Randomly Noted

Here’s a mind boggling stat: April has become the second highest month ever in terms of junk bond issuance with $31.8 billion of bonds sold. And pushing that volume was refinancing, not M&A activity, which is usually the case behinmd high issuance months. Newswire reporter Michael Aneiro notes that at the beginning of 2009, as the financial crisis was fully taking hold, junk bonds on average were trading around 61 cents on the dollar. Today, that average price is 99.5 cents.

What appears to be behind the demand for new issuance is investor appetite for higher returns. But we’ve heard this story before. This push for higher returns must not morph into investors not carrying about risk. That’s what lead to the financial crisis just a few years ago.

A record 40,000 people are expected to show up at Berkshire Hathaway Inc.’s annual “Woodstock for capitalists,” otherwise known as the Berkshire annual meeting.

The unique Omaha event finds Berkshire at a bit of an odd crossroads. It had a strong 2009, a year in which the firm made a big bet on railroads.

But as successful as Warren Buffett and his partner, Charlie Munger, have been as investors for so many years, they also have been about more than just strong returns. They have occupied a moral high ground in an investment world where sticking strictly to the legal minimums is more the norm.

That Berkshire is somehow expected to behave differently than other large investors is probably a bit unfair to Berkshire. Still, there likely were some disappointed fans when it was reported that Berkshire did some lobbying to try to protect its own interests in the financial regulation bill now the center of Senate attention.

To add to this, the lobbying was about derivatives and collateral that needs to be held against derivatives positions.

The fact that Buffett and Berkshire have derivatives positions at all likely surprised some, given Buffett’s vocal condemnation of them.

But clearly Buffett and group saw a trading advantage in derivatives and acted. Lobbying was done to try to prevent the passage of legislation that would put Berkshire at a disadvantage.

So Buffett and Berkshire seem a bit more like everyone else in the investment community, just more successful than most. Nothing wrong with that. That pedestal just gets in the way, anyhow.

The line snakes around the inside of the Apple Store today on 5th Ave. What are they waiting in line for? To see if their iPads have arrived.

A colleague joined me for a field trip to the 5th Avenue Apple Store in Manhattan today. Both of us were looking to buy some accessories for our iPads. We walked down the circular steps in the middle of the store and before us, was a mass of people the envy of every retailer – in a line that almost circled the interior of the store. I walked over to a salesman to see if I had to wait in that line to make my purchase (no, if using a credit card. Yes, if cash). I asked who all of these people were. He told us that almost everyone in line was there to see if their iPad’s had arrived. He said there have been production problems in Taiwan, so stores are experiencing serious shortages.

But then he mentioned another interesting point – he said he sells maybe two a day to people who live here in New York. “From other countries,” he said in response to my question of where did all of these people come from. He said he’s heard stories of how people would buy a couple iPads and take them back to their home country to sell them for $2,400. He even talked about”resellers,” people who bought iPads in the store and then sold them outside the buildinging to people who didn’t want to wait days or weeks to get their iPad.  Entrepreneurs everywhere.

The international sales element is interesting as likely many of the buyers are getting them here to take them home to play with.  Earlier this month, Apple delayed launcing the iPad internationally until sometime in May. If the New York store experience is like what other large cities are experiencing, you wonder what impact this will have on international sales when the product actually launches.

When the major credit ratings agencies found themselves on the hot seat some years ago after the accounting scandals at Enron and Worldcom, their defenses were reasonable.

If those fraud-ridden companies were essentially handing out inaccurate financials, it meant the ratings agencies were being duped like everyone else. After all, you couldn’t expect Standard & Poor’s and Moody’s Corp. to act as auditors. So, their ratings of the companies were too high when the companies’ real and troubling situations tumbled into public view.

Around the same time, the business models of the major ratings agencies were called into question – they are paid by the issuers whose securities they rate. The ratings agencies said they knew how to handle the apparent conflicts and because they were employed by so many issuers, the potential conflict was diminished as no one company represented a large percentage of the raters’ revenues.

