TRIBUNA: MANUEL SANCHIS I MARCO

Procrastinar

MANUEL SANCHIS I MARCO

20/09/2009


Siempre me ha fascinado anticipar la dirección que toma una pelota de rugby cuando sale rebotada del suelo, aunque no pueda decir lo mismo del rugby económico que practican las autoridades económicas cuando aplican medidas que salen rebotadas en cualquier dirección. Ello provoca confusión y aumenta la incertidumbre, dañinas para la formación de expectativas y la toma de decisiones correctas por los agentes económicos.

En la estrategia para combatir la recesión y el desempleo, el orden en el que se apliquen las medidas es parte de su éxito. La otra parte quizás consista en identificar el problema económico fundamental, que podríamos resumir diciendo que nos encontramos ante una severa recesión con paro, deuda en expansión y elevadas necesidades de capitalización. Y la mejor forma de abordarlo reclama un ajuste que restaure la competitividad, así como una mayor vigilancia de la solvencia de nuestras instituciones financieras.

Es necesario un escenario de recuperación. La experiencia enseña que éstas arrancan con la expansión de las exportaciones. Luego las empresas aumentan su grado de utilización de la capacidad instalada hasta que deciden invertir ampliando su capital físico y creando nuevos empleos que estimulan el consumo. Tal suele ser el itinerario de una fase expansiva y probablemente también lo será ahora. Por eso, nuestra economía debe prepararse para aprovechar el tirón de la demanda alemana y francesa. Además, y puesto que no podemos devaluar, necesitamos corregir la pérdida de competitividad mediante un ajuste competitivo interno: entre 1999 y 2008 los costes laborales unitarios relativos con respecto a la UE-15 han crecido el 12% en la economía, y el 24% en manufacturas.

También hay que determinar el momento idóneo para terminar con la ventilación asistida a la economía, y hacerlo cuando empecemos a vislumbrar la salida del túnel. A partir de ahora, la producción y el empleo caerán menos, pero no creo que lo peor haya pasado. La construcción exigía un ajuste que ya se está produciendo, aunque lentamente. En cuanto al empleo, las empresas se han desembarazado de los precarios, pero a partir de ahora destruirán empleo más protegido. Nos hemos roto el "menisco" de los precarios y ahora la pierna golpea sin amortiguador, hueso contra hueso. Cuantitativamente se notará menos, social y políticamente hará más daño.

Se comprende que las autoridades apliquen una nueva inyección distributiva del gasto mediante la ayuda especial al desempleo, pues, al fin y al cabo, los trabajadores no son los responsables de la crisis financiera e inmobiliaria. Además, es moralmente reprobable abandonar a los parados a su suerte. Pero tampoco podemos seguir aumentando el gasto y la deuda indefinidamente. Ello supondría acelerar la actual dinámica exponencial de la ratio Deuda/PIB (del 36,2% en 2007 al 62,3% en 2010) y avanzar por la senda del crecimiento insostenible de la deuda, antecámara de la insolvencia financiera.

Debemos enfrentarnos a esta aritmética desagradable. Estabilizar esa ratio exige que la tasa de crecimiento del tipo de interés sea inferior al crecimiento de la economía, y todos sabemos que los tipos de interés subirán con la recuperación europea, mientras que las perspectivas de crecimiento españolas son sombrías. Financiar aquel gasto con impuestos o deuda no saldrá gratis y, si no se aborda también el problema de fondo, alargará la recesión.

Quizás debido a esa aritmética desagradable que puede comprometer nuestra solvencia, las autoridades están pensando en subir los impuestos cuando, en mi opinión, la economía está todavía demasiado débil. Una solución más indolora, y que no afectaría a la competitividad, consistiría en subir el IVA a cambio de rebajas en las contribuciones sociales.

No está claro que las medidas anunciadas alcancen el fin que persiguen. La intención es admirable, aunque quizás de efectividad dudosa, porque las rentas del capital pueden evadir impuestos con mayor facilidad que las del trabajo. Para desgracia nuestra, la economía se desentiende con frecuencia de la ética. Al revisar las contribuciones de los economistas al ámbito de la ética, el filósofo Jesús Conill recoge en su libro Horizontes de Economía Ética la aportación de K. Homman, quien propone una teoría económica de la moral cuya tesis principal sostiene que la validez de las normas depende de su realizabilidad y ésta de la aplicación de la racionalidad económica.

