Finance Trends Letter

Well, sorry to repeat myself, but this is how I basically put it earlier today on Twitter: " “To detached observers, it’s obvious Goldman $GS hearings are a public spectacle designed to draw attn to fin reg. + pandering to US voters.” " Thanks to BMB for quoting me, and more importantly, for adding his own two cents . I really couldn't summarize the game plan any better than he does. Obviously, I'm not the only one who thinks the timing or circumstances of Goldman Sach's hearing in Congress are a little staged or convenient . And it's not that the SEC doesn't have a case against Goldman; that's for the legal system to decide. It's just that we're getting the broad strokes of information on this case in the midst of a circus sideshow, with politicians lashing out at the investment bankers in a blatant effort to appeal to their economically-strained voter base. I could go on about the timing and merits of the case, and the shameless grandstandi...

If you read James Grant's excellent and succinct piece on banking reform , you might also be interested to see his latest appearance on Bloomberg TV. Grant recently joined Pimm Foxx on "Taking Stock", where he discussed the economic recovery, the problems of our 21st century 'capitalism', and how to implement truly meaningful banking reform. I was surprised and delighted to hear Jim bring up Brown Brothers Harriman as an example of a long-lived investment banking firm that had survived this crisis due its prudence and its more conservative partnership structure, in which owners are personally accountable for losses. In recent weeks, I had been half-jokingly mulling over this very example of a private bank which stuck to its roots and sailed through the crisis unimpeded. Great to hear Grant bring up this point and elaborate on it so nicely; be sure to listen for it.

James Grant penned a great opinion piece on banking reform for the Washington Post called, "The best financial reform? Let bankers fail" . Here's an excerpt from Jim's essay: " The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits. Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors. .." You can see why I like it already. Be sure to read the whole thing if you haven't already, and pass it ...

Some Friday reading (and viewing) for ya. 1. Obama challenges financial industry to join regulatory overhaul - Bloomberg. 2. Marc Faber says China exhibits 'Danger Signals' , symptoms of bubble building (w/ video) - Bloomberg. 3. Jeremy Grantham on bubbles - FT.com. 4. Renegonomics: are deadbeat borrowers fueling consumption ? - Laurence Hunt's Blog. 5. Rail traffic recovery continues - PragCap. 6. John Paulson turns bullish on housing, economy - MarketWatch. 7. View From the Top: Mohamed El-Erian talks to FT about economic recovery, the US dollar, and the state of financial markets - FT.com Thanks for checking in at Finance Trends ; you can keep up with our posts and musings via RSS and Twitter . Have a great weekend, and be excellent to each other.

"Dr. Phil" Pearlman examines some of the important psychological trading themes at work in Greg Zuckerman's book, The Greatest Trade Ever , in this latest episode of Market Shrinkology on Stocktwits TV. This particular episode happened to come at an interesting time, given the recent uproar over Goldman Sach's alleged impropriety in structuring and selling certain CDO deals to institutional clients, which Paulson & Co. (John Paulson is the central figure of Zuckerman's book) helped structure as a subprime vehicle they could sell short . I think Phil does a great job of addressing not only some of the ethical questions that have cropped up around Paulson's trade in recent days, but the psychological factors (namely, "disposition effect") that were at work for investors like Paulson, Michael Burry, Andrew Lahde, and others who made their foray into this subprime short trade. What does it take to enter and hold on to a big longer-term win...

Twitter pal Dasan takes a look at Anthony Gallea's 1998 book, Contrarian Investing , in his recent post, "Contrarian Investing - a Classic Investing Book" . Here's an excerpt from the lead-in: " I believe serious investors are always trying to improve themselves. One of the ways to do this is through constant reading... ...I recently came across a book written in 1998 that a few smart hedge fund managers that I respect said had a great influence on them. I summarize its key points below, but don't let that stop you from reading the book yourself . "Contrarian Investing" By Anthony Gallea. Written 1998. In 1998, Anthony Gallea, a Portfolio Manager at Smith Barney, with help from William Patalon, a professional writer, wrote the classic “Contrarian Investing.” Jim Rogers wrote the forward to the book. Many successful investors have cited this book as a book that greatly influenced them. This volume, like Ben Graham’s “The Intelligent Investor...