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In Berlin to try to secure Germany’s assent for a Greece bailout deal, IMF boss Dominique Strauss-Kahn said earlier today that we “shouldn’t believe too much in what rating agencies say.”

One has to agree – on a number of levels. Over the past decade, Moody’s, Standard & Poor’s and Fitch have proved time and again they can be fallible – and late – in identifying all manner of credit vulnerabilities.

Moreover, during the Greek crisis, the rating agencies have become prime actors rather than arbiters – issuing downgrades and decisions that principally shape markets’ direction (in a fairly brutal way) rather than enlighten and inform.

DSK may in fact hold rating agency industry in contempt. But today what he’s really trying to do is calm markets. The rating agency downgrades – of Greece, Portugal and Spain – over the past two days have pushed the euro down significantly and spurred stock market selloffs around the world.

It’s the minimalist Federal Reserve.

With a tad of old-fashioned ‘white out,’ the U.S. central bank could have taken its statement issued at the conclusion of its March 16 policy meeting and re-issued it today to mark the end of its latest interest-rate confab.

Even Thomas M. Hoenig, the honorable dissenter on the Federal Open Market Committee, if left to repeat his solitary stand meeting after meeting.

Hoenig, the president of the Federal Reserve Bank of Kansas City, doesn’t want much, just for the Fed to abandon its phrase that near-zero short-term interest rates will be kept in place for an “extended period.”

Hoenig’s understandable view, in my paraphrase:  the economy is recovering, if slowly, so why use language that would seem to lock you into a longish-term commitment to emergency low rates?

Take away that “extended period” language and you would let people know that at some point you will return to merely easy monetary policy.

But the rest of the FOMC voters see no reason to shut off Groundhog Day. After all, they said (again) that “inflation is likely to be subdued for some time.”

The Fed seems to have a pretty good read on the economy. Slightly better today than in mid-March but far from out of the woods. Today, the labor market is said to be “beginning to improve.” In March it was “stabilizing.”

“Housing starts have edged up but remain at a depressed level.” In March, “housing starts have been flat.” 

The key fact seems to be that “employers remain reluctant to add to payrolls,” in the words of the Fed. That hasn’t changed and will likely only change to the upside very slowly in the months ahead.

That crucial indicator, and its molasses-like improvement, will keep the Fed’s statement writers nearly idle for the next few meetings. Nothing much will need to be changed.

It’s been discussed as a boxing match or a win-or-lose debate.

Unsurprisingly, your view of who ‘won’ was likely determined by where you stood on the Wall Street/Main Street political axis before the show got under way.

But if we can place cynicism aside for a moment, we might agree the hours and hours of back-and-forth Tuesday between U.S. senators and a gathering of Goldman Sachs & Co. current and former executives was of immense educational value for all.

Whether you are a “sophisticated” institutional investor (the word sophisticated now in some cases being taken to mean its opposite), a mere individual with his or her nest egg in the stock or bond market or an observer who thinks Wall Street is to blame for everything that’s gone wrong with the economy, you now have a much better idea of how things really work in some of the higher, more complex reaches of our markets.

The most educational quote comes from Lloyd Blankfein, the chief executive of Goldman Sachs. ”I don’t think our clients care or they should care” about what position Goldman might have as it sells a deal to others. “As far as whether something is a weak security or going bad, we are selling securities all the time that are weak or we in the market don’t like.”

You can express outrage at this idea, as some of the members of the Senate Permanent Subcommittee on Investigations chose to do. “You’ve got a short bet against that security, you don’t think the client would care?” asked Subcommittee Chairman Sen. Carl Levin, D-Mich.

But know this. Market makers and indeed all others in the financial services industry and probably any other industry will almost always take a narrow, legalistic view towards their responsibilities to the person or people with whom they are doing business. 

You can call them customers or clients or whatever you like. If you are one of their number you ought to know what the counterparty is legally obligated to tell you and expect nothing more.

If you get more, consider it a bonus.