Desde esa perspectiva consecuencialista, la capacidad recaudatoria de los impuestos que gravan las rentas del capital dependerá, entre otras razones, de sus posibilidades de deslocalización. Lo que sí está claro es que nadie invertirá donde aumenten los impuestos. No olvidemos que no son sólo las rentas de los ricos o los "capitalistas" las que se gravan, sino el ahorro de las familias y empresas en general. Por lo tanto, el anuncio desincentivará la inversión nacional y extranjera, cuando lo que necesita nuestra economía es capitalizarse. Y es que el infierno de la economía está empedrado de buenas intenciones éticas y políticas.

El nuevo gasto distributivo ni nos dispensa de la aritmética desagradable ni del ajuste competitivo y de capitalización. Procrastinar y practicar el rugby económico supone una receta diseñada para eternizarnos en un doloroso periodo de deflación.

Manuel Sanchis i Marco es profesor de Economía Aplicada de la Universidad de Valencia.

SEPTEMBER 19, 2009

Fed's Plan on Banker Pay Divides Industry

By DAMIAN PALETTA and DAVID ENRICH

Bankers and lawmakers are sharply divided over the Federal Reserve's plan to review -- and possibly veto -- the way that thousands of U.S. banks pay their key employees.

Some welcomed the Fed's proposal as necessary to guard against excessive risk-taking at financial institutions, while others were angered by the central bank's move to expand its oversight powers.

The split sets up a showdown in the next few weeks as the Fed completes work on a final proposal that would let it reject any compensation policies deemed to pose a potential threat to a financial institution's soundness.

While the roughly 25 largest U.S. banks would get the most scrutiny, overall the plan would give the Fed sweeping powers over executives, traders and loan officers at more than 5,000 banks.

The proposal, which was first reported Friday in The Wall Street Journal, will "give [regulators] another opportunity to have someone come in and tell us how to run our business," said Edward Wehmer, chief executive of Wintrust Financial Corp., a Lake Forest, Ill., company with about $11 billion in assets and 79 branches. "It's opening Pandora's box," he said.

Others in the business applauded the Fed's plan, saying it wouldn't affect banks with prudent pay practices. "I like it," said Steve Steinour, chief executive of Huntington Bancshares Inc., Columbus, Ohio. "Having disciplined pay practices is good for the country long term," he said. "I do believe people should be paid with a view of how much risk they're taking."

Amid the debate, other bank regulators could soon take similar steps. The Office of the Comptroller of the Currency has recently begun reviewing policies regarding compensation standards at the national banks it regulates, according to a person familiar with the matter.

White House officials didn't comment directly on the Fed plan. In a speech on Friday, White House National Economic Council Director Lawrence Summers echoed many of the principles outlined in the Fed proposal, suggesting that the Obama administration is at least tacitly in favor of the plan.

"Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system," Mr. Summers said. "The key is to ensure that the right incentives are in place for long-term value creation."

A final proposal is still a few weeks from completion and could be revised, according to people familiar with the matter. It requires a vote by the central bank's board, but no congressional approval.

Under the plan, regulators wouldn't set the pay of individuals, but could require changes to salary and bonus policies to make sure they don't create harmful incentives. The Fed believes it can police compensation through its powers as the "safety and soundness" regulator for banks it monitors.

Sen. Richard Shelby (R., Ala.), the top Republican on the Senate Banking Committee, said there were "important unanswered questions regarding the basis for the Fed's authority and approach on this matter." Some Republicans question whether the Fed has jurisdiction over pay issues.

Fed officials have shifted their view on compensation, now seeing it as possibly exposing individual banks -- and even the broader financial system -- to serious danger. The financial crisis of the past few years spawned many examples of excessive risk-taking encouraged by compensation, such as loan officers who earned lucrative bonuses for churning out thousands of low-quality loans that later went bad.

House Financial Services Committee Chairman Barney Frank (D., Mass.) praised the Fed's move but said a bill he helped pass through the House still needed to be signed into law because it would clear up ambiguity regarding whether the Fed had the authority to take such steps.

The Fed's proposal generally aligns the Fed more closely with European regulators as the Group of 20 world leaders prepare to meet in Pittsburgh next week. There has been a growing global debate over the way bank employees are paid ahead of the G20 meeting. Officials in the U.S. and abroad worry that if they don't coordinate their approaches, some countries could draw away talent from others.

