Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Lessons From JapanInteresting Article in the International Herald Tribune on Japanese monetary policy (both yesterday's version and that the more longer-term variety stretching back to the serious deflation days). Here's the most pertinent point:"According to Jerram, of Macquarie, one lesson of Japan's experience with such indirect measures is that they work only if bankers are confident that they will remain in place until the economy actually revives. To make this clear, he said the bank should accompany such an easing with public commitments not to raise borrowing costs again until some target is met, such as a rebound by consumer prices." Not sure if our program, such as it is, is geared toward this sort of option--at least not yet. Bank of Japan cuts rates for the first time in 7 years By Martin Fackler Friday, October 31, 2008 TOKYO: The Japanese central bank cut its benchmark interest rate for the first time in seven years on Friday, joining earlier moves by the U.S. Federal Reserve and other central banks to soften the brunt of a possible global recession. The Bank of Japan's policy board voted to lower the overnight lending rate between banks by 0.2 percentage point to 0.3 percent, reducing borrowing costs in order to rekindle growth in the country, which has the largest economy in Asia. The bank also seemed to confirm fears here that Japan was heading into a recession by lowering its forecasted growth rate for the current year to around zero percent, citing higher energy prices and weakening demand for Japanese exports. The loosening Friday was also aimed at easing a growing credit crunch in Japan, which had long seemed immune to the international financial contagion. As an additional credit-easing measure, the bank said it would start paying interest on some of the reserves that commercial banks keep at the central bank, a step that would provide more cash to lenders. This was the first interest rate cut during the current financial crisis by Japan, where short-term interest rates, already near zero, have constrained the central bank's room for maneuver. Read the rest of the article Labels: Bank of Japan, banking system, financial crisis bailout, Monetary Policy, recapitalization Naomi Klein on US RecapitalizationI don't agree with all of this: Naomi seems to forget that there are no longer any Wall Street firms of the sort that could wreak so much havoc with the assets they conjured up and simply expect someone else to endure the liability. But she's always provocative, and her politics are spot on. From today's Guardian:The Bush gang's parting gift: a final, frantic looting of public wealth The US bail-out amounts to a strings-free, public-funded windfall for big business. Welcome to no-risk capitalism Naomi Klein The Guardian, Friday October 31, 2008 In the final days of the election many Republicans seem to have given up the fight for power. But don't be fooled: that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700bn bail-out out the door. At a recent Senate banking committee hearing, the Republican Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bail-out. When European colonialists realised that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts. Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as "distressed asset" auctions and the "equity purchase program". But make no mistake: the goal is the same as it was for the defeated Portuguese - a final, frantic looting of the public wealth before they hand over the keys to the safe. Read the rest of the article Labels: financial crisis bailout, Naomi Klein, The Guardian Demand from New Admin: Claw This Back!From Reuters:U.S. banks owe billions in pay, pensions to executives: report Fri Oct 31, 2008 6:36am EST (Reuters) - Troubled financial giants getting cash infusions from the U.S. Federal Reserve owe their executives more than $40 billion for past year's pay and pensions as of the end of 2007, the Wall Street Journal said in an analysis. The sums owed are mostly for special executive pensions and deferred compensation, including bonuses, for prior years, said the paper. The Journal also cited investment banks Goldman Sachs Group Inc, which owes its executives $11.8 billion; JPMorgan Chase & Co, which has a payment of $8.5 billion pending; and Morgan Stanley, which owes between $10 billion and $12 billion to executives. Criticism of executive pay has gained momentum this election year with presidential candidates from both major parties lashing out over rich payouts for CEOs of companies that have suffered big losses in the U.S. housing market bust and ensuing credit crisis. As a result, the government has sought to rein in executive pay at banks getting federal money as part of the Bush administration's $700 billion bailout program. But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces, the Journal said. For instance, nine banks paid out an estimated $50 billion of bonuses in 2007, based on the total compensation expense for the companies