The Securities and Exchange Commission is claiming that in one synthetic collateralized debt obligation deal Goldman and one of its employees did less than what was required of them and so the SEC filed a civil fraud charge. The SEC says buyers of this particular CDO should have been told a hedge fund that was going short helped choose some of the contents of the CDO.

Goldman and the employee vehemently deny the charges.

If we want to change what market makers and others owe their clients as far as disclosure, let’s change it. Let’s legislatively be clear about what is demanded of various actors in the financial arena.

Once that’s settled, don’t expect anything more.

Ask a child who broke a chair or drew on the walls or put cat food in shoes what happened, and they are liable to answer: “Dolly did it”.

Apparently dolly is also now to blame for what’s happening in Greece.

We have murmurings that Greece’s woes–the latest being the downgrade of its sovereign debt to junk by Standard & Poor’s amid worries about its financing risks and growth outlook–aren’t of its own making. It was the euro that did it.

Czech President Vaclav Klaus has been quoted in the German daily Frankfurter Allgemeine Zeitung as saying the real cause of Greece’s crisis lies in the euro and not the country’s economic policy. It is “the euro that causes this tragedy,” he’s cited as saying.

In a way it’s surprising that we haven’t heard more of this sooner. Greece’s problems, and the worries about others in the region, like Portugal and Spain, provide the perfect chance to hammer the euro-zone and the euro in particular.

Finance ministers in the euro-zone haven’t shied away in the past in complaining about the euro’s level. It’s either too strong, or too weak, but never just right. The European Central Bank has been much more relaxed about the euro’s level than individual countries, in part because its primary monetary policy objective is to maintain price stability; certainly it’s not indicated any inclination to intervene in the market to adjust the currency.

Finance ministers also tend to grumble about the difficulties of a unitary monetary policy system. Interest rates that suit one country may not suit another.

But that’s not what caused Greece to get into such a mess. Blaming the euro is like giving Greece a leave pass for all its silly mistakes.

Its problems came about in some measure at least because it fudged its fiscal position to gain entry to the euro-zone. That fudging continued after it joined, and allowed government officials for years to sweep the budgetary problems under the carpet and operate in an increasingly precarious position.

Greece ignored its own difficulties, no doubt hoping that if it closed its eyes it’d all magically disappear.

People can argue that an elevated euro hurt the country’s exports or that interest rates were too high (though the ECB has kept them low for some time), and this sorry episode has highlighted the issues of a union like the euro-zone where there is a one-size-fits-all currency and monetary policy, but the Greek tragedy is largely one of its own making.

How about this -  a synthetic CDO that allowed one to go long or short the U.S. Senate Permanent Subcommittee on Investigations hearings today into Goldman Sachs and its role in the subprime mortgage meltdown. Something tells me there would be more people looking for the short position than the long position.

This subcommittee has spent 18 months looking into Goldman and its mortgage operations. A good six hours into the hearings, and in this blogger’s view, there have been no smoking guns. In fact, if anything, you come away with the feeling that these senators don’t understand what they are looking into.

For example, Chairman Carl Levin repeatedly asks the executives of Goldman if the firm had a significant short position. And they keep saying, yes we did, to offset a long position (something called hedging, Mr. Levin). And Levin replies that’s not what he asked (the long position answer).

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Senator Pryor asks this question. Dan Sparks hems and haws. Says he hasn’t thought about it enough to respond. Josh Birnbaum says it’s complicated – too much credit sloshing around - and says we all contributed. Sparks concurs. I say: Yes, that’s right. Goldman and many other institutions and individuals brought the economy down. The financial crisis was a collective cultural failing. The only truly interesting and relevant issue in the Goldman hearing is this: Should Wall Street bankers behave more ethically by selling only products they believe in? The answer: It’s up to the bankers and their employers. The rest of us need to invest more prudently. (By the way, the core issue isn’t about banks’ disclosure obligations- customers of the notorious CDO had access to info about the toxic junk it contained.)