In the U.S., the Fed's plan will further inflame the debate between those who feel it bank pay too high and those who resent Washington's reach into the private sector. Banking lobbyists are "going to push back, said Patrick Doyle, a partner in the banking practice at law firm Arnold & Porter LLP in Washington.

Some bankers said the Fed's move is an indictment of a system that lets banks get too big. "If institutions were not allowed to grow so large as to threaten the entire financial system, then federal intervention such as this would not be necessary," said Chris Nunn, chief financial officer of Security Bancorp of Tennessee Inc., a Halls, Tenn., banking company with nearly $700 million in assets.

In the past, small-business owner Clement Suttmann of Leland, Mich., says he always favored free-market policies. But after his banks all but shut funding for his candle-making operation over the past year, the 54-year-old had a change of heart. "After what's happened to us and what happened to millions of small businesses. I say, let them have it," said Mr. Suttmann, who helps run his company with his wife, Holly. "This is a giant mess-up and we're not getting any help."

—Jane J. Kim, Sara Schaefer Munoz and Andrea Thomas contributed to this article.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Schumpeter

Taking flight

Sep 17th 2009
From The Economist print edition

This week we launch a new column on business and management. Why call it Schumpeter?

September 20, 2009

Op-Ed Contributors

The Recession Is Over — for Now

By PETER BOONE and SIMON JOHNSON

SPEAKING at the Brookings Institution last week, the chairman of the Federal Reserve, Ben Bernanke, remarked that the recession in the United States is “very likely over.” He’s surely right that a recovery is under way; in fact, the short-term bounce back may actually turn out to be faster than he thinks — rapid growth is not uncommon right after a severe financial crisis.

Mr. Bernanke commands great respect because of his impressive efforts to head off financial collapse, but his speech was deeply worrisome on the bigger questions: what caused the financial crisis, and how can we prevent another such calamity?

Mr. Bernanke still refuses to acknowledge the Fed’s role in creating financial boom-bust cycles, and therefore his diagnosis and solutions sound overly technocratic and somewhat hollow. He has called for requiring banks to hold more liquid assets and increase their equity cushions, and passing legislation that would permit the Fed to effectively close large financial institutions when they are failing. He also wants the Fed to be responsible for regulation of such large banks.

But none of this is enough. Why should we believe that the Federal Reserve could regulate banks and avert financial bubbles when that agency has repeatedly failed to do so over the past 30 years? The greatest failure of all time happened from 2002 to 2007, and for most of that time Mr. Bernanke was on the Fed’s board of governors. To make financial regulation workable again, the chairman needs to admit the institution’s recent failures and call for deeper reforms in the operation of the Fed to make financial regulation workable again. Otherwise, the United States and the rest of the world are being set up to face another — much larger — financial crisis.

As someone who came to government from academia rather than banking, Mr. Bernanke is not beholden to business, and that puts him in a good position to make the kind of basic changes to the culture of regulation that are most needed — in particular, changes that would stop so many regulators from moving back and forth into the finance industry. He is also a student of the history of the Fed and knows how, after 1934, his predecessor Marriner Eccles helped lead a redesign of the financial system that served America well for 50 years. So he should also realize that if he truly wishes to end our cycles of boom and bust, he needs to fight for a stronger regulatory system and against the powerful financial interests that encourage policy makers to avoid real reform.

In successive financial boom-busts over the past 30 years, the Fed undertook smaller versions of what Ben Bernanke did over the past 12 months. In the Latin American debt crisis of 1982, the savings-and-loan crisis of the late 1980s, the Asian financial crisis and the collapse of Long-Term Capital Management in 1998 and during the bursting of the dot-com bubble in 2001, you saw the same pattern: First, of course, the financial system grew rapidly, bank profits were large and a bubble emerged. At a certain point, we reached the market peak and stared down the mountain. Bankers frantically called the Fed, and it dutifully stepped in to prevent an economic collapse — by lowering interest rates and providing credit to “maintain liquidity.”

In his speech last week, Mr. Bernanke indicated that interest rates are now likely to stay low for a long time. That means that if you are running a major bank, you have good reason now to take on more “leverage” (debt). If collapse threatens again, bank executives know the Fed will support them. And lenders know that it is a far better risk to make loans to banks supported by the Fed than to firms that can go bankrupt, like automakers or high-technology companies.

All of this facilitates a short-term recovery, of course, and is the cornerstone of Mr. Bernanke’s strategy. But it also feeds a new financial frenzy — making it harder to sustain real growth, and also making it less likely that a broad cross section of society will benefit.

