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Softpanorama
(slightly skeptical)
Open Source Software Educational Society |
May the
source be with you,
but remember the KISS principle ;-)
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Financial Skeptic Bulletin, February 2008
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| "The dollar is our currency, but your problem."
Nixon's Secretary of State John Connally to European
peers
who were carping at him about a falling dollar
|
| All the middle-class 401K frogs are welcomed to the slowly
warming stagflation pot. |
| Practical men, who believe themselves to be quite exempt from any
intellectual influences, are usually the slaves of some defunct economist.
John Maynard Keynes
|
| “You can fool some of the people all of the time and those are
the ones you want to concentrate on”
George W. Bush
|
Interestingly enough, remember what the IMF’s solution for
the Asian tigers was back in 1997 (a solution that worked by the way) ? (1)
Cut back on government spending to reduce deficits; (2) Allow struggling illiquid
banks and financial institutions to fail, and (3) Aggressively raise interest
rates. When faced with the exact same scenario (caused by similar conditions),
the U.S. Feds instead chose to (1) Raise the national debt ceiling and increase
deficits; (2) Bail out insolvent banks and financial institutions by printing
as much money as they needed; and (3) Aggressively reduce interest rates. Does
anyone really believe that this solution will end well?
Strong and continued inflation of a currency will always
invoke a couple of reactions:
1. Wealth will be stored not in domestic currencies but
in non-monetary assets or in a relatively strong foreign currency to maintain
Purchasing Power Parity (PPP).
2. Monetary and trade transactions occur in a foreign stable
currency, not the domestic currency.
Certainly condition (1) has been executed by Americans,
at least among savvy investors, for many years now with the accumulation of
foreign currencies as well as the accumulation of lots of gold, silver and real
estate in emerging and developing countries. Condition (2), while not yet common,
is starting to appear. I’ve seen U.S. based merchants online now demand Euros
as the default currency of payment rather than the dollar.
Two more such rate cuts and we might need to learn Japanese. Main Street will
definitly pay for the sins of Wall Street but US always has something in the sleeves
when the situation became untenable. Last time it was PC revolution that saved the
day. then collapse of the USSR helped enormously. Still in the short time frame
the most plausible trajectory for S&P500 for the next couple of quarters is down.
Defensive allocation like 80% bonds 20% stocks might be better then banalced ( 50%/50%
or 100%-your age) for 401K health.
A comment by Ricardo Hausmann in today's Financial Times
takes US policymakers to task for trying to prop up demand and stave off a recession.
We've pointed out repeatedly, as have various economists quoted here, that consumption
as a percentage of US GDP is unsustainably high and saving correspondingly too
low. It can only continue with massive foreign borrowing, and there are limits
to how long friendly central bankers will keep bailing us out. If the US does
not reduce consumption and increase savings, it will eventually and even more
painfully be foisted on us when our creditors start cutting the debt supply.
Lower consumption means lower domestic demand. At a minimum, that translates
to lower growth, and give how far our savings rate has plunged, probably a recession.
The US has repeatedly given that sort of tough-medicine advice to developing
nations, and many readers have commented on the hypocrisy of the US deciding
that it is a special case, exempt from normal good economic practice.
"Expansionary Aggregate Demand Policies are Likely to Bring about a Period of
Stagflation"
Guillermo Calvo responds to Larry Summers
call to to move beyond monetary and fiscal stimulus and begin repairing
the underlying problems in the financial system. While he agrees that the financial
system needs to be strengthened, he does not have much faith in monetary and
fiscal policy and believes their use will result in stagflation:
Guillermo Calvo, Economic Forum: I agree that we need “consistent, determined
approaches” which will probably take us far beyond conventional monetary
and fiscal policy. The main problem, however, is that we don’t seem to have
a consistent macro view that is widely agreed upon and is itself consistent
with the stylized facts of the current crisis. Thus, for example, policy
has strongly relied on lowering the reference interest rate, a policy that
is typically justified in models that abstract from credit market difficulties.
The same applies to fiscal expansion. This lack
of intellectual consistency is bound to create further confusion.
Thus, I would encourage Larry and the other high-profile commentators to
give a simple but clear view of their underlying assumptions.
To be consistent with my preaching, let me say that
I am of the view that the current subprime crisis
is starting to look more and more like those in emerging markets.
The big but somewhat superficial difference, however, is that initially
the problem did not entail a whole country but a sector (and, incidentally,
since a sector does not print its own money,
its situation is similar to that in emerging markets which suffer from Liability
Dollarization, or Original Sin).
Since the subprime sector hit the global financial market, it had the
potential to damage other sectors through contagion, much like it happened
in emerging markets after the Russian August 1998 crisis. Thus, we are witnessing
the effects of a “supply” shock, implying that the crisis is unlikely to
be fully resolved by a stimulus to aggregate demand through lower interest
rates.
And even less by transitory fiscal expansion, for the additional reason
that credit crises involve “stocks,” while transitory fiscal policy involves
“flows.” Thus, if you agree with my view, a key to resolving the current
crisis is to reinforce the financial sector which, incidentally, leads me
to enthusiastically agree with Larry's thrust in his column. But, on the
other hand, I have a much less favorable opinion about expansionary monetary
and fiscal policy. These aggregate demand policies are easy to implement
in the short run, while strengthening the financial sector is time consuming.
Since the latter would be key for avoiding a slowdown, expansionary aggregate
demand policies are likely to bring about a period of stagflation, seriously
undermining the credibility of policymakers.
Should not military spending keep the USA out of recession ?
EJ: So what you are saying is that post-bubble reflation policies,
including tax cuts and an increase in deficit spending, allowed a few of the
areas that benefited from the tech stock bubble to benefit from government policies
designed to support the economy after the tech bubble popped—in effect bubble
double dipping?
JG: No, the geographic pattern changed. Under the Democrats, income growth
was led by companies, large and small, in the tech sector. After the tech bubble
collapsed, the recovery was led by the government sector, especially military
spending, and by the continued expansion of housing.
EJ: Interesting that you mention the increase in military spending. That’s
not discussed much. I'll relate it to events here in the Boston area for local
readers. The Boston Globe recently ran a piece—“The
defense dollars flow: In antiwar state, contracts have soared since 9/11"—that
goes a long way toward explaining why the economy is doing as well as it is
in our area, the suburbs outside Boston. The growth ain't coming
from biotech: I'll quote from the article, "Since 2001, contracts awarded annually
to Massachusetts companies by the Pentagon have surged from $5.3 billion to
$8.3 billion. Almost $1,300 is being spent by the military for every man, woman,
and child in Massachusetts." Military spending contributes
three times as much to the local economy as biotech. This explains
why the nearby Burlington Mall, for example, is packed this holiday shopping
season. Since we didn't make your county list, this local phenomenon is apparently
not outstanding and so perhaps is occurring across the United States near the
levels we are seeing here, with defense contracts increasing 30 to 40 percent.
Looks like Fed partially lost the credibility and stimulated inflation: after
0.5% cut 10 years note yield is moving up not down +0.0690 (+1.89%)
As we have already noted, the Fed lost all credibility in the 1970s as inflation
soared into the double digits.By the time Paul Volcker became Chairman of
the Federal Reserve, it was painfully obvious that inflation had to be brought
under control. He was committed to lowering inflation, but neither he nor the
Fed had much credibility with the public. The price we had to pay to regain
that reputation and credibility was severe, as I suggested earlier. We would
rather not go through that experience again. It was the price we paid for operating
without commitment.
Can mass "home walking" (sending the lender keys and moving to a similar
house that costs probably $100K less then current loan" create an interesting
new situation ?
"Another effect we are seeing has been a challenge with the media
and consumer groups; and with consumers willingness
just to walk away from homes. We haven't seen anything like this
since Texas during the oil bust and people just
willing to declare bankruptcy and walk away. We are seeing a
lot of that similar type social phenomenon occurring, especially in California.
And that is concerning to us."
Mark Hammond, CEO, Flagstar Bancorp
conference call. (hat tip Scott)
Hammond also expressed concern that a larger percentage of homeowners -
as compared to previous housing busts - that go delinquent, don't cure.
They just "go under" in Hammond's words.
Here is what Hammond means: Say a homeowner misses a payment and becomes
delinquent. Historically most homeowners try to make future payments - even
if they stay 30 days late. Now, according to Hammond, once they go 30 days
late, many homeowners just give up and keep missing all payments; they go
60 days late, 90 days late, and on to foreclosure.
Also, there was some concern expressed about CRE loan concentrations and
delinquencies.
What was the business model behind all this craziness ? Is it worth it to originate
or buy 49 fraudulent loans in order to get that one good one ?
