Before we get into today’s Money Morning, a brief announcement…
Your editor is taking a long weekend. However, we’ve lined up a couple of guest essays to give you something to read while you’re tucking into your Easter eggs.
Tomorrow, BullionVault’s Adrian Ash will give you more info on China’s gold buying spree. And on Monday, Diggers & Drillers editor Alex Cowie will give you the lowdown on Australia’s second largest export commodity – coal.
In between, assistant editor Shae Smith will have the usual weekly round-up of events for you in Money Weekend on Saturday morning.
But until then, this…
If you want to get a good picture about how much money you can make as an investment banker, look no further than the latest press release from the Federal Reserve Bank of New York.
The press release states:
“The Federal Reserve Bank of New York today announced that it has expanded the information that it makes available to the public related to the Maiden Lane portfolios.”
So what? Well, the Maiden Lane portfolios are the quaint and innocuous sounding names given to the government owned holding of former Wall Street heavyweights Bear Stearns and American International Group (AIG).
For your pleasure, Maiden Lane holds USD$74.9 billion, Maiden Lane II USD$34.8 billion and Maiden Lane III USD$56 billion.
But funnily enough, that’s not even the full picture. Because as the Fed points out:
“The new information includes nearly all of the holdings of Maiden Lane LLC (ML)-with the exception of residential whole loans as that would violate individual borrowers’ privacy…”
In other words, it doesn’t contain all the crappy subprime mortgage loans that are rotting away on the balance sheet.
But it’s not the dollar number that amazes us so much – we expected that – rather it’s the number of ‘assets’ in the portfolios.
Each asset represents a deal that has been lovingly crafted and nurtured by a caring and responsible parent – or, investment banker.
Take this one from the Maiden Lane portfolio:
IVYL_06-1A A1 144A (cusip: 46601QAC2) – USD$102,286,000
Or this valuable asset from the Maiden Lane III portfolio:
ALTS_05-1A ALTB 144A (cusip: 02149RAC2) – USD$1,102,582,000
Beautiful aren’t they!
Unfortunately your editor doesn’t have access to the wildly expensive Bloomberg Professional service which would reveal exactly what these investment gems are. So we’re somewhat in the dark.
[Ed note: If you do use the Bloomberg Professional service, feel free to send a screen grab of the description page of these assets to moneymorning@moneymorning.com.au, we'd greatly appreciate it].
The first one we’ve got no idea what it could be. The second we’ll take a wild guess. It could be a coincidence, but we do recall the bank examiner to the Lehman Brothers collapse referring to ‘Alt-B’ residential mortgage backed securities.
Without going through the 2,000+ page report again, our addled brain tells us Alt-B mortgages were almost as risky as Alt-A loans, which themselves were only slightly less risky than Subprime loans.
But, as we say, it could be a coincidence. Whatever they are, USD$1.1 billion is a heck of a lot of money. And remember, that’s just one deal. And it’s also just the amount held by Maiden Lane III. Consider how much of this stuff is being held by the banks and funds that haven’t gone bust.
We haven’t counted all the individual ‘assets’ in these portfolios, but looking at the number of pages they run to, you’re looking at thousands of them. And as we say, these are just the ones revealed by these bust companies.
And each asset represents part of a deal crafted by the bankers to rip money from investors. Investors who for the most part have absolutely no idea they’ve bought any of this stuff.
It helps to give you an insight into how investment banks like Macquarie Group became known as the ‘millionaires factory.’
Quite frankly, it all backs up our ages-long skepticism towards any investment that’s ‘packaged’ for retail customers. It doesn’t matter whether it’s a packaged property investment, a packaged share investment or a packaged bond investment, I just don’t like them.
The trouble is, part of the reason these types of investment are so popular is due to compulsory retirement savings schemes both here and overseas.
When individuals don’t have direct personal control over their savings, it ends up in the hands of investment managers or advisers who prefer to take the easy route. And what could be easier than chucking millions of dollars at an investment banker who tells you that investment ‘ALTS_05-1A ALTB 144A’ is the best thing since Google went public.
Compulsory savings schemes are just like any other compulsory scheme. Because you’ve got no choice but to do it, you see it as an impost or a burden, and therefore you take less care and less interest in it.
If there was no compulsory savings then investment managers would have to try and attract your savings. And chances are you’d want to know exactly where that money was going.
If your monthly retirement contribution came out of your pocket rather than being paid for before it gets to your pocket, don’t you think you’d want to know where it’s going?
Can you imagine any investment manager saying this to you:
“Oh, I thought we’d buy you $10,000 worth of ALTS_05-1A ALTB 144A. It’s a lovely little investment. It’s got an exposure to over-leveraged, marginal home owners in Michigan, Alabama and Wisconsin. The clever thing is, we’ve managed to engineer the investment so that all these crappy borrowers with low credit scores are classified as a triple-A credit rating. It’s clever because it means I get to make the sale and earn a million bucks by making you think it’s low risk, but you still lose all your money when investors figure out how rubbish it is. Everyone’s a winner – except you! Sign here…”
Would you buy? Thought not.