There is nothing wrong with having the Federal Reserve in place to deal with financial shocks. This was the original idea that emerged from the 1907 financial crisis, and from the subsequent National Monetary Commission reports — that the United States needed a central bank to manage downturns. At that time, Democrats were rightly suspicious that the commission, led by Senator Nelson Aldrich, Republican of Rhode Island, was looking for a way to give private banking interests influence over federal money.

When it was created in 1913, the Federal Reserve was meant to be a compromise — a way for private bankers to have a say in the operation of the national bank but also a way for the government to keep private bankers in check. And that is how it worked from 1935 to 1980, when the Fed and other agencies ensured that banks’ activities did not put the public purse at risk.

Both before 1935 and again after 1980, however, the Fed’s financial regulation was and has been weak. At the heart of this weakness are the large profits that can be earned by taking advantage of lax regulation in the financial sector. The phenomenal growth of the derivatives market over the past 30 years, for example, has made all our big banks far more interconnected, and hence systemically risky; if one bank falls the others fall with it. Yet our regulators, many of whom remain in office today, watched as this time bomb grew and then exploded with the collapse of the American International Group.

Since our top regulators are political appointees, it should be no surprise that, in the face of heavy lobbying by the financial sector, they often turn out to be regulatory doves. We’ve permitted our mid- and high-level regulators to revolve between jobs in finance and officialdom. To name just two examples, during the Clinton administration, Robert Rubin left Goldman Sachs to become secretary of the Treasury, then returned to the industry to take an oversight role at Citigroup, while Henry Paulson, the secretary of the Treasury during the last years of the George W. Bush administration, came straight to government from Goldman Sachs.

A high-level position at the Federal Reserve, the Treasury, the White House National Economic Council or at a Congressional committee overseeing banking can be a ticket to riches when public service is done. The result is that our main regulatory bodies, including the Fed, are deeply compromised. Rather than act as the tough overseers of the public purse that we need — and that we had before 1980 — they have become cheerleaders for the financial sector.

These cheerleaders, in turn, generate financial cycles by letting our financial system grow too fast, with far too little capital for the risks it takes. When the Federal Reserve inevitably bails banks out, it receives great applause (particularly from the financial sector). Yet with each cycle of failure and bailout, the financial system grows ever larger and more dangerous.

Not all of this, of course, is under Ben Bernanke’s control. Like Alan Greenspan before him, when he provides bailouts and facilitates recovery, Mr. Bernanke can say he is only doing his job. But the true and original responsibility of the Fed is much broader that that. The central bank is supposed to prevent crises that threaten to bankrupt the country.

In today’s nascent global recovery, we are already seeing bubble-like rises in the prices of real estate and assets, from Hong Kong and Singapore to Brazil. And many more emerging markets will likewise soon boom. The details of who makes which crazy loans to whom will no doubt be different from what they were from 2002 to 2007, but the basic structure of incentives in the system is unchanged. The same people are running the American banks, and the same regulators are regulating them, so you can easily get the same outcome here as we have just seen.

We should prohibit companies and senior managers in regulated financial industries from making donations to political campaigns. We should also restrict public employees involved in regulatory policy from working in those industries for five years after they leave office. And we should prohibit people who move to government from the finance sector from making policy decisions on bailout and regulatory-related matters for a minimum of five years.

Our regulators need to be smart people who understand finance, but they don’t need to be drawn from the upper echelons of the financial industry. There are many proven, dedicated professionals in our regulatory agencies today, and we should support the development of an even stronger cadre of career regulators. It should be up to the financial sector to make its practices clear and simple enough for these professionals to understand, and any that are too complex should not be approved.

Finally, we should significantly raise capital requirements for the financial sector — and the bigger the bank, the more capital you should need. (Of course, this would discourage banks from growing too large.) The Obama administration should at least triple the current requirements.

Our financial system provides valuable services to the public, but it also poses serious risks. If we can’t re-regulate more strongly to better protect public funds, the next crisis could be worse than the last one.

Peter Boone is the chairman of Effective Intervention, a British charity, and a research associate at the London School of Economics’ Center for Economic Performance. Simon Johnson is a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.

Copyright 2009 The New York Times Company

Monday, September 21, 2009

FEATURE

Bully for Bullion!