March 26, 2007 |
Calculated Risk
My theory of the Fraud for Bubbles is, in a nutshell, that it isn’t that
lenders forgot that there are risks. It is that the miserable dynamic of unsound
lending puffing up unsustainable real estate prices, which in turn kept supporting
even more unsound lending, simply masked fraud problems sufficiently, and delayed
the eventual “feedback” mechanisms sufficiently, that rampant fraud came to
seem “affordable.” So many of the business practices that help fraud succeed—thinning
backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans,
speeding up review processes, cutting back on due diligence sampling, accepting
more and more copies, faxes, and phone calls instead of original ink-signed
documents—threw off so much money that no one wanted to believe that the eventual
cost of the fraud would eat it all up, and possibly more.
... ... ...
I suspect most of us feel, generally, that fraudsters—borrowers, lenders,
anyone else—who get burned just got what they deserved. True enough. But lending
fraud, like warfare, creates quite a bit of “collateral damage,” in all senses
of the term. Those honest homeowners watching their neighborhoods collapse after
the fraud-bombs finally detonated are not probably very comforted by the fact
that it wasn’t their fault. So when we debate the question of potential “bailouts,”
we keep running up against the question of who needs or deserves the bailout.
If you want to do something to assist the honest homeowner who bought with an
80% loan but is now upside down because of the neighbors’ fraud, how do you
do that without, inevitably, helping out the lender who facilitated that fraud,
too? If you want to do something to protect the stability of the honest lenders,
how do you do that in a way that doesn’t, inevitably, also protect the scumballs
and incompetents?
Getting into a bubble is easy. Getting out?
[Jan 28, 2008]
Video - CNBC.com High Time For High Yield
There is risk, but there is a reward too. In any case 401K investor needs
to stick to junk funds that are focused on BB and B issues of the junk bond
spectrum. The latter is higher end of the spectrum. Pimco, T. Row Price
and Vanguard high yield funds belong to this category...
Calculated Risk
From
American Express:
"... we saw clear signs of a weakening economy and business environment
in December,”
Kenneth I. Chenault, chairman and CEO.
"Irrational enthusiasm" is finally over and confidence
in Fed is lost. "Fed bubble" was the last bubble to pop.
January 26, 2008 | Economic
Dreams - Economic Nightmares
Doug Noland tells us — preaching to the choir, since no one else will listen
— that the stage for the mess now unfolding was built on a foundation laid over
20+ years by US Federal Reserve policy, cheerled by Wall Street finance. Noland
says, "The unfolding financial and economic crisis has been more than 20
years in the making. It's a creation of flawed monetary management; egregious
lending, leveraging and speculating excess; unprecedented economic distortions
and imbalances on a global basis. And I find it rather ironic that Wall Street
is so fervidly lambasting the Fed. For twenty years now the Fed has basically
done everything that Wall Street requested and more." Here's more:
More
than 20 Years in the Making, Doug Noland, Credit Bubble Bulletin,
Jan. 25: … When the junk bonds, LBOs, S&Ls, and scores
of commercial banks all came crashing down beginning in late-1989 to 1990,
the Greenspan Fed initiated an historic easing cycle that saw Fed funds
cut from 9.0% in November 1989 all the way to 3.0% by September 1992. In
order to recapitalize the banking system, free up system Credit growth,
and fight economic headwinds, the Greenspan Federal Reserve was more than
content to garner outsized financial profits to the fledgling leveraged
speculator community and a Wall Street keen to seize power from the frail
banking system. Wall Street investment bankers, all facets of the securitization
industry, the derivatives market, the hedge funds and the GSEs never looked
back — not for a second.
In the guise of "free markets," the Greenspan
Fed sold their soul to unfettered and unregulated Wall Street-based Credit
creation. What proceeded was the perpetration of a 20-year
myth: that an historic confluence of incredible technological advances,
a productivity revolution, and momentous financial innovation had fundamentally
altered the course of economic and financial history. The ideology emerged
(and became emboldened by each passing year of positive GDP growth and rising
asset prices) that free market forces and enlightened policymaking raised
the economy’s speed limit and increased its resiliency; conquered inflation;
and fundamentally altered and revolutionized financial risk management/intermediation.
It was one heck of a compelling — alluring — seductive story.
But, as they say, "there's always a catch". In order for New Age Finance
to work, the Fed had to make a seemingly simple — yet outrageously dangerous
— promise of "liquid and continuous" markets. Only with uninterrupted liquidity
could much of securities-based contemporary risk intermediation come close
to functioning as advertised. Those taking risky positions in various securitizations
(especially when highly leveraged) needed confidence that they would always
have the opportunity to offload risk (liquidate positions and/or easily
hedge exposure). Those writing derivative "insurance" — accommodating the
markets' expanding appetite for hedging — required liquid markets whereby
they could short securities to hedge their risk, as necessary. There were
numerous debacles that should have alerted policymakers to some of New Age
Finance's inherent flaws (1994's bond rout, Orange Co., Mexico, SE Asia,
Russia, Argentina, LTCM, the tech bust, and Enron to name a few). Yet the
bottom line was that the combination of the Fed's flexibility to aggressively
cut rates on demand; ballooning GSE balance sheets on demand; ballooning
foreign official dollar reserve holdings on demand; and insatiable demand
for the dollar as the world's reserve currency all worked in powerful concert
to sustain (until recently) the U.S. Credit Bubble — through thick and thin.
Despite his (inflationist) academic leanings and some regrettable ("Helicopter
Ben") speeches as Fed governor, I do believe Dr. Bernanke aspired to adapt
Fed policymaking. His preference was for a more "rules based" policy approach
of setting rates through some flexible "inflation targeting" regime, while
ending Greenspan’s penchant for kowtowing to the markets. Today, it all
seems hopelessly naïve. Inflation is running above 4%, while the FOMC is
compelled to quickly slash the funds rate to 3%. And never — I repeat, never
— have the financial markets been more convinced that the Federal Reserve
fixates on stock prices while is permissive when it comes to inflationary
pressures. Today, the contrast to the ECB and other global central banks
could not be starker. The Fed has climbed way
out on a limb, and it is difficult at this point to see how they regain
credibility as inflation fighters or supporters of the value of our currency.
It is not only trust in Wall Street-backed finance that is being shattered.
The greatest flaw in the Greenspan/Bernanke monetary policy doctrine
was a dangerously misguided understanding of the risks inherent to their
"risk management" approach. Repeatedly, monetary policymaking was dictated
by the Fed's focus on what it considered the possibility of adverse consequences
from relatively low probability ("tail") developments in the Credit system
and real economy. In other words, if the markets (certainly inclusive of
"New Age" structured finance) were at risk of faltering, it was believed
that aggressive accommodation was required. The avoidance of potentially
severe real economic risks through "activist" monetary easing was accepted
outright as a patently more attractive proposition compared to the (generally
perceived minimal) inflationary risks that might arise from policy ease.
As it was in the late 1920s, such an accommodative ("coin in the fuse box")
policy approach is disastrous in Bubble environments.
The Fed's complete misconception of the true
nature of contemporary "inflation" risk was a historic blunder in monetary
doctrine and analysis. To be sure, the consequences of accommodating
the markets were anything but confined to consumer prices. Instead, the
primary — and greatly unappreciated — risks were part and parcel to the
perpetuation of dangerous Credit Bubble Dynamics and myriad attendant excesses.
Importantly, the Fed failed to recognize that obliging Wall Street finance
ensured ever greater Bubble-related distortions and fragilities — deeper
structural impairment to both the financial system and real economy. In
the end, the Fed's focus on mitigating "tail" risk guaranteed a much more
certain and problematic "tail" — a rather fat one at that.
Fundamentally, the Greenspan/Bernanke "doctrine"
totally misconstrued the various risks inherent in their strategy of disregarding
Bubbles as they expanded — choosing instead the aggressive implementation
of post-Bubble "mopping up" measures as necessary. They were
almost as oblivious to the nature of escalating Bubble risk as they were
to present-day complexities incident to implementing "mop up" reflationary
policies. "Mopping up" the technology Bubble created a greatly more precarious
Mortgage Finance Bubble. Aggressively "mopping up" after the mortgage/housing
carnage in an age of a debased and vulnerable dollar, $90 oil, $900 gold,
surging commodities and food costs, massive unwieldy pools of speculative
global finance, myriad global Bubbles, and a runaway Chinese boom is fraught
with extraordinary risk. Furthermore, the Fed's
previously most potent reflationary mechanism — Wall Street-backed finance
— is today largely inoperable. …
It is also as ironic as it was predictable that Alan Greenspan
— Ayn Rand "disciple" and free-market ideologue — championed monetary policies
and a financial apparatus that will ensure the greatest government intrusion
into our Nation’s financial and economic affairs since the New Deal.