and assuming that for investment banks about 60 percent of total compensation was allocated for bonuses, and for commercial banks about 20 percent went to bonuses. Goldman Sachs, Morgan Stanley and JP Morgan Chase did not immediately return calls seeking comment. (Reporting by Shradhha Sharma in Bangalore; Editing by Kim Coghill) Labels: executive pay, financial crisis, financial crisis bailout, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Reuters, Wall Street Journal This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street Barney Frank's JP Morgan Chase ConnectionFrom Bob Feldman:Since 1989, the corporation whose Political Action Committee [PAC] or executives have been the top source of campaign contributions for the House Financial Services Committee Chairman, Barney Frank, has been JP Morgan Chase & Company. A Democratic Congressional representative from Massachusetts, Frank has accepted over $70,000 in campaign contributions from JP Morgan Chase executives or its PAC since 1989, according to the Center for Responsive Politics web site data base at www.opensecrets.org. In 2007, for example, Rep. Frank accepted $6,000 in campaign contributions from JP Morgan Chase's PAC, according to the JP Morgan Chase web site. Coincidentally, Frank recently helped push through Congress a Wall Street corporate welfare bill which authorized the U.S. Treasury Department to invest $25 billion in JP Morgan Chase. In a January, 1996, I asked Rep. Frank, in a phone interview for the now-defunct Lower East Side alternative weekly, Downtown, why his campaign committee had accepted a $500 contribution from then J.P. Morgan vice-chairman Robert Mendoze in April 1995. "I'm surprised by the question," Frank replied in 1996. "There's no alternative to accepting such contributions, although I'm in favor of public financing of campaigns. I am on the banking committee and I accept contributions from many different contributors. But none of these contributors will determine how I vote on the banking committee." According to Frank, when he first ran for Congress he received no campaign contributions from banking industry executives. But apparently, after some banks saw that, as a House Banking Committee member, Frank favored allowing banks to again enter the securities business, he began to receive some campaign contributions from people in the banking industry. Asked in 1996 how he'd respond to the argument that the acceptance of a campaign contribution from a bank executive by a member of the House Banking Committee, which passes legislation that regulates banks, represents a conflict of interest, Frank replied in 1996: "That's nonsense." According to the Massachusetts representative, it was as ethical for him to accept campaign contributions from corporate special interest groups and JP Morgan's vice-chairman as it was for him to accept campaign contributions from public interest groups, labor union members or organizations that favor the legalized use of marijuana for medical purposes. Yet in the appendix of his 1992 book, Still The Best Congress Money Can Buy, Philip Stern defined "conflict-of-interest' receipts as "contributions given to, and accepted by, that lawmaker from groups having a particular interest in the decision of the legislative committee on which that lawmaker sits (e.g....gifts by banks and other financial PACs to members of the House Banking Committee)..." Stern also indicated in this same book that the "conflict-of-interest" receipts accepted by Rep. Frank between 1985 and 1990 exceeded $149,000. The chairman of the JP Morgan Chase board of directors' Risk Policy Committee and a member of the JP Morgan Chase corporate board's Public Responsibility Committee, General Dynamics board member James Crown, has also been a heavy campaign contributor to 2008 Democratic Presidential candidate Barack Obama's campaigns since 2003. On June 27, 2003, for example, JP Morgan Chase board member Crown gave a $10,000 campaign contribution to Obama's campaign committee, prior to Obama's 2004 election to the U.S. Senate. Coincidentally, U.S. Senator Obama also supported using U.S. Treasury Department money to help bail out JP Morgan Chase. Other members of the JP Morgan Chase board of directors besides James Crown include Exxon Mobil's retired chairman of the board and former CEO Lee Raymond and Comcast Cable Communications President Stephen Burke. --bob f. Labels: barney frank, Bob Feldman, JP Morgan Chase Another Taxpayer Bailout SwindleWilliam Greider explains in The Nation what happens when we let the foxes guard the henhouse.The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return. Labels: Corporate Swindles, financial crisis bailout, Goldman Sachs, Henry Paulson, The Nation, William Greider U.S. Consumers Shop, DropThe most recent Economic Snapshot from the Economic Policy Institute:American consumers shopped but have now dropped Bad signs for tomorrow's GDP report by L. Josh Bivens | October 29, 2008 For two years, consumer spending has managed to grow even in the face of trillions of dollars of evaporating housing wealth. As consumption spending is 70% of total U.S. gross domestic product (GDP), this resilience kept the overall economy from shrinking. Two recent government reports indicate that the U.S. consumer has finally surrendered, and this augurs badly for tomorrow's Commerce Department report on third-quarter GDP growth.  