Of course, when investments are pooled, you’ve got no idea, and very little say in the matter. When the individual has control, then it’s a different story.
Don’t get me wrong, individuals make investing mistakes too when they’re left in charge of their own money. People who fell in with Opes Prime and Storm Financial are a classic example.
But the point is, when individuals have control over their investments they should have a better understanding over where that money is invested.
And even the Storm and Opes Prime examples – as we understand it – are more of a case of investors being told what to do rather than the whole process being explained to them properly.
But the way we see it, much of the cause of the excesses in financial markets is due to financial engineers having too much access to investor’s cash, too much access to bank-created credit, and too much of an incentive to get create new products and investments for the sake of earning a fee rather than because it’s a good investment for the punters.
Our fear is things will only get worse if trade unions and property spruikers have their way and convince politicians that retirement money should be compulsorily invested in pointless infrastructure projects, residential mortgage backed securities or government backed annuities.
What’s the solution? Well, that’s something Dan Denning and I are working on in Australian Wealth Gameplan. But I’ll also fill you in with some ideas in the next few weeks in Money Morning.
Cheers,
Kris.
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I think that Fitch is (unfortunately) right on to it but human behaviour is mostly predictable after all. I disagree with the demise of the US empire theory just yet. I reckon the old empire has got one last gallop left in it – and most importantly they probably think so too and certainly aren’t going to relinquish their dominant status without a fight. We forget that in the past China has had several turns as a world empirical power and a regional power too . Ho Chi Min’s famous declaration on the failure to gain independence to a unified Vietnam at the end of WW2 but rather grudgingly ceeding control back to the French that he would rather ‘sniff French shit for a few years rather than eat Chinese shit for a thousand years’ is an example of such sentiment. If and when push comes to shove I can see rather ironically that the US will adopt a similar attitude to their once arch nemesis Uncle Ho and simply refuse to ‘eat shit’ dished up by China. Taiwan will be the trigger. After that, all bets (and repayment of loans) are off.
Fitch, The are two hypes today, the first is the China hype that they are going to be the next superpower and that America is in decline. Both hypes have no logical explanation.
Below is an excerpt from an article I read that really shines a light on the US/China relationship – I still do not believe China has the upperhand!!!
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In the aftermath of World War II, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans would be granted wide latitude in determining the security and foreign policy stances of the rebuilding states. In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. For the Americans, it provided the ability to preserve much of the World War II alliance network into the next era in order to compete with the Soviet Union.
The strategy proved so successful with the Western allies that it was quickly extended to World War II foes Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. Militarily and economically, it became the bedrock of the anti-Soviet containment strategy. The United States began with substantial trade surpluses with all of these states, simply because they had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the Americans that the policies were continued despite the increasing economic hits. The alliance continued to hold, and one result (of many) was the eventual economic destruction of the Soviet Union.
Applying this little history lesson to the question at hand, Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the United States opens its markets, eschewing protectionist policies in general and mercantilist policies in particular. Eventually the United States extended this privilege to China to turn the tables on the Soviet Union. All China has to do is produce — it doesn’t matter how — and it will have a market to sell to.
But this may be changing. Under President Barack Obama, the United States is considering fundamental changes to the Bretton Woods arrangements. Ostensibly, this is to update the global financial system and reduce the chances of future financial crises. But out of what we have seen so far, the National Export Initiative (NEI) the White House is promulgating is much more mercantilist. It espouses doubling U.S. exports in five years, specifically by targeting additional sales to large developing states, with China at the top of the list.
***
I think the US have realised Bretton Woods no longer works. You can see how they have used it though because the US have never really extracted their resources (oil, copper) but have instead imported it. That is why when the US sneezed the world caught a cold. Now the tide has turned and the US will limit imports and start to produce/extract their vast resources. Latest announcement from Obama is that he is opening up areas that are to be drilled for oil of the east coast. They also now have the technology to extract gas from shale or something? They are also pushing green technology over oil technology. Give it 10 years and the US will be importing much less from the world. However, this will mean the US wont be so dominating in the future.
The chinese government know they are in trouble and I am willing to bet they do what the US says – like Iran sanctions. They also know there is nothing they can do – appreciating the yuan will devestate their economy, depreciating the yuan will make other countries block chinese imports and their stimulus package that was designed to prop up their industrial/exporting industry will cause high inflation which is effectively the same as appreciating the yuan.
For me, I would prefer to be in US shoes, I have had the painful slowdown and although its ongoing the intial fear is subsiding and I can begin to see that in the future their may be work on oil rigs, on the gas seams, digging up copper or even in the steel industry making drill rods for oil companies.