Articles berating contemporary Capitalism are becoming commonplace.
I fear that the most important lesson from this experience may fail to resonate:
that to promote sustainable free-market Capitalism for the real economy
demands considerable general resolve to protect the soundness and stability
of the underlying Credit system. …
October 09 , 2007, |
Sify.com
With apologies to Karl Marx, a spectre is haunting the capitalist West: that
of sovereign wealth funds (SWF).
The rates at which foreign exchange reserves of emerging economies rise,
and the efforts made by them to invest abroad are scary.
In recent years, the International Monetary Fund (IMF), the Bank for International
Settlements (BIS) and major banks have been publishing data on the rising reserves
of these countries. Until two years ago, they were not troubling.
What set the cat among the pigeons was a study by Morgan Stanley published
in May 2007 (⌠How big could sovereign wealth funds be by 2015?). It reported
that SWFs could turn absolutely massive and rise from the current level of $2.5
trillion to $12 trillion by 2015, with an annual rise of $500 billion. The report
went on to suggest how this would affect fundamentally the risky assets trade
and give rise to ⌠financial protectionism.
The Economist described SWFs as a "secretive society" flush with assets and
added how, if they continued with their spree, ⌠the world will witness the intriguing
spectacle of its largest private companies being owned by governments whose
belief in capitalism is often partial.
Sebastian Mallaby of The Washington Post (⌠The Next Globalization Backlash,
June 25, 2007) narrated the challenges posed by them to globalisation and how
⌠chunks of corporates could be bought by Beijing"s government - or, for that
matter, by the Kremlin.
It is evident is that the fear of SWFs that has
been creeping in recently has degenerated into paranoia. A Cold War-like atmosphere
permeates discussions on the subject.
This turnaround is surprising as, till recently, members of the developed
world were the advocates of globalisation with capital freedom and foreign investment
as its centre-pieces.
Further, economists sympathetic to the concerns of emerging economies were
cautioning the latter about the "excessive" build-up of reserves and investing
them in low-yielding US Treasuries. Prof Lawrence
Summers, former US Treasury Secretary, in a lecture in Mumbai in March 2006,
bemoaned the irony of the emerging nations wasting their reserves.
He pleaded for a new focus toward the challenge of deploying them effectively.
Separate vehicles
Within the emerging economies, public opinion turned against their central
banks and pressed them to adopt bolder
investment
strategies. With the levels of reserves far exceeding prudential
liquidity needs, the central banks themselves realised the need for setting
aside a part of the reserves in separate vehicles for
investments to get better returns.
Singapore set the precedent by creating Temasek. Oil exporters such as Kuwait,
Abu Dhabi and Saudi Arabia had set them up earlier. Russia, with its equalisation
fund, is a recent addition to the pantheon.
China setting up a State Foreign Exchange Investment Corporation with a capital
of $300 billion was a thriller when it was reported. The formal launch on September
28 of China Investment Corp (GIC) with a capital of $200 billion was a low-key
affair, ostensibly in order not to ruffle the feathers of western critics.
On date, the SWF club has 25 members and includes small countries such as
Kazakhstan and Botswana. Truly, it is a motley assortment. Many are new to the
game and do not have any common strategy. And yet, their emergence has disconcerted
the older players.
The chorus voicing concerns over SWFs is from Western governments, academics
and journalists. Broadly, they allege that SWFs are state-owned and, ergo, are
not commercially driven and thus their motives suspect. Prof Summers would argue
that these funds "shake capitalist logic" (Financial Times, July 29, 2007) as
they seek non-economic objectives.
More transparency
It is also suggested that SWF operations are clothed in secrecy and lack
transparency. Most attacks on SWFs harp on these themes in some form or other.
Clay Lowry, Acting Under-Secretary of the US Treasury, gave his views in
a lecture delivered in San Francisco. He felt that the ⌠common objective should
be an international financial system where countries do not accumulate more
foreign exchange assets than they want or need. Sadly, he could not elaborate
how this utopia could be achieved with the US" uncontrolled twin deficits.
Indeed, he was pragmatic and added, "SWFs are not going away, and it will
be increasingly necessary to work to integrate these funds as smoothly as possible
into the international financial system". His main thrust was on transparency
of their operations and adoption of "best practices." He hoped a joint task
force of the IMF and the World Bank could work out the guidelines.
There are reports about Germany drawing up plans to stop strategic assets
falling into the hands of ⌠giant locust funds controlled by Russia, China and
West Asian governments. Germany"s fear was over Russia "stealing" its technology,
though it does not say it openly. It is said to be drafting new legislation
to cover national security and, possibly, energy.
The EU Commissioner for Economic and Monetary Affairs, Joaquin Almunia, explained
in an interview on September 27 that unless
investments by SWFs are more transparent, they would be restricted.
The intention, as he explained, was not to be "protectionist" but to protect
the region"s interests without being "protectionist." Though somewhat ambivalent,
the UK holds a similar position.
Southern shift
Fear of SWFs has deep roots. There has been a southern shift in economic
balance in recent years. The US has been losing its hegemonic role even in financial
markets. In the post-bubble era, its strength was boosted by the passive piling
of reserves by emerging economies. In fact, they were subsidising the US financial
market and some economists even dubbed it ⌠Bretton Woods II which would subsist
for long.
As Prof Brad Setser of Oxford put it in his blog (of July 10), The BRIC
taxpayers are subsidising the US to the tune of roughly $130
billion a year. That is roughly 1 per cent of US GDP. It helped Americans buy
BRIC goods and services at lower prices. It kept interest rates low and helped
banks and brokers make huge capital gains selling debt back to emerging economies
in complex packages.
Private equity firms might not be the kings of
Wall Street in the absence of huge surge in central bank for debt, and the resulting
easy availability of liquidity. They would lose their kingdoms
if emerging economies withdrew their reserves or diversified into other economies.
True, there are limits to which they may do it individually or collectively.
However, there are signs that the trend has commenced.
Stephen Roach of Morgan Stanley puts it more trenchantly:
"The day will come when surplus funds will begin
to shift focus away from functioning as lender to the external world".
It would lead to a shifting mix in composition of global savings
and tradeoffs associated with the alternative uses of funds. There will be downward
pressure on the dollar and upward pressure on long-term US real interest rates.
Investment through SWFs is another major and significant trend.
All these together would end the party in New York.
This is the spectre that haunts the US.
Larry Summers is an interesting transformation of an economist emerged in casino
capitalism environment. He was implicated in the "privatization" team that destroyed
the economics of Russia more successfully that Hitler armies ;-). Later he tried
to protect from prosecution professors Andrei Shleifer and Jonathan Hay "who illegally
speculated in Russian stocks and bonds, even as they directed a US-funded, Harvard-backed
project to help the Russian government set up honest and transparent capital markets
-- a project whose rules expressly forbid them to invest in the host country."
Economic Principals
He was also implicated in Enron fraud as well gold manipulations. Not surprisingly
Summers he has a plan on how to solve the current crisis with monolines.
It is critical that sufficient capital is infused into the bond insurance
industry as soon as possible. Their failure or loss of a AAA rating is a potential
source of systemic risk. Probably it will be necessary to turn in part to those
companies that have a stake in guarantees remaining credible because they have
large holdings of guaranteed paper. It appears unlikely that repair will take
place without some encouragement and involvement by financial authorities. Though
there are many differences and the current problem is more complex,
the Long-Term Capital Management work-out is an
example of successful public sector involvement.
If global growth slows, the idea that export will save the USA economics is
a wishful thinking...
Bloomberg.com
Global growth may decelerate close to the 3 percent pace economists deem
a worldwide recession, from a 4.7 percent rate in 2007.
... ... ....
The meltdown of the U.S. subprime-mortgage market has pushed up credit costs
worldwide and forced European and Asian banks to write down billions of dollars
in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere.
"We'll see more collateral damage," says Allen Sinai, chief economist at
Decision Economics in New York. "The risk of a global recession is rising."
...the IMF postponed publication of its latest world economic forecast, originally
due Jan. 25, to take into account recent market turbulence.
In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc., the world's
third-largest aluminum producer, said he foresees ``a difficult year. I don't
think the world can decouple itself from what's happening in the U.S.''
The U.S. economy is a bubble economy -- going from bubble to crash to the
next mania -- and the new bubble is likely to be clean energy, says Wall Street
insider Eric Janszen in the cover story of the February Harper's.
We've seen two bubbles, internet and housing, within a decade, writes Janszen,
"each creating trillions of dollars in fake wealth."
"There will and must be many more such booms, for without them the economy
of the United States can no longer function. The bubble cycle has replaced the
business cycle."
Here's why Janszen thinks the necessary next bubble will be clean energy.
