Top 10 at 10; Bugger it's Basle III; Lunatics predict market returns; Christmas songs; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below. This is the last Top 10 for 2009. I'll be back on January 18 with my first Top at 10 for 2010. Have a great summer. 1. A small profit? - David Hillary at Lost Soul fisks a claim by South Canterbury Finance that it made a profit on the shares it sold in PGC. Hillary points out that once the rights issue costs are taken into account South Canterbury made a NZ$3.92 million loss. 2. 'Bugger we've been Basled' - The impact of the Basle III changes to regulatory capital requirements earlier this week and Citigroup's failed capital raising is finally dawning on a few people. Richard Smith, a capital markets and IT consultant, has a few thoughts at Naked Capitalism.

Thursday: Basel II bins deferred tax assets as regulatory capital , so Citi face the prospect of raising another US$40Bn in addition to the shares they didn't sell on Monday. And they are still stuck in the TARP. Now, the conspiracy theorist interpretation of this is that Citi or US Treasury got a whiff of the Basel III rulings, tried to get a sale away, (before investors realised that if they bought in they'd be diluted yet again as some point by the fundraising required when the DTAs get binned), and then got snubbed by equally well informed investors on Weds. Kind of self-cancelling insider trading. Second, banks will soon have a VERY big equity hole! Haven't seen any analysis of how the new Basel bank capital calculations would affect US bank regulatory capital, but if Credit Suisse's back of an envelope calculation is right for Eurobanks (they will need EUR 1.1 Trillion of extra capital of one sort or another), then a crude read-across is that American banks need another US$400Bn of capital, of one sort or another.

3. Ultimate revenge - There seems to be a growing movement among American taxpayers who are in over their heads with housing and other debts to simply walk away from their debts and force the pain back on the banks. The thinking seems to be that there  was no moral hazard for banks who were bailed out so why should there be any moral hazard for borrowers from those same banks. I have a little sympathy. It's known as the 'strategic default' movement. Steve Waldman makes the case for default here, arguing against Megan McArdle's now infamous piece about a 'new breed of deadbeats' who default :

I think that underwater homeowners ought to walk away from their loans for the very same reason McArdle want us to consider them jerks for doing so. We both want to see norms we consider valuable enforced. I think that banks violated a great many norms of prudence and fair dealing in their practices during the credit bubble, and that they violate the fundamental norm of reciprocity by fully exploiting their own legal rights while insisting that borrowers have a moral obligation not to exercise a contractual option. In order to strengthen norms I consider crucial, I hope transgressors face legal and social consequences (strategic default and reduced shame attached to default) that will alter their behavior

4. Waldman then quotes from a letter he received from a soldier about officers returning home from Iraq and Afghanistan to find they were under water and their banks had been bailed out. The implications are powerful. It gives you a sense of the betrayal many in America feel.

The whole moral universe, in regards to debt, has been overthrown for these good and righteous men with whom I went to war. They started out with an inclination as to what the right thing to do was, and then they were unsure. Then they questioned whether they were just being "suckers" and if there really was any kind of moral question at all given what was happening in the world around them. I wonder what new moral lessons these men, indeed our whole generation, will now teach our children and grandchildren. I'll guess that the content of these lessons will not include much sense of moral obligation or sympathy towards banks. Perhaps that's for the best, moral intuitions being supportive of certain beneficial survival instincts in the modern dog-eat-dog financial world where ordinary folks need be constantly on their guard. I hope it doesn't spillover, baby-with-the-bath-water-like, and create a generational animosity for a free market economy and open society in general. I also hope they find a way to preserve some space for social interactions involving money that aren't "just business" and where, indeed, it's sometimes worthwhile to make an non-mandatory personal sacrifice for no other reason than because its the "right thing to do".

5. Bitter taste - U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study reported by Reuters.

"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement. Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds. As of late September, nearly 700 financial institutions had received bailouts of $205 billion under the capital purchase program, the study said.