The Hole in the FDIC

This week we continue to look at what powers the forces of deflation. As I continue to stress, getting the fundamental question answered correctly is the most important issue we face going forward. And the problem is that we cannot use the usual historical comparisons. This week we look at one more factor: bank lending. I give you a sneak preview of what will be an explosive report from Institutional Risk Analytics about the problems in the banking sector. Are you ready for the FDIC to be down as much as $400 billion? This should be an interesting, if sobering, letter.

Outrageous! - Artificial Deflation!

Speaking of deflation, let me mention something I find totally outrageous. Normally, I actually take up for the bureaucrats who are stuck with the task of trying to monitor inflation. It is a tough job, and like Monday-morning quarterbacks, everybody thinks you should have done it differently. I can understand the rationale for hedonic measurements, housing rent equivalents, etc., even if I don't agree with them. You have to set some rules and live with them. But the latest imbroglio is disgraceful.

It seems the US Bureau of Labor Statistics, in the CPI next week, will treat the subsidy received by those 800,000 car buyers who bought a car in the "Cash for Clunkers" program as if the price of a car fell by $4,500. Really? My tax dollars account for nothing?

This does several things. It will decrease the inflation used to adjust the GDP for this quarter. Not the end of the world, but annoying. But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS.

If I tried to defraud one of my clients using such accounting legerdemain, I would be shut down, sued, and taken to court (at the minimum) by the host of regulators who look over my shoulder.

And I should be! You don't make such changes in the rules to your own benefit. But that is what the BLS did. This policy should be overruled immediately. There are enough deflationary forces in the world without having to artificially create some more. OK, off the soapbox and onto the banking system.

The Hole in the FDIC

And speaking of holes, let's look at a huge one that is looming at the FDIC. Institutional Risk Analytics (IRA) is maybe the premier bank-analyst service in the country. They charge over six figures for their flagship service. Good friend and Maine fishing buddy Chris Whalen runs the show and was kind enough to send me some of his new data, which they have not yet released to the public. You get it here first. (www.institutionalriskanalytics.com)

IRA takes the data from the FDIC and crunches it with their own set of risk parameters. While the FDIC has a little over 400 banks on its current "watch" list, IRA gives 2,256 banks an "F." They project that over 1,000 banks will either fold or be taken over during the current cycle. To date in 2009, a total of 92 banks have failed across the country, compared with 25 for all of 2008, according to the FDIC. 900 more to go. Ouch.

(Click to enlarge)







How much money are we talking about? The banks rated F have total insured assets of $4.46 trillion. So far in this cycle banks that have been taken over by the FDIC are showing losses of 25%!

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Turning to a note from IRA: "An important point in the analysis is that estimated losses for failed bank resolutions by the FDIC are running around a quarter of failed bank assets, a level much higher than between 1980 and 1995, when failures cost an average 11 percent. Our firm's long-held view of the likely loss rate peak for the US banks in this credit cycle is 2x 1990 loss rates or, as noted by the IMF, around 4 percent of total loans. Since total loans and leases held by all FDIC-insured banks was some $7.7 trillion as of Q2 2009, the IMF estimate implies a cumulative loss of over $300 billion.

"If you start with the internal assumptions used by our firm that roughly half of the banks currently rated "F" or some 1,000 banks will fail and/or be merged with another institution and that the loss to the FDIC bank insurance fund will be approximately 20-25% of total assets, then the cost of these resolutions to the FDIC through the full credit downturn could be in excess of $400-500 billion. Keep in mind that in making this alarming estimate we ignore other banks currently in ratings strata above "F" and that some of these institutions may indeed fail as well.

Also, our overall "worst case" or maximum probable loss ("MPL") for large US banks above $10 billion in assets is $800 billion through the current credit cycle."

From almost $60 billion last fall, the FDIC's reserves have been drawn down to only about $10 billion today (after set-asides), a 16-year low. A quick look at the FDIC's own data shows us how inadequate those reserves are compared to the deposits they are now insuring. The FDIC only has about two-tenths of one cent for every dollar of assets it covers. Look at this chart from my friends at Casey Research.


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The FDIC can borrow $100 billion in an emergency line of credit, and through 2010 it can get another $500 billion. But if and when that money is borrowed, it will have to be paid back. Remember the money that was lost in the savings and loan crisis 20 years ago? The FDIC had to borrow a mere $15 billion. We are still paying that 30-year loan back.

The FDIC has two options to replenish its insurance fund in the short run: it can charge banks higher fees or it can take the more radical step of borrowing from the US Treasury. It has already levied a "special fee" that garnered over $5 billion.

Now, let's hold that thought, as we will come back to it in a minute.