At the end of September, the Commerce Department reported no pickup in overall consumer spending in August, following a huge decline in July. A rough forecast based on these two months tells an ugly story: consumer spending probably fell by about 2.5% in the third quarter (see chart). If this happened, it will be the largest decline since 1990. (Note 1) Two weeks ago, the Census Bureau reported a large decline in retail sales for September, continuing a downturn that has now lasted an entire year. Retail sales are essentially a subset of overall consumption spending (and are the subset that fluctuate the most, falling more quickly than overall consumption in bad economic times). For the third quarter, inflation-adjusted retail sales fell more than 9%, the largest fall since the Census Bureau began tracking them consistently over time. (Note 2) The bursting of the housing bubble has forced what seemed impossible for so long—outright cutbacks from U.S. consumers. The result of these cutbacks will throw the entire U.S. economy into reverse in coming quarters, and the first sign of this will be tomorrow's GDP report. Notes 1. The September number for overall consumption spending will be released tomorrow. Using the "two-month method" employed here tends to give very accurate results for the overall quarter. 2. Retail sales are deflated using the overall personal consumption expenditures price index. The September value for this index is not yet available, so September prices were assumed to be unchanged from August—a conservative estimate. Further, the 9% decline is the quarter's decline expressed as an annualized rate; this makes it comparable to the overall consumption figures reported above and the overall GDP numbers that will be reported tomorrow. 1992 is the first year that detailed time-series data on retail sales are kept. Labels: consumer debt, consumerism, Economic Policy Institute, financial crisis, housing bubble Banks Spend Cash On Dividends, Not LoansSenator Charles Schumer (D-NY) and others are raising alarm bells at reports that banks are spending more than half of their bailout money on paying dividends to shareholders, rather than lending money to borrowers.According to today's Washington Post
The Treasury Department defends the practice, claiming that otherwise banks would be dissuaded from applying for bailout funds in the first place. For their part, the banks are claiming that the dividends are coming from an entirely different stash of money, presumably the one that they have kept hidden from anyone as they pleaded for government support. Labels: banking system, financial crisis bailout, taxpayer ripoff, Treasury Department Humble Pie Chart This is from a fantastic and hilarious site, Bubblewrapped, that we just discovered. It bills itself as offering "Financial tools, objective analysis and mixed metaphors to help you stay afloat in the crash." Besides Greenspan, this "humble pie chart" mostly skewers journalists from the British business press, including, alas, Anatole Kaletsky (sorry, Larry...). Alan Greenspan Chairman of the US Federal Reserve, 1987-2006; knighted by the Queen in 2002 for his "contribution to global economic stability" Before 2003 "What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so. We think it would be a mistake [to more deeply regulate the contracts]." 2004 "Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." 2007 "I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk … But I believed then, as now, that the benefits of broadened home ownership are worth the risk." "It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade. The worst have failed; investors no longer fund them and are not likely to in the future." After 2008 US Congress hearing, 23 October 2008 REPRESENTATIVE HENRY WAXMAN: [Mr Greenspan, you said:] "I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We've tried regulation. None meaningfully worked." That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made? GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to – to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact. WAXMAN: You found a flaw in the reality … GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? GREENSPAN: That is … precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. Check out the rest of the site. Labels: Alan Greenspan, Anatole Kaletsky, Bubblewrapped, financial crisis, The Fed Singing for Our SalvationThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.One of the reasons Mozart's Requiem is the sublime work it is is that the end of the "Kyrie" (or, "Lord Have Mercy") expresses such a powerful entreaty that it seems that a superhuman mercy will surely