsin, who presided over Argentina’s return to democracy from military dictatorship and later resigned amid economic chaos, died today. He was 82. Alfonsin, who was battling lung cancer, suffered recently from pneumonia, his doctor Alberto Sadler told reporters in Buenos Aires. Dozens of people carrying candles gathered outside Alfonsin’s house in the capital.
Click here to read Raszweski's story. Alfonsin dismantled the armed forces's power structure. He created the National Commission on the Disappearance of Persons to record human rights abuses that took place under the past military leadership. One footprint of democratic values that our leaders should always use as a model. We have so many undemocratic leaders in this region that use votes and institutions created for people like Alfonsín to perpetuate in power. The Chávez, Uribes and so on won't be as fondly remembered as the old Alfonsín will. Rest in Peace, Mr. President.

Click on this link to read Otto Rock's IncaKolaNews' very touchy posting on Alfonsín. It's partly in Spanish, lo cual lo hace más sentido aún.

New Issuance: Odebrecht Becomes First Private Company in Brazil This Year to Offer Bonds in International Markets

This came out yesterday, and I apologise, dear readers, I was on holiday. Bloggers have holidays too. Odebrecht, the construction giant, is offering bonds in international markets to buy stakes in some ventures and units, as well as to improve its corporate structure. This might be the first latin dollar bond sale since Digicel's very bumpy $335 million offering a few weeks back. On the use of proceeds, these Odebrecht bankers branded it as UOP for general corporate purposes -- I wish these bankers were more transparent. I wished the company was more transparent too.

Here are the details of the offering:

Issuer: Odebrecht Finance Ltd.
Rating: BB (stable) / BB+ (stable)
Tenor: Five Year (April 2014)

Size: $ 150 Million

Yield Guidance: To Be Announced

Change of Control: 101% (Ratings Downgrade)

Format: 144A/Reg S

Bookrunners: Banco Santander SA/Banco Itau Holding Financiera SA

Co-Manager: Banco Espirito Santo SGPS

Use of Proceeds: General Corporate Purposes (including equity investments in Odebrecht group units)

Timing: This Week

Finally! Obama Believes Bankruptcy Best Solution for GM, Chrysler. Now, What is the Solution for Banks Like Citigroup or Financial Companies Like AIG?

Bloomberg News moved this story late last night:

April 1 (Bloomberg) -- President Barack Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said. Click here for the link to the entire story.

The thing is, my comments have to be more moderate from now on. The surprise will come on April 8. Anyways, I am surprised by the assymetry of the comments by the newly-sworn in president: he has failed to produce a similar comment concerning the situation of banks that, like Citigroup Inc. or financial services companies like AIG, had awful risk-assesment strategies and led the credit markets to the shambles they are on right now.

I ask, When this new U.S. administration will say something solid, concrete and strict about the heath of these financial companies and when the world will stop bailing out these institutions?