A growing economy requires a growing credit market. If credit is shrinking it signals a receding economy. But banks are having to raise capital, and that means many banks are having to curtail lending. First, let's look at a chart of total bank loans for the last five years. Notice that there was a big jump in late 2008 as commercial paper became hard to obtain and businesses hit their credit lines. Since then banks have been cutting back.

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This next chart is again total bank loans but goes back to 1947. Notice that loan growth was relatively smooth with only a few sideways drifts during recessions and never dropping significantly, as it has in the last year. And the data suggests that banks intend to keep reducing their loan exposure as they try to increase their capital (at least the large number of banks that have problems).

(Click to enlarge)










Consumer credit-card lending is down. Banks have cut their outstanding and unused bank lines to corporations. I can go on and on, but you get the picture. Remember the money that the Fed used to purchase toxic assets so that banks could lend? They are increasingly using that money to buy Fannie and Freddie loans and banking the interest in an effort to improve their profitability.

Why are they raising capital? Because their loan losses are high and rising. Look at this chart from Northern Trust. What it shows is consumer loan losses rising, and so far there is no sign of those losses topping out. The lines are still going up. The same can be said for real estate loans at commercial banks, which are now running over 9% delinquent. These are loans the banks kept on their books.

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Everyone knows that commercial real estate loans are the next shoe to drop, and write-offs may be as large as $400 billion. This will force some banks to go under, but other banks will simply have to absorb the losses.

Now, let's come back to the FDIC. Sheila Bair, who heads the agency, has emphatically said that the FDIC will not ask Congress for a capital infusion. That means, as noted above, that the FDIC will have to either use their credit lines or ask for more "one-time" special-fee contributions.

If the FDIC borrows the money, and it is highly likely they will, they are going to have to raise the rates they charge member banks for the government backing. And to pay back $3-400 billion? Rates will have to be raised quite high, on the very banks struggling to raise capital and make a profit.

This is going to be a huge drain on future profits of US banks for a very long time. It is going to make it even harder for them to increase their capital – and they need to. But it has to happen. Zombie banks, those that are bound to fail, need to be taken out and put into stronger hands so that credit growth can once again start to rise. But this will not happen overnight. It is going to take time.

While I am writing about US banks, this is a problem all over the developed world. Banks that have to raise capital and reduce loans are not growing credit and are a drag on growth. As credit shrinks it is a large deflationary force. And that is not even taking into account the implosion of the shadow banking system.

Yes, we are seeing statistical growth in the economy this quarter and probably the next. But unemployment is rising and wages and incomes are falling. We will go into that next week.
We are in for a very poor, jobless recovery, and the risk of falling into a double-dip recession is quite high. The stock market is pricing in a steep V-shaped recovery in both GDP and corporate profits. I am not convinced.

How Can Just Four Stocks Be 40% of the NYSE Volume?

Before I hit the send button, a brief comment on a very odd market happening. It appears that recently up to 40% of the volume in the NYSE is in just four low-priced financial stocks.

"According to Reuters, four beaten-up financial companies - Bank of America (BAC), Citigroup (C), Fannie Mae (FNM), and Freddie Mac (FRE) - have accounted for upwards of 40 percent of the trading volume on the New York Stock Exchange to begin this week."

The stocks are basically churning in price. Why is this? There are a lot of theories, so let me offer one of my own. I think it has a lot to do with flash trading. As I wrote in a previous letter, with high-frequency program trading hedge funds and sophisticated brokers can make as much as 0.5 cents buying and selling a share of stock at breakeven. Supposedly, the exchanges pay these premiums for adding liquidity. But we are seeing liquidity in stocks where none is needed.

The SEC announced this week that they are going to look into halting these programs. Good. It can't come too soon. Allowing certain funds and brokers to basically front-run the average fund or individual because they have their servers on the actual trading floor is just wrong. This must stop. And if program trading is actually driving the volume in these four names, it needs to be stopped as soon as possible.

Candidly, I have no way of knowing what the true reason for the volume is. Maybe it is something simple and innocent. But I am deeply suspicious. I doubt it's people buying Bank of America, which has seen its volume as high as 238 million shares, or Citi at 973 million shares, in ONE day! This for stocks that are severely financially impaired? Someone needs to be on top of this. As in Monday.

Your never wanting to build a home analyst,

John Mauldin
John@FrontLineThoughts.com


Copyright 2009 John Mauldin. All Rights Reserved