The new bubble sector must:
1. Already be formed and growing as the previous bubble (housing) deflates.
Check.
2. Have in place or in the works legislation guaranteeing investors favorable
tax treatment and other protections and advantages. Check.
3. Be popular, "its name on the lips of government policymakers and journalists."
Check.
4. "Support hundreds or thousands of separate firms financed by not billions
but trillions of dollars in new securities that Wall Street will create and
sell." Is that coming? Janszen is quite expansive in his definition
of clean energy, including a massive retooling of the country's transportation
and power infrastructure.
Janszen, a one time venture capitalist and serial entrepreneur, thinks the
financial sector is driving the U.S. economy (and, per force, much of the global
economy). The financial sector gets behind whatever new thing they think can
provide the hyperinflated returns they require. And they bring to bear massive
political influence, well lubricated by money, to insure whatever public policy
they require.
Advocates of renewable energy might say bring on this bubble. But Janszen
cautions: "Bubbles are to industries that host them what clear-cutting is to
forest management. After several years of recession, the affected industry will
eventually grow back, but slowly."
In an email interview I asked Janszen if a clean energy bubble was a good
thing — bringing massive investment to vital new industries — or bad, leaving
those industries struggling in the wreckage of the inevitable crash down the
road.
"The term ‘bubble' is pejorative," he replied. "The alternate title for the
Harper's piece was ‘The Good Bubble.' These are changes we need but lack the
political ability to make due to the inertia of entrenched interests...Employment
of the bubble system that was responsible for the tech and housing bubbles may
be the only means available both to fight the impact of the debt deflation recession
that started in Q4 2007 and also to deploy resources on the scale required."
In this scenario, the big losers will likely be the investors or taxpayers,
as in the housing collapse.
The System is not designed to purify credit addicted lost souls or soulless
bankers through poverty and perdition, and if a soup line forming and mass bank
failure inducing economic debacle did occur the primary victims–as usual and
in the current instance of historically unprecedented distribution of wealth,
more than usual–will be the middle class on down the economic prosperity ladder.
This group has hardly any liquid assets net of what’s put aside to cover the
housing bubble bloated mortgage and refinancing payments on the rapidly depreciating
homestead.
...With millions of households fragile from a decade of excessive borrowing
and thousands of businesses levered up on debt from the LBO boom, the US economy
is better poised for a 50 foot swan dive into a dirt pit than at any time in
the last 70 years. (You remember the LBO boom, right? It was the nearly daily
announcements of multi-billion dollar buyouts that suddenly stopped last summer.
Here’s an idea for a new web site: Forgotten Financial News. If you create it,
don’t forget to feature Jim Cramer. He’s busy now recasting himself as a champion
for the little guy who warned about the bear market,
again.) Thus it is the majority, the great mass of voters, who in our great
republic are carefully managed during a recession, especially in an election
year.
That's an apt new term "casino capitalism". BTW inflation is a regressive tax.For
example, the DOE and DOT say an American car gets an average of 24 MPG. The average
price of a gallon of regular gas a year ago was $2.27 versus $3.11 today. The average
car owner who earns less than $30,000 a year will spend about $375 more this year
than last year just on gasoline, while the car owner who makes more than $100,000
will spend $492 more.
December 26, 2007 |
International Political Economy
Zone
Securitization involves the packaging of various assets to be sold to other
investors in the form of, well, securities. Most infamously, residential mortgage
backed securities or RMBS have been in the limelight as the subprime mess has
hit primetime and housing loans which should never have been granted in the
first place have begun defaulting in ever higher numbers. Actually, I am not
a hardened critic of the idea of securitization as it can serve as a worthwhile
way for securing additional funding. However, there isn't much you can do when
what is being securitized is garbage to begin with like in the case of the housing
mortgage mess. Garbage in, garbage out--there is no such thing as financial
alchemy that allows trash to end up golden. King Midas is not a mortgage broker.
I got a chuckle after visiting the American Securitization Forum website and
seeing a
notice that its 2008 annual conference will be held in Las Vegas for the
second year in a row--at the Venetian, no less. If you're a hard boiled critic
of the whole securitization mess, the choice of location is rich with irony.
Las Vegas, the "ultimate boomtown," is now beset with the
highest rates of foreclosure in the US as that market has cratered, to state
things conservatively. Is securitization all smoke and mirrors, mere hocus-pocus,
or both? And, is securitization a fancy word for gambling, oftentimes with the
fortunes of others? You've got all the Star Wars droids being
discussed at this event, that's for sure--CDOs, CLOs, RMBS, ABS, ABCPs,
SIVs, etc. In particular, I am keen on the concept of "whole
business securitization." While pretty much any asset which yields an income
stream can be securitized, this kind of securitization involves what it says--securitizing
an entire business operation. As the link above suggests, this kind of securitization
is more worthwhile for firms that are rich in intellectual property--brands,
patents, and trademarks. Given the current rate of financial innovation, maybe
we'll see "whole country securitization" in a few years' time...
Looks like S&P500 might fall below 1200, which was the starting point
of "Paulson rally" :-(.
January 23, 2008 |
Is Not Making This Up
Well, as far as NotMakingThisUp is concerned, the most obvious thing missing
in all of yesterday’s headlines was this: no share
buybacks were announced by any major company before, during or after the brief
morning sell-off.
Not one.
During the panic of October 1987, grey-beards will recall, the tape was clogged
not only with headlines of trading-halts amidst the worldwide rush to sell,
but also with a steady stream of share buyback announcements by U.S. companies.
Coke, P&G and many others that week and in weeks subsequent to the Crash
of ’87 used the substantial cash on their balance sheets to take advantage of
the market dislocations that caused even the good here no share buy-backs announced
yesterday?
Could it be that the Great Private Equity Cash
Robbery of 2007, in which previously healthy companies either “cleared” their
balance sheets of cash—to use the euphemism employed by Steve Odlund, the Chief
Cash Clearer at Office Depot—by buying back their own stock at bull-market peaks
or faced the prospect of having it cleared for them by the Private Equity Cash
Robbers?
We suspect that is precisely the case, and in continuing our look-back here
at previous efforts to Not Make It Up, reprint this review of the Great Private
Equity Cash Robbery of 2007 through the eyes of a made-up public company CEO
ruefully ruminating on the after-effects of his effort to
“return value to shareholders”
Now with confidence in banks being a toast and Greenspan
name becoming similar to a dirty word, more, not less regulation might be beneficial.
After Depression measures were actually a big success in taming excesses of 'wild'
capitalism...
... We need to restore confidence in the markets’ basic ability to function,
not in their presumed tendency to make us all rich by always going up...
One main response to the Depression that helpedor="#FF0000">was a set
of tools that improved confidence by truly improving market security.
One of these was the Federal Deposit Insurance Corporation, in 1933, but there
were also a large number of others, especially the Securities and Exchange Commission
the next year.
These were not obvious innovations and, in fact, were highly controversial
at the time. Indeed, it is never obvious how the government should foster well-functioning
markets. The fundamental role of governments in promoting markets is clear,
but the design of their instruments must make creative use of a great deal of
information about financial theory, human psychology and existing institutions
and practices. The successful markets we have are a result of considerable inventive
effort.
The F.D.I.C. was controversial because it was established amid the ruins
of various state-level deposit insurance plans that had just gone bankrupt.
Critics at the time also argued that federal deposit insurance would encourage
unsound banking. But it turns out that the F.D.I.C. was a very good idea. It
restored confidence in the banking system during the Depression, and with hardly
any cost.
The S.E.C. was similarly controversial. Critics said it would hamstring or
straitjacket the markets. But it is now the model for securities regulation
around the world.
We need ... to set up a national study commission and to pay for serious
creative research on how to adapt important ideas, like deposit insurance and
securities regulation, to a modern financial world. ...
There is still a disconnect between the general level of optimism and the reality
of the "post subprime" economy. Unemployment rate dynamics is quite worrisome.
Accrued Interest
Bail-out for ABK and MBI? Sounds more and more likely something is going
to happen. The story from the WSJ makes it sound similar to the
LTCM bailout, where a group of parties interested in seeing the bond insurers
survive provide the capital, not as a strategic investment, but to protect themselves
from bigger losses. I've said before that I don't like a
government bailout, but if a group of banks/brokers have essentially bet
too heavily on bond insurers surviving, then they should pay the price when
the insurers need more capital. Nothing wrong with that.
Treacherous time for 401K investor. Bond rates are no longer compensatory and
Fed can cut to 2.5%; stocks are too dangerous. Deficit spending means inflation
or worse stagflation.
Let's drop the euphemism of "stimulus package" and call this agreement by
its proper name: "deficit spending."...
