Simplification

With hints of Cain's "9-9-9" plan, is this relatively simple alternative to the Volcker Rule in fact feasible? Brown Brothers Harriman seems to exemplify and legitimize the partnerships of old. Regardless, the authors' most thought-provoking decree reads as follows: "Bankers at Morgan Stanley, Goldman Sachs and other leading firms may complain about it, but they should look at the portraits on the wall of their predecessors who, as partners of the very same firms, worked and prospered under such a personal liability rule every day of their lives." Indeed, personal culpability is a powerful incentive.

Summit Expectations

The next ten days in Europe are critical, not only for the resolution of the peripheral sovereign debt crisis, but also for the future of the Eurozone. Morgan Stanley's Daniele Antonucci expects the following announcements at the upcoming policy meetings ("EU Summits" from 10/21-10/24, especially the Merkel/Sarkozy meeting on 10/22): (1) bank recapitalization providing higher Basel III Tier 1 ratios, primarily backed/funded by the strong sovereigns (France, Germany) and the EFSF (2) larger PSI for Greece, with NPV of haircuts increased to a range of 30-50% from 21% (3) disbursement of a further (specifically, sixth) loan tranche of the first bailout package and confirmation of second package (4) strong push (in Antonucci's words, a "political committment") towards Euro area economic coordination; it is highly possible that such coordination would involve some sort of legally-complex Eurobond issuance.

More on point (1): MS's 10/21 European Credit Strategy report includes a fascinating chart depicting capital ratios across Western Europe, with the standard T1 ratio along the x-axis and tangible common equity to tangible assets on the y-axis. Here we see the average ratios to be approximately 10% and 4%, respectively:

Interestingly, PIGS look relatively better off and France/Germany look worse when using the TCE/TA metric. The charts below plot the iTraxx SenFin (banks included in the senior debt CDS index) against the two previously discussed US and EU capital ratios:

So, then, what might all this mean? One of the most important differences in the two measures of bank capitalization involves the concept of risk-weighted assets (RWA). The MS strategists elegantly explain: "The source of Europe's low risk weightings, and market concern, is sovereign debt." Indeed, the banks in the iTraxx SenFin index hold roughly €700b in PIGS debt, but this debt is given a zero percent risk weighting (a sheer anomaly given current conditions, but historically sovereign debt has been deemed risk- free). This "makes for a relatively simple storyline: Europe's capital ratios are excessively flattered by risky sovereign exposure." But, however, we must remember that this €700b in sovereign debt exposure represents a mere 3% of the European banking system's €35t in total assets, a fact making the sovereign debt weighting "frankly irrelevant." In addition, mortgage delinquencies (percent of mortgages 90D past due) are significantly lower in Europe (lower leverage, higher underwriting standards) than in the United States, perhaps providing a reasonable justification for the lower risk weightings of European debt.

Ultimately--as I have said before--making sense of Eurozone bank recapitalization demands multifaceted and flexible analysis. More to come next week.

Life After Debt

NPR reported yesterday on a previously unreleased Clinton Administration document which details the possibility of the United States Treasury paying down its entire debt - by 2012, no less. The paper, titled Life After Debt, explores the question of "what would the world look like without Treasury bonds?" Since much of the global economy relies on Treasury bonds, the effects of a world without them would be unprecedented. Even after the S&P downgrade, the world is still flooding into the Treasury market (evidenced by historically low interest rates).

Alas, with US pubic debt at over 14 trillion, the question over the ramifications of an even Government balance sheet seems more like a fantastical thought experiment than a potential problem. One needs only to glance at the graph below (from the CBO via NPR) to appreciate how far we've fallen.

The Obama Doctrine

With Qaddafi's death earlier today comes further vindication of the Obama Doctrine. That is not to say the President is solely responsible for his death; in fact, it is quite the contrary, as Qaddafi died at the hands of the Libyan people. And that is the point.

