Excellent John Hussman Article

[haha]

Hussman Funds - Weekly Market Comment: A Blueprint for Financial Reform - January 25, 2010

 

[unclemick]

Good article - I've drifted away from reading Hussman over time. Don't always agree - but he gets the brain cells working. No. 8 - not so much.

heh heh heh - Work the red beads and white beads - shooting the messenger doesn't change the message. Changing the rules - gives one the 'opportunity' to become enlightened. .

 

[Purron]

He rejects the notion of "too big to fail" and instead suggests using the threat of concervatership/receivership to encourage financial instutions to "straighten up and fly right". I have my doubts this would result in the desired outcome. Short term rewards have, and I believe will continue, to rule over long-term financial responsibility.

These comments did cause me some concern and, unfortunately, I agree with Hussman here:

Despite last week's decline, the Market Climate remains characterized by overvalued, (intermediate-term) overbought, overbullish and rising-yield conditions. As I noted last week, this is " a situation that has historically been associated with a moderate continuation of upward stock market progress and a tendency to make successive but very marginal new highs, typically followed by abrupt and often severe market losses within a time window of about 10-12 weeks. As usual, that's not a forecast - just a regularity. But it's a harsh enough regularity to turn our knuckles white here."

 

[harley]

He rejects the notion of "too big to fail" and instead suggests using the threat of concervatership/receivership to encourage financial instutions to "straighten up and fly right". I have my doubts this would result in the desired outcome. Short term rewards have, and I believe will continue, to rule over long-term financial responsibility.

Whether or not it would result in the desired outcome, it's still far better than the current environment where there is absolutely no incentive for the financial institutions to behave responsibly. I think there would be a significant response from the employees and the public if corporate officers continued to act in destructive manners resulting in failure of the institutions. It may not solve all the problems (there is no single solution), but it would be a step in the right direction.

 

[Purron]

Whether or not it would result in the desired outcome, it's still far better than the current environment where there is absolutely no incentive for the financial institutions to behave responsibly. I think there would be a significant response from the employees and the public if corporate officers continued to act in destructive manners resulting in failure of the institutions. It may not solve all the problems (there is no single solution), but it would be a step in the right direction.

I agree there is no single solution and stronger enforcement may help. However, the thought of Federal regulators taking over and running our largest financial instituions scares the living daylights out of me. Not only have the regulators shown a poor track record, but by the time the institution is conserved, it may be too late.

 

[Independent]

I've also been bothered by the Fed/Treasury attempts from the beginning to protect bondholders. I thought the better approach for Bear Stearns would have been to let it go into bankruptcy, but make an immediate offer to buy all debt at 90 cents on the dollar. That would have forced a haircut on the bondholders, while still giving them a firm number for their balance sheets.

In the long term, it seems that we need something other than standard bankruptcy court to wind down certain types of financial institutions. We've already got that for FDIC participants. I'm guessing the root problem is that we let people do banking without forcing them to comply our regular banking regulations.

Hussman assumes that we can separate "customers" from "bondholders", fully protecting one while giving the other just a residual value. It's an appealing idea, but I'd like to see exactly how he'd do that in complex, non-FDIC institutions.

I'd also like to see some separation of activities like G-S had. If nothing else, it weakens the claim that "regulators can't possibly understand my business because it's so incredibly complex that we barely understand it."

I think that requiring mortgage originators to keep part of the mortgage is kind of shutting the barn door after the horse is out. I'd hope that for the next 20 years investors will look at stuff like this whether or not the gov't requires it. However, it would be interesting to look at this rule for securitizations of all types.

(Am I missing the point of this thread, or does it belong in Political?)

 

[harley]

I agree there is no single solution and stronger enforcement may help. However, the thought of Federal regulators taking over and running our largest financial instituions scares the living daylights out of me. Not only have the regulators shown a poor track record, but by the time the institution is conserved, it may be too late.

Whoa there, pardner!!! No way have I EVER recommended the gov't taking control of the financial institutions (or any others, for that matter). All I said is that I agree with Hussman that the corps(es?) should not be considered "too big to fail", and therefore needing to be bailed out by the feds. I think, and I believe JH was agreeing, that they should be allowed to founder or survive based on their own actions. Not that what I think really matters, but I just don't want to be on record supporting government intervention in what I believe should be free markets.

I just reread my previous post, and I can see where the confusion comes from. I didn't specify my subject preoperly, just saying "it" in response to your quote. Mrs. Rosenwasser would have smacked me on the back of the head back in 11th grade English for that one.

 

[Purron]

Whoa there, pardner!!! No way have I EVER recommended the gov't taking control of the financial institutions (or any others, for that matter). All I said is that I agree with Hussman that the corps(es?) should not be considered "too big to fail", and therefore needing to be bailed out by the feds. I think, and I believe JH was agreeing, that they should be allowed to founder or survive based on their own actions. Not that what I think really matters, but I just don't want to be on record supporting government intervention in what I believe should be free markets.

I just reread my previous post, and I can see where the confusion comes from. I didn't specify my subject preoperly, just saying "it" in response to your quote. Mrs. Rosenwasser would have smacked me on the back of the head back in 11th grade English for that one.

Whew! Thanks for clearing this up. Actually, I think we agree on many points. Federal intervention, in the form of bailouts or conserving institutions, is far from a desirable solution.

Like you, I have problems with the "too big to fail" concept. However, we shouldn’t sit idly by while corporations make stupid decisions and ruin people’s careers and investment portfolios. I don't think we necessarily need new regulations but we do need better enforcement to make sure risk is managed appropriately. Yeah, I know, more vigorous federal supervision is a form of government intervention. Even so, it beats large corporate failures, federal bails outs and conserving large companies.