This "stimulus bill" is really $150 billion worth of some future generation's
resources appropriated to finance our own consumption....
The imperative to do "something" is all the entitlement politicians need.
In political arguments, you can't beat something with nothing. But we can learn
from this experience to have a better menu of fiscal policy options the next
time around. Two changes to our budget policy would go a long way toward that
goal.
First, we should rule out deficit spending to finance a consumption binge.
As the economy slows, the deficit will widen even without changes in fiscal
policy. But an honest budget policy would be calibrated to balance the budget
over a complete business cycle.... [W]e must not waive pay-as-you-go rules that
require spending that increases the current deficit to be offset later, when
the economy is stronger.
Second, we can plan well in advance. The federal
government has a critical role in maintaining and developing public infrastructure,
whether in transportation, telecommunications or energy transmission projects.
A sensible capital budget would include a prioritized list of projects that
need attention. Some would be slated for this year, some for 2009 and so on,
over the useful lives of the projects. When economic growth falters, the government
would be in a position to move some of the projects from later years into the
present year....
With a little forethought, short-term economic concerns and long-term budget
goals need not be in conflict.
Citi and Merrill can lose $20 billion in one quarter and is S&P 500 did not
decline much that's OK. But a sharp stocks drop because unwinding of trades of a
rogue trader who managed to lose $7 billion for the whole year forced Fed jump into
the action... "The mistaken belief of market fundamentalism" is more
dangerous that you can infer from the paper. "If, as
Soros argues, the underlying cause of the problem is the end of the
dollar's hegemony, then the
Fed is doing more damage by treating the symptom, i.e. cutting interest rates to
support the stock market. "
Some commentators may nominate Jerome Kerviel as the poster boy for everything
that is wrong with the Federal Reserve's policies. The Fed has demonstrated
by now that they
prefer to treat the symptom, and not the cause. Monday's carnage
on stock markets was the symptom, and Societe Generale's weak internal control
was one of the causes. Cutting interest rates by 0.75% isn't going to stop Jerome
Kerviel v2.0 from trying to cheat the system.
Of course, the Fed has little control over the
internal controls at banks, but the above example illustrates the futility of
treating the symptom instead of the cause. Let's take the cause/symptom
analogy a step further. What if the current crisis is merely a symptom of a
deeper cause? To quote the legendary investor George Soros: "The current crisis
is not only the bust that follows the housing boom [symptom], it's basically
the end of a 60-year period of continuing credit expansion based on the dollar
as the reserve currency [underlying cause]. Now the rest of the world is increasingly
unwilling to accumulate dollars."
If, as Soros argues, the underlying cause of
the problem is the end of the
dollar's hegemony, then
the Fed is doing more damage by treating the symptom, i.e. cutting interest
rates to support the stock market. By using aggressive interest
rate cuts to shore up stock markets, the Fed devalues the yield advantage of
the greenback. Why should other nations hold the dollar as a reserve currency
if the Fed shows no restraint in damaging its value? Why should other nations
hold the dollar when the Fed is reactive instead of proactive? Not to mention
the wave of inflation that will come on the back of the recent rate cuts.
What if every modern day financial crisis is a symptom of a deeper cause?
Once again, to quote George Soros: "This is the end of credit expansion [the
symptom] based on the mistaken belief of market fundamentalism [the cause],
that you should let markets have total freedom." If you give the market total
freedom, you create myriad opportunities for Jerome Kerviel v2.0.
I assure you that he is not the only "computer genius" conducting fictitious
futures trades to lift bonuses or cover up embarrassment. How
much of the world's derivatives market is fiction?
Are monolines the next domino to fall in this mess ? To what extent Fed
bears the responsibility for the failure of oversight ?
From
CNN:
'This office wants to know when and if MBIA and Ambac disclosed to bond
issuers -- the cities, towns, districts and other public authorities
-- that their financial condition as an
insurer was being severely impacted as a result of their involvement
with these highly risky securities,' Galvin said.
"this won't be a drive-by
recession like the one we experienced in 2002." I think that the US economy
will just scrape through 2008 without one due to huge military spending.
The Mess That Greenspan
Made
For those of you who have seen those loopy Fox Business infotainment shows on
the weekend with their uber-bullish cast of characters and seemingly endless
optimism about owning stocks, this
report of an about-face by Tobin Smith, formerly the uberist of the uber-bulls,
might come as a bit of a surprise.
The evidence has been building that we are in a recession.
And according to all of the indicators I study,
this won't be a drive-by
recession like the one we experienced in 2002.
...
All four key barometers used by the National Bureau of Economic Research—employment,
real personal income, industrial production, and real sales activity in
retail and manufacturing—are negative.
The US economy is stalled,
and without another historic set of interest rate cuts by the Federal Reserve
and another round of big tax cuts, we are likely going to continue crawling.
He goes on to talk about things like getting rid of high P/E stocks, holding
more cash, and recommends against any sort of panic selling.If he is as wrong
about panic selling as he was about what the Fed would do (this was written
two days ago), his inbox will probably fill up rather quickly between now and
the next Bulls & Bears.
America's economy is headed for a major slowdown. Whether there is a recession
... is less important than the fact that the economy will operate well below
its potential, and unemployment will grow. The country needs a stimulus, but
anything we do will add to our soaring deficit, so it is important to get as
much bang for the buck as possible. The optimal package would contain one fast-acting
measure along with others that could lead to increased spending if and only
if the economy goes into a steep downturn.
We should begin by strengthening the unemployment insurance system, because
money received by the unemployed would be spent immediately.
The federal government should also provide some assistance to states and
localities, which are already beginning to feel the pinch, as property values
have fallen. Typically, they respond by cutting spending, and this acts as an
automatic destabilizer. Federal assistance should come in the form of support
for rebuilding crucial infrastructure.
"For a
few days there it looked like overconsumption and the lack of domestic savings in
a bubble-economy that had run out of bubbles was about to meet its inevitable end."
Regardless, it took only 2 days to learn just how ill-considered the Fed's emergency
market rescue plan was: To wit, a fraudulent series of losses led to a major
European bank unwinding a huge trade:
Societe Generale Reports EU4.9 Billion Trading Loss.SG's $7.1Billion
dollar unwinding led to panicked futures selling on Monday and Tuesday.
Hence, we quickly learn what sheer folly and utter irresponsibility it is
for the Fed to use its limited ammunition to intervene in equity prices.
Their panicky rate cute were not to insure
the smooth functioning of the markets, but rather, to guarantee prices.
As we have been saying for the past two days, this is not the Fed's charge.
They are supposed to be maintaining price stability (fighting inflation) and
maximizing employment (supporting growth) -- NOT guaranteeing stock prices.
Comments
Helicopter Ben | Jan 24, 2008 10:51:12 AM
If we are realists (rather than members of the bull or bear dogmatic religions),
then we need to accept that the Fed is a put on the investment community. It
matters not what their job description is in the public arena -- aren't we all
believers in the maxim "actions speak louder than words"?
One of the underlying presuppositions that seems
to cause faulty expectations is that the US exhibits either a free market system
or is aspiring to do so. As a student of history, I do not believe either are
true. The wealthy will always protect one another, and they will
manipulate the system to maintain the orderly structure that has benefited them
in the past. With all do respect, anyone who does not believe such behavior
will continue is a bit naive (or waiting for a messiah).
The power elite will never support a true free market system because in practice
it means chaos or at least letting go of the yoke they so tightly grasp. "Free
market" is nothing more than the catch phrase of the day. Anyone who knows economic
reality knows that all markets are manipulated by laws and power (including
money). Kudlow is a perfect example of why "free
market" is nothing more than double speak for "fiscal and legislative aid for
investor capitalists."
Also note that although the Fed is bailing out
speculators, they are ALSO providing a put for all the boomers
who are currently or in the near future set to retire (or supplement income)
on the worth of their two major assets: house AND EQUITIES. The value
of equities play a very real role in consumer sentiment and per capita wealth.
Thus, with all due respect, I think focusing on the Fed's effect on speculators
over simplifies the issue.
Every Major U.S. Bank Was Profitable Last Year"
John Berry says we shouldn't feel too sorry for banks, or worry that credit
is about to dry up and ruin the economy [Update: After today's events, I'll
be curious to see if John Berry, who has been more bullish (or at least less
bearish) than many other commentators, changes his tune at all.]:
Every Major U.S. Bank Was Profitable Last Year, by John M. Berry, Bloomberg:
With all the large writedowns and losses announced for the fourth quarter,
hardly any attention is being paid to just how profitable U.S. banks really
are.
That inattention has raised unnecessary concerns that the banks may be
so crippled by losses that they will cut lending to the point it might undermine
the U.S. economy.