Obama's foreign policy team has strategically decided when to intervene, when to sit on the sidelines, and when to pull the strings behind the scenes. The administration has shifted away from nation building and focused much more on counter-terrorism and covert operations than the previous administration. In the words of Foreign Policy's David Rothkopf, "The Obama Doctrine prioritizes the use of intelligence, unmanned aircraft, special forces, and the leverage of teaming with others to achieve very narrowly defined but critical goals." Such a strategy has resulted in the killing of both Osama bin Laden and Anwar al-Awlaki.

By focusing on such narrowly defined goals, Obama is essentially a 21st century version of George H.W. Bush - but with one crucial difference: size of force. Bush 41 adhered to The Powell Doctrine which called for an "overwhelming and disproportionate" force to reach narrow goals. Obama, on the other hand, has utilized advancements in intelligence over the past 20 years to advocate for a slimmer, more targeted use of force. And given his successes, it is impossible to deny the wisdom of many aspects of this strategy. Say what you may of Obama's domestic shortcomings, but the President's foreign policy strategy deserves to be looked at as a template to build on for administrations to come.

Is Gadaffi Dead?

If Gaddafi was indeed "...shot in both legs and in the head," and if the body "will [in fact soon] be arriving in Misrata" (words of media spokesman Abdullah Berrassali to Sky News), the world is a better place. Celebrate, Sirte.

More on Perry/Romney

Today's New York times features a piece detailing the Romney/Perry rivalry back to 2006 when Romney was head of the Republican Governors Association. More and more as one watches the debates, however, does this rivalry reveal itself to be an uneven contest. Perry may have ideological consistency over the former Massachusetts Governors, but Romney is a superior candidate in every aspect. This will be made perfectly clear when, in a year, Romney will be preparing for his debates against Obama, and Perry will be swallowing his pride, endorsing Mitt Romney.

Which Mitt?

The Obama campaign, much like many others in the political establishment, is betting on Mitt Romney to win the Republican Primary. As a result, they are preparing for a general election campaign against the former governor. Evidence of this mindset can be found in the release of the DNC's new website WhichMitt.com. The website, which features various instances where Romney infamously flip-flops on issues of crucial importance to many Republican primary voters, clues us into the strategy of the DNC.

By characterizing Mitt as a flip flopper on issues like abortion, immigration, health care, and gay rights, the Obama campaign forces Romney to go on record during the primary as taking stances that are to the right of the majority of Americans - positions that he will be forced to walk back in the general election. This aims at having the two pronged effect of making Romney appear both as a right-wing conservative, and as a unprincipled and weak political shapeshifter.

So far, Romney has done well at addressing the second of the two attacks. Unlike in the 2008 campaign, he has not been backing away from his health care reform in Massachusetts, and is standing strong against his opponents. He has dealt with his main Republican adversary, Rick Perry, by chuckling away and patronizing Perry, significantly diminishing the formerly larger-than-life Texan. Perry looks like a stuttering amateur next to the polished Romney. The true test for Romney, however, will come not until he stands on stage next to the President of the United States -- a fact of which both he and the President are fully aware.

Back to Basics

In today's NYTimes article entitled "Chasing Opportunity in an Age of Upheaval," the author quotes UVA-grad and past leader of Hunt Private Equity Group Stephen Smiley as saying: "At some point we’ll start building houses again, and the consumer will go back to the store and buy what he needs. That’s going to create a demand for energy.” Of course Smiley's track record investing within the energy (oil and natural gas) sector is essentially unmatched, but is it really that simple? Does such a black-and-white projection qualify as legitimate?

Groupon Revisited

Groupon IPO, via Dealbook. Groupon's S-1, via Edgar. Things have certainly changed since my post in July; Lefkofsky is a sleaze.

Marketing expenses for the three months ended March 31, 2011 nearly equal expenses for the entirety of 2010 (which were, in their own right, staggering and highly unsustainable at $263.2m).