take pity on the petitioners. But the "Dies Irae" ("Day of Wrath") immediately following is so savage, and impresses on us the majesty of superhuman justice so effectively that the former is reduced to a pathetic display of pride that should, and must, be punished accordingly. It seems like the global economy is getting to this part of the record. At 12.15 PM Eastern time, US and European equity markets are still in positive territory--only just--despite large gains earlier in the morning. The rally has been powered by the Federal Reserve's .5 % rate cut yesterday, the likelihood that the Bank of Japan will cut by a quarter-point (to .25%), and a flurry of bottom-fishing among investors. The Japanese cut is noteworthy not only because Japanaese rates are already so low: instead, the recent Yen strength that developed out of the unwinding of carry trades (a lot carried out by hedge funds cashing out to fund huge redemptions in other trades) promises to choke off Japan's all-important export sector, and that will, in turn, affect Japanese shares, which will hammer the Japanese banks that hold a lot of the shares, thereby making the banks vulnerable to a global bank crunch that only weeks ago Japan's banks were thought to be immune from (remember the Japanese bank, Mitsubishi UFJ, buying a stake in Morgan Stanley a few weeks ago?). Well, the Fed move and hopes for a Japanese one (done by a Bank of Japan that is as spooked by deflation--it's dealt with nearly 2 decades of it-- as the European Central Bank is by inflation) to follow promised to reverse this unwinding, and investors have responded accordingly. Also, Federal Reserve has teamed up with the IMF to offer swap lines to some important emerging economies. And though this does not, as yet, address the really huge problems in places like Ukraine and Pakistan, which are enduring intense crises, but do not have the dollars to deal with them, it shows global authorities are at least not going to sit back and wait for something really bad to happen before doing something. And that has added to the return of confidence, if you can call it that. Until now. Today, US GDP figures for the third-quarter came in, and there was a decline of .3%. In addition, bad news about pension underfunding of major US companies and a potential $8 billion charge to hospitals as a result of bad derivatives trading has spoiled the party. But the gloom goes further than this. Ultimately, it is another breakout of extreme pessimism that keeps resurfacing and is founded on the thought that despite all the extraordinary measures--and that's putting it mildly--that authorities worldwide, sometimes even, unusually, working in relative concert, have initiated, the blow to corporate profits (especially for US multinationals as long as the dollars remains a haven of saferty) of the slowdown we're facing now, which is characterized by long wage-and savings poor consumers abruptly cut off from all credit and continuing to face high, if levelling prices, will be particularly severe, especially given the wildly optimistic forecasts of profitablility that held only months ago. Not to mention the wave of deleveraging that is sapping the world of capital, and will continue to do so for a while, at an advanced rate. And this already dire situation is only to be exacerbated by the fact that banks will be cutting back lending even more to shore up their books for the end of the year, and the retail sector will be in for a very, very black Christmas. A true double-whammy here. Anatole Kaletsky of The Times had a interesting piece in the paper today, in which he mused over the steps that absolutely need to be taken if really, really serious pain is to be spared the US, and the world. His list of proposals includes: "emergency economic measures, which should be quickly implemented. Such measures could include a six-month moratorium on home foreclosures; a compulsory programme for reducing unsustainable mortgage debts; an urgent review of international monetary relations to protect emerging markets from the financial meltdown; and emergency tax cuts to support consumption, paid for by long-term revenues from a large-scale energy or carbon tax." So far, so good, and, from the point of view of a leftist (unlike the mainstream Kaletsky), a mere beginning. But the politically keen Kaletsky also notes that this stage of the crisis could exert so much of an adverse impact on the economy that the constitutional provisions regarding transfer of power between the incoming Obama (if it's McCain, by some miracle of American stupidity or fraud, we can just forget about it) may make even bold initiatives taken in the first hundred days rather moot in effect. He's hopeful that American politicians will be up to the challenge of speeding up the transition somehow to do something before the nominal transfer of power, something actively involving the presiodent-elect and the incoming administration. I think he's right. But I also believe, rather than sitting around waiting for the politicians, we