Some commentators have said the banks are in the worst shape since the
Great Depression. That isn't close to being correct.
Other analysts have raised the specter of the stagnant Japanese economy
of the 1990s, when banks there were crippled by huge losses when a real
estate price bubble burst... This comparison also is off base.
Even Citigroup Inc., by far the hardest hit of the big U.S. banks by
subprime-related problems, earned $3.62 billion last year. That was with
a $9.83 billion fourth-quarter net loss and more than $22 billion in writedowns
and additions to loan-loss reserves.
For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was
on the 34 percent drop in fourth-quarter profits from a year earlier. Its
full-year $15.4 billion profit, a record, was largely ignored. ...
Economist Robert E. Litan, a senior fellow at the Brookings Institution
who has done numerous studies of the U.S. financial system, said the banks
are in far better shape than the dire assessments suggest.
''Strip out the losses and Citi could make close to $10 billion a quarter,''
Litan said. Noting how quickly the bank has been able ... to replace the
capital depleted by losses, he added, ''Why would anybody buy stock if they
thought Citi was going down the tubes?''
''And this is nothing like the Japanese situation,'' Litan said. ...
The story is largely the same at Merrill Lynch & Co., the world's largest
brokerage, though the losses are greater relative to its size. ...
Credit isn't as readily available as it was for several reasons, including
a less favorable economic outlook, tighter lending standards, particularly
for mortgages, and a lack of a secondary market for some types of loans
such as jumbo mortgages.
On the other hand, the interest rates many borrowers are paying have
dropped. The bank prime rate, to which many loans are linked, is 7.25 percent,
the lowest since January 2006.
As of Jan. 17, the average interest rate on 30-year fixed- rate mortgages
dropped to 5.69 percent, the lowest level since June 2005.
In the two weeks ended Jan. 18, corporate borrowers sold $50 billion
worth of investment-grade bonds at the lowest interest rates since April
2007.
The credit well hasn't run dry and it's not about to. And the nation's
banks will be supplying a large share of it.
Wow. First the markets, now the Fed’s
reaction.
What you probably should know is that Ben Bernanke, in his capacity as a
professional economist, spent a lot of time worrying about Japan’s experience
in the 1990s. (So did I.)
What was so disturbing about Japan was the way monetary policy became ineffective;
by the later 1990s the short-term interest rate was up against the ZLB — the
“zero lower bound.” This is alternatively known
as the “liquidity trap.” And once you’re there, conventional
monetary policy can do no more, because interest rates can’t go below zero.
There was a lot of discussion of various unconventional monetary things you
could do. But the best answer was not to get there in the first place.
A 2004
paper co-authored by
Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient
inflation buffer and easing preemptively as necessary”.
It's amazing how many people now want heads of "best friends of Alan Greenspan"
-- investment bankers...
The ways
of Wall Street invariably seem impenetrable to outsiders. This may indeed be
because they defy conventional commercial logic. Most listed businesses are
presumed to be run for the benefit of shareholders, employees and “stakeholders”
(whatever that means), in that order. But as Bloomberg’s Michael Lewis writes
(“What does Goldman know that we don’t ?”), conventional commercial logic and
Wall Street make uneasy bedfellows. How else to explain, for example, the payment
for failure pocketed by outgoing Merrill Lynch CEO and amateur golfer Stan O’Neal
($161.5 million) versus Merrill’s latest $16.7 billion
writedown ? Commercial language can’t really cope with this mismatch between
reality and the money-porn fantasy that passes as executive compensation. Fiction
can at least attempt to – we can legitimately say that this is ‘Alice through
the Looking Glass’ stuff.
...even
at today’s battered down valuations, it is debatable whether investors have
truly priced in the disappearance of so many different revenue streams for what
may be some time to come, and the likely permanent closure of some of the more
exotic or opaque structuring areas.
Those
investors who bought what they presumed to be AAA rated debt offering a riskless
premium to Treasuries and saw it default in a matter of months will surely take
a more skeptical view of Wall Street’s plat du jour in future – if
they have the luxury of retaining their jobs at all.
"By coining unnecessary paper, as the Fed has done and continues to do, the
Fed effectively freezes prices at stratospheric levels, to the benefit of the institutions
who screwed up, and at the expense of "ordinary Joes" whose savings are in bonds,
CDs, etc. It subsidizes speculators over savers."
naked capitalism
Michael Panzner offers a useful post, "The
Wrong 'Flation" on this topic, arguing for the deflationary outlook. The
most powerful evidence for this view comes from the fact that the monetary authorities
have lost control of credit generation (broader money, the old M3) as observers
ranging from
market mavens like Michael Shedlock to
Serious Economists like Mohamed El-Erian have pointed out. The credit crisis
means credit contraction, a process the Fed will likely be unable to staunch.
That in turns points to deflation.
However, "unlikely" does not necessarily mean "unable". Bernanke is a well
known expert on the Great Depression, and well schooled in the dangers of letting
contractionary processes feed on themselves. So he and his colleagues will be
doing everything in their power from keeping a vicious circle from setting in.
The Term Auction Facility was a creative measure that managed to stave off a
crisis in the money markets. Perhaps he will be able to use a combination of
novel measures, liquidity injections, and smoke and mirrors to keep confidence
at a reasonable level (confidence and willingness to extend credit are what
really is at risk here).
Comments
Yes, in the near term, it leads to plunging consumption, which, in turn,
forces a plunge in prices, until a new, cheaper equilibrium is reached.
By coining unnecessary paper, as the Fed has done and continues to do, the
Fed effectively freezes prices at stratospheric levels, to the benefit of the
institutions who screwed up, and at the expense of "ordinary Joes" whose savings
are in bonds, CDs, etc. It subsidizes speculators
over savers. Again.
[Jan 20, 2008] The Education of Ben Bernanke
God knows what will happen if the 401K lemmings became scared enough to pull
their money out of stock funds. Looks like a real crisis in confidence can be in
the cards.
Roger Lowestein's
8,000 word article on Ben Bernanke.
As a doctoral candidate at M.I.T., he blossomed into a star, and
at the tender age of 31 he received a tenured
position in the economics department at Princeton. (what
a joke -- tender age; 31 is not 21 --NNB)His academic research
was steeped in the increasingly sophisticated discipline of econometrics,
which uses computer models to simulate (and predict) the economy. By contrast,
Greenspan often relied on his hunches. The difference is partly generational,
but Bernanke is clearly more comfortable working with mathematical
formulas than with anecdotal examples. (One looks in vain in his
Depression writings for stories of banks that failed or of workers who lost
their jobs.). (looks like Greenspan was grossly
undereducated for the job, but he was a shrewd politician and an excellent
PR man; Bernanke might be well over-educated --NNB)
A lot of 401K participants out there might also enter a steep learning
curve a kind of replay of 2001-2003 scenario.
Drunk in a bankrupt world
By Chan Akya
Rising interest rates in turn made bankrupt the people borrowing money they
couldn't pay for houses they couldn't afford on incomes they didn't have.
"Bankers caught with their hands in the cookie jar are reprimanded, but almost
never dismissed thanks to the complete lack of accountability The running
total is that there has now been $100bn of subprime-related write-offs and $59bn
of capital injections (see FT report on the
latest shocker, from Merrill Lynch)."
Wall Street's five biggest firms together paid a record $39
billion in bonuses, even though three of them suffered the worst quarterly losses
in their history and shareholders lost more
than $80 billion.
Goldman Sachs Group, Morgan Stanley, Merrill Lynch,
Lehman Brothers Holdings and Bear Stearns together paid $65.6 billion in compensation
and benefits last year to their 186,000 employees. Year-end bonuses usually
account for 60 percent of the total, meaning bonuses exceeded the $36 billion
distributed in 2006 when the industry reported
all-time high profits.
Merrill Lynch Plans to Write Off ACA Bond Insurance (Update1)
January 17, 2008 | Bloomberg
Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations,
said it will write off $2.6 billion in default protection from bond insurers
including ACA Capital Holdings Inc. because it's worthless.
Merrill Lynch cut $1.9 billion of debt insured by ACA, whose debt ratings
were lowered 12 levels to CCC in December, and $679 million from other insurers.
Guarantors including MBIA Inc. and Ambac Financial Group Inc. are under threat
of losing their AAA ratings from Moody's Investors Service and Standard & Poor's.
"We are reserving against ACA dollar for dollar so it's 100 percent reserved,''
said John Thain, chief executive officer of New York-based Merrill Lynch, during
a conference call today with analysts and journalists.
Merrill Lynch's writedowns demonstrate how a downgrade of bond insurer credit
ratings can spread throughout financial markets. Losing the AAA stamp would
cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of
securities.