The SEC's civil suit against Goldman Sachs , accusing the firm of fraud in structuring certain mortgage backed CDOs (ABACUS 2007-AC1), has been the financial story of the day. According to the SEC complaint, Goldman let a large hedge fund (Paulson & Co.) influence its structuring of synthetic CDOs, which were subsequently sold on to bullish clients (buyers such as pension funds and other large investors) under the premise of their being assembled by an independent party. Wall Street Journal has the details: " According to the SEC, Goldman structured and marketed a synthetic collateralized-debt obligation, or CDO, that hinged on the performance of subprime residential-mortgage-backed securities. The CDO was created in early 2007 when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said. "Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc., with econo...

Charlie Rose interviews investor Jim Chanos , the noted short-seller and hedge fund manager (Kynikos) who now insists there is a property bubble of epic proportions in China. We shared this interview link on Twitter earlier in the week, but I wanted to post this here for everyone to see. If you've seen some of Chanos' past presentations on China , you'll be familiar with some of his arguments on the real estate bubble, but this interview provides an excellent update to, and clarification of, his thoughts. Enjoy the discussion, and see our related links for more on this theme. Related articles and posts: 1. Jim Chanos: "Overheating in China" - Finance Trends. 2. Pivot Capital report: China's investment boom - Finance Trends.

Bit of a Monday afternoon reading list. Here's what we're looking at today and for the week ahead. 1. Bank profits dimmed by prospect of home equity losses . 2. Trader blows whistle on gold and silver price manipulation (Jesse's Cafe). 3. Check out copper's run back up to $3.50 over the past year. 4. The Wall St. Journal sees a light at the end of the bailout tunnel . 5. Economist special report: America's economy set to shift from consumption and debt, towards saving and exports. 6. Gregor MacDonald and Stocktwits combine forces for the Macro Weekly letter . Thanks for checking in. Reminder: you can also keep up with our latest links and thoughts on Twitter or subscribe to our RSS blog feed to keep posted with our market musings.

Michael Burry explains credit default swaps and his subprime short to Scion Capital investors in this November 2006 document shared by Marketfolly: " A big hat tip to Greenbackd for originally bringing this to our attention. Below you will find a very interesting primer on credit default swaps and the subprime mortgage short from Scion Capital's hedge fund manager Michael Burry. Burry of course was recently featured in Michael Lewis' latest book, The Big Short (which we highly recommend reading) for his notable early short position in subprime mortgages. Michael Burry penned his primer back on November 7th, 2006 and it's almost comical now to think about how he was running a value fund focused on equities and then all of a sudden has to explain his short subprime trade and complex derivatives to his certainly surprised and confused investors... " Head on over there to read the full embedded document . Should make for very interesting reading, as by now I'...

There's a great interview in the latest Financial Sense Newshour with Richard Eckert , the former CFO/risk manager at Lahde Capital Management. The interview topic: "The Greatest Trade Ever: An insider's behind the scene view of how a hedge fund made millions out of the credit collapse." For those who don't recall, Lahde Capital is the small Santa Monica hedge fund set up by Andrew Lahde, which profited mightily from short bets on the subprime housing market. After raking in his dough, Lahde famously kissed the hedge fund world goodbye in a widely circulated, and widely discussed, farewell letter to clients. Lahde is also one of the main investors profiled in Gregory Zuckerman's book, The Greatest Trade Ever , a treasure trove of information on the subprime crash and the hedge fund managers who profited in the downturn. As I come to the end of Zuckerman's book, one thing that I'm totally struck by are the obstacles that investors like Andrew Lahde, M...