Chinese shoes means I have the inevitable reduction in capacity coming up that is going to be forced on them whether they like it or not. The world is not buying the same volume of goods anymore so capacity has to reduce. The chinese have their recession coming.
bb & GB thanks for your insightful comments. Like you GB I don’t see China as a threat. Their capacity is too closely tied to consumption so any trade restrictions or slump in demand send them packing. Militarily they are third rate so they would stand down if and when met with opposition of substance. Not to mention that the fight would be mounted on many fronts, many of those from within.
The balance of power in Europe on the other hand…..
LOL, The Germans are coming… again!
I think the EU will probably fail but it may not. It was designed in part to challenge US supremacy but there are too many different countries in Europe which will make it hard to hold together.
Interesting comment by Japan’s finance minister
“I didn’t tell him what to do” about China’s currency, Kan told reporters today in Beijing after the meeting. “I told him I expect China to make a wise judgment.”
We have the US pressing hard on China, The EU are investigating unfair subsidies on chinese goods and now the Japanese basically saying de-peg the yuan or else.
The slowdown of china, if not handled properly, has the potential to be the most interesting event we ever live through.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.Fi9vSe0fb4&pos=4
For those interested, I will paste in a few links to clips from the CFTC’s inquiry into the metals. Here is the first one:
http://www.youtube.com/watch?v=JXQ6Yqyjr1M&feature=player_embedded
thanks CB – very interesting and useful contributions as always!
hi CB
About a month or two ago i contacted one of the places which you spoke about as a good source for obtaining physical gold from. i think it may have been Australian Bullion Company…
Anyway, was a bit taken aback at a few things which came out from my questions to the lady (sounded foreign) who answers the phone:
1. if i wanted to sell gold to them i could send it via Australia Post
2. if i buy gold through them then they keep the gold on my behalf
Not sure what your experience is with them? Perhaps i just spoke to the wrong person, but i wasnt exactly inspired with confidence by the conversation…
CB – at the risk of repeating yourself – but could you pls give another headsup on your experiences? In particular:
1. which places offer the best rates to buy physical gold?
2. which ones offer best rate if you want to cash in some gold?
3. do you trust any of these places to “safekeep”/store your physical bullion? (i just found it strange how keen they are to do this “free of charge” – often not giving you much choice in the matter)’
4. do you take physical delivery of your bullion and if so, where do you keep it? Is it insured?
5. These issues will become very important soon when purchasing assets through my SMSF – i intend buying physcial bullion – probably silver…
6. What is the best form to buy the bullion in? i.e. coins, bars, ingots, etc? and are certain types/sources of such coins/bars/ingots better than others? i.e. are some more difficult to liquidate back to cash than others? (one obvious reason could be that for example only certain coin producers are trusted wrt purity of the gold/silver etc in the coin/bar/ingot etc)
Hope i’m not being too nosy here, but your insight into these matters is very helpful and enlightening…
i for one believe that gold is going to reach US$5000 and above within the next few years or so, and i see this as the only way i could ever pay my home mortage off … I just dont want to be caught with worthless ETF gold …
Sandra – It is funny how that company/business was keen to buy physical metal off you, but did not even suggest how they would ship you the physical metal in the even that you were buying. Do not trust any of them to “store” your metal for you. Take delivery of it, and put it into a safe deposit box, in a bank, or hold it in some other secure place that you have access to. You need to make sure that your metal is safe and one of the requirements for that is to keep quiet about it in the first place. If people know about you having a lot of cash or bullion around, you could become a target of crime. Use your instincts and commone sense.
As to which dealr to use when buying and selling, it is always best to call around and get quotes. Prices change all through the day. A good, reliable dealer is The Perth Mint, owned and backed by the WA Government. Here is the link to their daily quotes on the various products they buy and sell.
http://www.perthmint.com.au/metalPrices.aspx
Print it out and study it, and then call them and ask them any questions you might have. If they, or any other dealer offers to store your metals for you, give them a polite thanks, and make it clear that you are only interested in physical delivery. They will charge you postage and insurance on top of the metal, but they will make that quite clear to you in a written quote, which they will email to you right after discussing it with them. The same process should work with any other dealer you might approach. One of the best things you can do is to walk into a local dealer’s shop. Do a search and look up the Yellow Pages for Bullion Dealers and Coin Shops. If you find a local dealer who can match the ABC or Perth Mint prices, then you can simply walk in and collect your metal, and save some money on postage and insurance. Whether you buy ongoing insurance for your metal, is something up to you. You will need to call some insurance companies and get quotes, but the only things you need to worry about are fraud, robbery and theft. Hence the keeping of a low profile being a very good policy.
In gold, the 10 Oz bars are very common and convenient, and in silver the 100 Oz bars. I would split any holdings roughly 50-50 between gold and silver, in dollar terms.
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