The bond insurers guaranteed almost $100 billion of CDOs backed by subprime-mortgage
securities as of June 30, according to an Aug. 2 report by Fitch Ratings. Most
of those guarantees are in the form of derivative contracts. Unlike insurance,
those contracts are required to be valued at market rates.
ACA Financial Guaranty Corp., a unit of ACA Capital, had to seek approval
from the Maryland Insurance Administration before pledging or assigning assets
or paying dividends, the New York- based company said in a filing Dec. 27 with
the U.S. Securities and Exchange Commission.
Delinquency Proceedings
A telephone call to Karen Barrow, a spokeswoman for the Maryland Insurance
Administration, wasn't immediately returned. A message left for Alan Roseman,
ACA's chief executive officer, also wasn't immediately returned.
New York-based ACA reached agreements to avoid posting collateral until tomorrow
against credit derivatives it uses to insure the debt. The Maryland regulator
held off filing delinquency proceedings while ACA seeks ways to raise capital.
ACA was required under its agreements with swap counterparties to post collateral
on those contracts if its rating fell below A-.
Canadian Imperial Bank of Commerce had to sell more than C$2.75 billion ($2.7
billion) in stock to investors to rebuild its balance sheet after taking writedowns
tied to ACA guarantees. Canada's fifth-biggest bank sold C$1.5 billion in stock
to institutions and another C$1.25 billion to individual investors, the Toronto-based
bank said in a statement Jan. 14.
CDOs are created by packaging debt or derivatives into new securities with
varying ratings.
Default Risk
ACA, down 94 percent this year, fell 12 cents to 47 cents in over-the-counter
trading at 3:27 p.m. in New York. The company was founded in 1997 by former
Fitch executive H. Russell Fraser.
S&P's projected losses for the bond insurance industry will be 20 percent
higher than in its previous review, based on updated results from a new "stress
scenario,'' the ratings company said today.
Credit-default swaps tied to MBIA's bonds soared 15.5 percentage points to
31.5 percent upfront and 5 percent a year, according to broker Phoenix Partners
Group in New York. The contracts trade upfront when investors see a high risk
of default. The price means it would cost $3.15 million initially and $500,000
a year to protect $10 million in MBIA bonds from default for five years.
Contracts on Ambac, the second-biggest insurer, rose 15 percentage points
to 30 percent upfront and 5 percent a year, prices from CMA Datavision in London
show.
To contact the reporter on this story: Mark Pittman in New York at
mpittman@bloomberg.net
Nicely executed and probably pre-rehearsed Cramer rant :-) It's clear that a
fundamental weakness of free-market system is that in boom periods there is
a significant decline in ethical standards. There is only one analog in the
last 100 years for the five year, 200% rise in the Dow in the late 1990s -- the
1920s. The cultural context ("greed is good", Greenspan, etc) is also reminiscent
of the 1920s.
"How can we have these levels of fiction in financials after Sarbanes-Oxley?
How do people get away with this? How do they live with themselves?"
Cramer made his comments while
reviewing results from Merrill. But his real consternation surrounded the insurers
who cover banking investments. Some of those insurers haven't come clean about
their liabilities, Cramer speculated. Eventually they will, and then the "fiction"
will disappear, he said.
The banking sector and its
related industries are all too chummy, Cramer accused. That led the numbers
related to mortgage investments -- investments that are currently souring --
to break from reality.
"I think the financial guys all belong to the same club and they got to protect
each other," he said.
Worse, those executives behind
the current credit crunch are unlikely to get any punishment for their mistakes
and disingenuousness about their numbers, Cramer opined.
"I'm fed up with it. The American
people should be fed up with it. And the SEC should be fed up with it," Cramer
said.
"This is what the SEC is supposed
to protect us from," he added.
[Jan 17, 2008] today S&P500 return from Jan 1996 using cost averaging starting
from zero retuned -2% in comparison with Vanguard institutional stable value fund
Here are stable value returns used in the calculation
|
1996 |
7.31 |
|
1997 |
7.21 |
|
1998 |
7.14 |
|
1999 |
6.71 |
|
2000 |
6.81 |
|
2001 |
5.98 |
|
2002 |
4.68 |
|
2003 |
4.54 |
|
2004 |
4.39 |
|
2005 |
4.39 |
|
2006 |
4.50 |
|
2007 |
5.00 |
|
2008 |
5.00 |
This is the first acknowledgement a major institution that part of the bond
insurance as "worthless". Aren't monoline bond insurers the next shoe to drop.
"Merrill Lynch cut $1.9 billion of debt insured by ACA, whose debt ratings were
lowered 12 levels to CCC in December, and $679 million from other insurers."
Buried amid a rather dismal set of numbers from Merrill Lynch on Thursday,
proof positive that the ailing monoline bond insurers have the potential
to inflict further pain on the Wall Street banks.
... ... ...
But the bank also took “credit valuation adjustments
of $2.6bn related to hedges with financial guarantors
on US ABS CDOs.”
These amounts reflect
the write down of the firm’s current exposure
to a non-investment grade counterparty from
which the firm had purchased hedges covering
a range of asset classes including U.S. super
senior ABS CDOs.
(5 comments)
Having worked with the Japanese, and knowing how hostile they are to any
meaningful foreign role in their economic affairs, I never saw Chinese attitudes,
at their core, as fundamentally different (although their playbook bears little
resemblance to that the Japanese, who have the disadvantage of being a military
protectorate of the US, despite the existence of the Japanese
Self Defense Forces). Push comes to shove, the Chinese would have few inhibitions
about nationalizing foreign assets.
... ... ...
From
Palley:
Americans tend to disregard history. Henry Ford declared bluntly, “History
is bunk,” while Gore Vidal calls the U.S. “the United States of Amnesia.”
Usually, this disregard has few consequences, but sometimes not. That may
be so with investing in China, where history suggests profits will be far
below expectations, possibly making those investments fool’s gold.
China’s history is completely different from that of the United States and
it has left deep imprints on China’s politics. Therein lies the trap for
investors and policymakers who ignore history and wishfully think market
forces will inevitably make China just like the United States.
One critical factor is China’s attitude to foreigners. That attitude is
captured by the Great Wall of China, which provides a metaphor for China’s
long history of isolationism and xenophobia. A second critical factor is
the legacy of China’s humiliating defeats in the unjust 19th century opium
wars with Great Britain. At the time, Britain was importing large amounts
of tea and silks from China, and demanded the right to sell Indian opium
in exchange. As the opium trade grew, not only did it cause massive addiction,
it also caused a damaging monetary outflow of silver from China. That prompted
China to stop the trade, and Britain then turned to military force to keep
China’s market open.
"While undeniable accurate, the fact that these recommendations are on his list
is an appalling indictment of the job central bankers
are doing." The Fed, for instance, did not do its own homework and
was unduly influenced by Brave New World views of investment banks
naked capitalism
Their power has diminished as the financial system has gotten much better
at generating liquidity outside their purview. Yet despite this shrunken role,
politicians and the public expect them to be able to steer macroeconomic policy
as before. Any manager will tell you that having responsibility without having
authority is a terrible position to be in.
El-Erian gives a five point program. Two items are revealing:
First, they need to improve their understanding of the new financial landscape....Third,
they need to improve, directly or indirectly, scrutiny of financial activities
that have migrated outside their formal jurisdiction.
While undeniable accurate, the fact that these recommendations are on his
list is an appalling indictment of the job
central bankers are doing. The Fed, for instance,
did not do its own homework and was unduly influenced by Brave New World views
of investment banks and commercial banks merrily reaping current profits with
little thought as to the long-term consequences of their moves (and why should
they be? They don't affect this year's bonus).
Reader comment:
As someone who did have the Fed inspect his books once upon a time, my memory
tells me that they were very big on invoking "street practice". If you're up
to it, you were okay. But there is no questioning whether the entire street
might be bonkers, and certainly no attempt (and no ability) to understand the
products on the book.
naked capitalism
Pershing Square believes, based on MBIA's latest SEC filing, that the firm
will need $10 billion in additional capital to maintain its AAA rating, up from
an estimate of $8 billion in November (note that this is the requirement over
time, not an immediate need).
Problems will be amplified by diminished local governments spending due
to lower tax revenues...
The Fed's snapshot of business conditions showed a national economy losing
momentum heading into the new year and a future riddled with uncertainty. The
persistent housing slump and harder-to-get credit are making people and businesses
ever more cautious, it said.
Separately on Wednesday, more big banks reported losses and said people were
having trouble making payments for everything from credit cards to cars. Stocks
were mostly down for the day, the Dow Jones industrial average declining 34.95
points, or 0.28 percent.
The Fed report was the unwelcome icing on a recent batch of economic indicators
-- ranging from a plunge in retail sales to a big jump in unemployment -- raising
concern that the country is heading for its first recession since 2001.