6. A bunch of lunatics (at Macquarie) - It's hard to believe real analysts at Macquarie Bank have done this work and I checked the calendar to make sure it's not April 1. Leo Lewis at The Times reported research on how markets move in relation to the lunar calendar. HT Kevin via IM.

In a piece of research that involved 14 of its senior analysts from across five leading financial centres scrutinising data from 32 leading indices over several decades, Macquarie Securities has arrived at a startling discovery: the two days on either side of the new lunar month represent most of the positive returns on equity markets for the next four weeks. "Using data since 1988 for a wide variety of indices," the report concluded, "it is quite clear that a strong surge in returns can be seen leading into the turn of the (lunar) month." The analysts are quick to dismiss the idea that the theory applies only to markets in Asia -- a part of the world where belief in the lunar theory, especially in Hong Kong and Japan, is better established. "The effect is not just an Asian effect, it happens globally," the Macquarie report said.

7. No wonder - So that's where all the money goes. It's a dirty little secret of the funds management industry that they underperform the markets they invest in routinely after fees. Maybe some of the fees are going into research into lunar calendars. Here Alan Kohler at BusinessSpectator makes the good point that the big Australian banks are relying on fund managers to help their customers, when the ASX is thumping them regularly with better performance on its cheap-to-run Exchange Traded Funds on indices. If only someone offered a KiwiSaver fund that was an ETF. HT Alex via IM.

For the calendar year to date the median growth fund return was 11.9 per cent. That compares with a 27.3 per cent rise by the All Ordinaries index. There's nothing particularly novel about this "“ investment managers and super funds, on average, almost always underperform the sharemarket after fees because their investments are diversified to reduce risk. The problem for the major banks is that their entire wealth management strategy is based around persuading consumers of the benefits of financial advice that leads to pooled investment management "“ either on proprietary platforms or in superannuation master trusts "“ and charging handsomely for that process. And the ASX is increasingly and deliberately becoming a direct competitor to the managed fund industry. The ASX already has a limited range of exchange traded funds (ETFs) and exchange traded commodities (ETCs) that provide a cheap form of pooled investment in industries, sectors, overseas markets and commodities. This is on top of the actively managed listed investment companies (LICs) and property trusts on the ASX.

8. Blame the MBAs - Noam Scheiber at The New Republic points out that business schools in the United States changed after World War II to produce financiers rather than producers. This helped create the financial monoliths that were bailed out because they were too big to fail. An interesting take.

Since 1965, the percentage of graduates of highly-ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that's the problem. Harvard business professor Rakesh Khurana observes that most of GM's top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company's vaunted Treasurer's office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, "That's how you end up with GM rather than Toyota." How did we get to this point? In some sense, it's the result of broad historical and economic forces. Up until World War I, the archetypal manufacturing CEO was production oriented"”usually an engineer or inventor of some kind. Even as late as the 1930s, business school curriculums focused mostly on production. Khurana notes that many schools during this era had mini-factories on campus to train future managers. After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, "Managing Our Way to Economic Decline," Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and long-term* market share.

9. 'They were this close' - Andrew Ross Sorkin, the New York Times journalist that wrote the epic 'Too Big to Fail' book, explains in this video how Goldman Sachs and Morgan Stanley were 'this close' to failing in late 2008. 10. Bailout for Santa - Santa is threatening to cancel Christmas if he doesn't get a US$25 billion bailout....apparently. 11. (Christmas Bonus) Totally irrelevant hymnal video before Christmas - Aaaahhh the magic of Youtube. No one actually sings, but it's still fun. HT Rolfe Winkler at Reuters. Merry Christmas everyone. Be safe and come back in 2010 for more fun with economics, interest rates, taxation and the whole damned lot. 12. (Christmas Bonus) - Best Christmas song ever by a drunk man with bad teeth. RIP Kirsty McColl. This is the live 1988 version.