Passport Capital's Suggested Reading List ~ market folly

Friday, March 13, 2009

Passport Capital's Suggested Reading List

Recently, in an email to investors, John Burbank's $2 billion investment firm Passport Capital sent out a few links of suggested reading. If you're unfamiliar with Passport, their investment process "uses a combination of macroeconomic analyses to develop major themes and rigorous fundamental research on individual companies to create global portfolios" (as per their website). Since we here at Market Folly have Recommended Reading Lists (books) and "What We're Reading" posts (articles), we thought it would be interesting to post up what Passport is suggesting. Here are their recommendations, with the underlined titles as links to the original articles:

Current US Situation

Beyond the age of leverage: new banks must arise
Niall Ferguson, 2/03/09
"Two things must happen. First, banks that are de facto insolvent need to be restructured - a word that is preferable to the old-fashioned "nationalization". Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bond-holders may have to accept either a debt-for-equity swap or a 20 per cent "haircut" (a reduction in the value of their bonds) - a disappointment, no doubt, but nothing compared with the losses when Lehman went under."

We can do better than a bad bank
George Soros, 2/04/09
"Although the amount needed to recapitalize the banks would be more than $1 trillion, it would be possible to mobilize a significant portion of the required total amount from the private sector. In the current environment, a good bank would enjoy exceptionally good margins. Margins would narrow as a result of competition, but by then the banking system would be revitalized and nationalization avoided."

Nationalized Banks Are "Only Answer," Economist Stiglitz Says
Interview with Joseph Stiglitz, 2/06/09
"I think many governments of emerging nations actually have a much better central banking system than the United States. They realized the risks of excessive leverage, excessive dependance on real estate lending and so they took much more prudent actions. Many developing countries also built up large reserves and are in a better position to meet this crisis than they were a decade ago."

IMF Outlines Dire Consequences if World Fails to Act on Banks
IMF Survey, 2/07/09
"The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money. Even with these measures, it will take time to restore credit growth. They will also be expensive for governments. But you know very well that the costs of banking crises increase if problems are not addressed quickly. This is not the time for hesitation," Strauss-Kahn said."

Why Obama’s new Tarp will fail to rescue the banks

Martin Wolf, 2/10/09
"The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets."

How Washington can prevent ‘zombie banks’
James Baker, 3/01/09
“This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.”

Former Banking Crises

Bank Failures, Danish Style
Randall Podenza, 8/03/90
"An institution that fails to meet Danish capital standards is subject to rapid sanctions. For losses which cause an institution's capital-to-asset ratio to fall below six percent, the bank must immediately seek additional capital in the marketplace. At most, the bank has until its next shareholders meeting to raise at lease 75% of the capital shortfall. If necessary capital is not provided, closure is immediate."

The Swedish Experience
Governor Urban Bäckström, 8/29/97
"The Swedish Bank Support Authority had to choose between two alternative strategies. The first method involves deferring the reporting of losses for as long as is legally possible and using the bank's current income for a gradual write-down of the loss making assets. One advantage of this method is that it helps to avoid the bank being forced to massive sales of assets at prices below long run market values. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly; otherwise the difficulties compound, leading to much greater problems when they ultimately materialise. The handling of problems among savings and loan institution in the United States in the 1980s is a case in point. With the other method, an open account of all expected losses and writedowns is presented at an early stage. This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed. This can lead, for instance, to borrowers in temporary difficulties being forced to accept harsher terms, which in turn can result in payments being suspended. The Swedish authorities opted for the second method: disclose expected loan losses and assign realistic values to real estate and other assets."

Stopping a Financial Crisis, the Swedish Way
"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar? It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent. But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing."

The Asian Crisis: A View from the IMF
Stanley Fischer, First Deputy Managing Director of the International Monetary Fund, 1/22/98
"Likewise, we have been urged not to recommend rapid action on banks. However, it would be a mistake to allow clearly bankrupt banks to remain open, as this would be a recipe for perpetuating the region's financial crisis, not resolving it. The best course is to recapitalize or close insolvent banks, protect small depositors, and require shareholders to take their losses. At the same time, banking regulation and supervision must be improved."

The Aftermath of Financial Crises
Carmen Reinhart and Kenneth Rogoff, 12/19/08"Reinhart and Rogoff (2008a) included all the major postwar banking crises in the developed world (a total of 18) and put particular emphasis on the ones dubbed “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992). It is now beyond contention that the present U.S. financial crisis is severe by any metric."
Worse than Japan?
The Economist, 2/12/09
"A similar dynamic will surely play out in America’s over-indebted households. With their assets worth less and credit tight, people will be forced to save much more than they used to. The household saving rate has risen to 3.6% of disposable income after being negative in 2007. For much of the post-war period it was around 8%, and in the short-term it could easily exceed that. But, whereas dis-saving by Japanese households countered the corporate balance-sheet adjustment, American firms are unlikely to invest more while consumers are in a funk. Propping up demand may therefore require more persistent, and sustained, budget deficits than in Japan."


Special thanks to Passport Capital for sharing their suggested reading list. And, as always, if you have any articles you think are essential reads, feel free to contact us.

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