At the beginning of last year, many economists put the chance of a recession
at less than 1-in-3; now an increasing number say 50-50 or even worse. Goldman
Sachs, the biggest investment bank on Wall Street, thinks a recession is inevitable
this year.
This is a little bit alarmist post but author makes a couple of interesting
points. The efficiency of individual car-based transit is really unacceptably
low and its feasibility depends on the low price of gasoline. Sitting for hours
in the traffic to get to metropolis is just the waist of time and resources. Hybrids
like Toyota Prius can greatly help but railways looks like are "back to the future"
transportation.
The dark tunnel that the US economy has entered began to look more and more
like a black hole last week, sucking in lives, fortunes, and prospects behind
a Potemkin facade of orderly retreat put up by anyone in authority with a story
to tell or an interest to protect -- Fed chairman Bernanke, CNBC, The New
York Times, the Bank of America.... Events are now moving ahead of anything
that personalities can do to control them.
The "housing bubble" implosion is broadly misunderstood. It's not just the
collapse of a market for a particular kind of commodity, it's the end of the
suburban pattern itself, the way of life it represents, and the entire economy
connected with it. It's the crack up of the system that America has invested
most of its wealth in since 1950. It's perhaps most tragic that the mis-investments
only accelerated as the system reached its end, but it seems to be nature's
way that waves crest just before they break.
This wave is breaking into a sea-wall of disbelief. Nobody gets it. The psychological
investment in what we think of as American reality is too great. The
mainstream media doesn't get it, and they can't report it coherently. None of
the candidates for president has begun to articulate an understanding of what
we face: the suburban living arrangement is an experiment that has entered failure
mode.
I maintain that all the "players" -- from the bankers to the politicians
to the editors to the ordinary citizens -- will continue to not get it as the
disarray accelerates and families and communities are blown apart by economic
loss. Instead of beginning the tough process of making new arrangements for
everyday life, we'll take up a campaign to sustain the unsustainable old way
of life at all costs.
A reader sent me a passle of recent clippings last week from the Atlanta
Journal-Constitution. It contained one story after another about the perceived
need to build more highways in order to maintain "economic growth" (and incidentally
about the "foolishness" of public transit).I understood that to mean the need
to keep the suburban development system going, since that has been the real
main source of the Sunbelt's prosperity the past 60-odd years. They cannot imagine
an economy that is based on anything besides new subdivisions, freeway extensions,
new car sales, and Nascar spectacles. The Sunbelt, therefore, will be ground-zero
for all the disappointment emanating from this cultural disaster, and probably
also ground-zero for the political mischief that will ensue from lost fortunes
and crushed hopes.
From time-to-time, I feel it's necessary to remind readers what we can actually
do in the face of this long emergency. Voters and candidates in the primary
season have been hollering about "change" but I'm afraid the dirty secret of
this campaign is that the American public doesn't want to change its behavior
at all. What it really wants is someone to promise them they can keep on doing
what they're used to doing: buying more stuff they can't afford,
eating more shitty food that will kill them, and driving more miles than circumstances
will allow.
Here's what we better start doing.
Stop all highway-building altogether. Instead,
direct public money into repairing railroad rights-of-way. Put
together public-private partnerships for running passenger rail between American
cities and towns in between. If Amtrak is unacceptable, get rid of it and set
up a new management system. At the same time, begin planning comprehensive regional
light-rail and streetcar operations.
End subsidies to agribusiness and instead direct dollar support to small-scale
farmers, using the existing regional networks of organic farming associations
to target the aid. (This includes ending subsidies for the ethanol program.)
Begin planning and construction of waterfront and harbor facilities for commerce:
piers, warehouses, ship-and-boatyards, and accommodations for sailors. This
is especially important along the Ohio-Mississippi system and the Great Lakes.
In cities and towns, change regulations that mandate the accommodation of
cars. Direct all new development to the finest grain, scaled to walkability.
This essentially means making the individual building lot the basic increment
of redevelopment, not multi-acre "projects." Get rid of any parking requirements
for property development. Institute "locational
taxation" based on proximity to the center of town and not on the size, character,
or putative value of the building itself.
Came on, state capitalism is alive and well in the USA.And the fact the Wall
street strayed from the course is partically due to the fact the a bank loggist
was at the helm of Fed for too long.
Salon
Less than two decades after the collapse of the Soviet Union and the West's
gleeful jig dancing on the grave of communism, state capitalism is suddenly
threatening the autonomy of the global "free" market. Wall Street's elite banks,
longtime freedom fighters for deregulation and scorners of all government intervention
in the marketplace, are now begging, cup in hand, for aid from a gallery of
regimes that includes some of the most authoritarian and undemocratic governments
on the planet.
... ... ...
...The root of Wall Street's woes leads back directly to their own strategic
missteps, greed, speculation-run-amok, and lack of appropriate supervision.
The brightest minds in finance had exactly what they wanted, a playground where
the monitors were looking the other way, and they blew it. When the China
Investment Corp. pumps in $5 billion to Morgan Stanley, we are not witnessing
the triumph of state capitalism, but rather, the embarrassing, humiliating
failure of Reagan-Thatcher style unregulated capitalism. So now the U.S.
buys Chinese toys at Wal-Mart, and China uses the resulting cash to buy American
banks. Hey, anything's fair in love and war and free markets.
The suburban living was an experiment that might recently enter a failure mode
due to high costs and inefficiencies.
- Steak N Shake has overexpanded.
- Restaurants in general have overexpanded.
- Retail stores have overexpanded.
- Strip malls have overexpanded.
- Commercial Real Estate has overexpanded.
- Europe and Asia will not disconnect from the US.
- PEs of 23+ are silly for big restaurant chains.
We do not need more Steak n Shakes (SNS), Pizza Huts (YUM), McDonald's (MCD),
Panera Breads (PNRA), Starbucks (SBUX) or any other restaurants for that matter,
at least in the US.Layoffs related to all of the above are coming. Consumers
are tapped out.
Those who think Europe will disconnect from the US are likely to be sadly
mistaken. Investing in restaurants with PEs of 20+ when the economy is in a
recession and you can still get 5% guaranteed on a CD does not make a lot of
sense to me.
[Jan 14] FT Alphaville / CDS might
just be the new subprime.
CDS might just be the new subprime. "Last week Bill Gross
of Pimco gave a round-about figure of $250bn as a potential loss from CDS contracts
defaulted."
Here’s Wolfgang Münchau, writing in Monday’s FT:
If this had been a mere subprime crisis, it would
now be over. But it is not, and nor will it be over soon. The reason is
that several other pockets of the credit market are also vulnerable. Credit
cards are one such segment, similar in size to the subprime market. Another
is credit default swaps, relatively modern financial instruments that allow
bondholders to insure against default.
This is a theme that the FT’s markets team
picked up on Friday. Credit default swaps, it seems, are in for a lot
of column inches in 2008. CDS might just be the new subprime.
As Münchau explains, the reasons for that are principally linked to the
now-likely prospect of a US recession.
At a time of low insolvency rates, many investors
used to consider the selling of protection as a fairly risk-free way of
generating a steady stream of income. But as insolvency rates go up, so
will be the payment obligations under the CDS contracts. If insolvencies
reach a certain level, one would expect some protection sellers to default
on their obligations.
Last week Bill Gross of Pimco gave a round-about figure of $250bn as a potential
loss from CDS contracts defaulted. Commenters on FT Alphaville picked up that
figure and took umbrage with it: pointing out that some cases -namely Delphi
- CDS contracts are taken out for up to ten times the value of the bonds they
insure.
The key question is how much capital will be diluted by those write downs. Citi
need to raise 10 billion dollars to offset write-downs.Mark to make belief need
to be replaced with the realistic mark, but they cannot write down them to zero.Same
financials that did well in the last quater might outperfom in the next.
Jeff Harte Expects `Stunning' Writedowns for Financials:
Video January 14 (Bloomberg) -- Jeffery Harte, an analyst at Sandler O'Neill
& Partners, talks with Bloomberg's Carol Massar from Chicago about the outlook
for fourth-quarter earnings at U.S. financial-services companies and his investment
strategy. Bloomberg's Julie Hyman also speaks.
(Source: Bloomberg)
Watch
The miracle of compounding is working against US now.Perhaps the
question that should be asked is: How much time will be required to get all the
rot out of the system?10 year ? More then that ?
(Bloomberg) -- Darius
Kowalczyk, chief i
Brock said...
“great to be rich in America everyone makes $30m by doing nothing”.
“I could make lots of “money” from what is going on “but I have a conscience”
“All about commissioning, jamming stupid people to make money”
can’t wait to see this on youtube