must get out and agitate, and try like hell to force them, for once, to respond, now, to our concerns. Rather than chanting Kyries under our breath, we need to be chanting slogans, loudly and in unison, on the streets. Now. Labels: Anatole Kaletsky, financial crisis, financial crisis bailout, Larry Peterson Swap Lines Extended To At-Risk CountriesAs we expected (see blog post of October 22nd, "Not a Slow News Day"), the Fed has extended a lifeline facility to a number of pivotal, mainly emerging economies (Brazil, South Korea, Mexico and Singapore), whose currencies have been falling through the floor as a result of mass-repatriations under the impetus of the rush to safety in the US dollar. As usual, Yves Smith was on the ball:Wednesday, October 29, 2008 Fed Establishes New IMF Facility. Dollar Swap Lines with Brazil, South Korea, Mexico, and Singapore ... Today, the Fed provided Brazil, South Korea, Mexico, and Singapore with dollar swap lines of $30 billion each (hat tip readers Robertm, Dwight). From the Fed's press release: Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies. Federal Reserve Actions In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. Read the rest of the post Labels: currencies, Emerging markets, financial crisis bailout, IMF, The Fed Commercial Paper (Max Fraad Wolff)A primer on commercial paper by the wonderful Max Fraad Wolff, special to the D&S website:Financialization's (Latest) Weak Link There may be no better illustration of the staggering pain emanating from financial market turbulence than the carnage experienced recently in commercial paper markets worldwide. Commercial paper (often abbreviated as "CP" in the financial press) is not a synonym for trade journals or advertising-heavy publications of little intellectual value. "Commercial paper" is the term used for short-term loans—for less than 35 weeks— that are made without needing (in the United States) to be registered at the Securities and Exchange Commission (SEC). Companies raise money by selling repayment promises—IOUs—below the full value at the time of repayment. The difference between the price received by firms in the commercial paper market and the amount they pledge to pay is referred to as the "discount." You may find large household name firms selling $1000 repayments in 90 days for between $960 and $980 today. A few months ago, firms were selling $1000 in 90 days for $990 or more. The discount has risen, as money has become hard to get. Most loans are for far less than 270 days, and loans average around one month's duration. Trusted firms with good credit ratings can borrow—nearly at will—for low cost when markets function well. So commercial paper markets allow corporations fast and easy access to cash for operations, near-term expenses, and even payrolls. Consequently, commercial paper markets grew to a size of about $2 trillion, and this market became essential to the basic functioning of many firms—and hence to the whole economy. Read the rest of the article. Labels: credit crisis, financial crisis, Max Fraad Wolff, SEC Movement on the Bailout FrontThis could be pretty big news. From Reuters:Bair says FDIC's powers could extend to insurers Wed Oct 29, 2008 11:34am EDT By Karey Wutkowski WASHINGTON (Reuters) - The Federal Deposit Insurance Corp's powers could be expanded if Congress decides to shift insurance companies from state regulation to federal regulation, FDIC Chairman Sheila Bair said on Wednesday. The FDIC could start providing guarantees for insurance companies, much like it already guarantees the deposits of most U.S. banks, if the insurance industry comes under federal regulation, Bair said. Insurance companies are currently regulated by individual states. "Our authorities would be expanded," Bair said at the annual conference of the International Association of Deposit Insurers. Read the rest of the article Many people know about this already, but remember the pressure on the automakers. They want to get a (subsidized) deal done before the election next week, so an incoming government won't be able to tamper with it. But the deal is so complex it'll be extremely difficult to pull off. Sounds a bit like Bear Stearns, but in the non-financial, real-economy sector. From the Financial Times: GM and Cerberus race to finalise Chrysler deal By Bernard Simon in Toronto, Julie MacIntosh in New York James Politi in Washington, John Reed in London. Tuesday Oct 28 2008 19:20 General Motors (NYSE:GM) and Cerberus Capital Management are racing to finalise a deal for the carmaker to acquire the private equity group's stake in Chrysler before next week's US election. While many motor industry experts question the benefits of a tie-up between Detroit's number one and number three carmakers, they increasingly recognise that the companies have few other options. Both are bleeding cash and in danger of running out of liquidity some time next year as sales fall in their core US market. Read the rest of the article Labels: Cerberus Capital Management, Chrysler, FDIC, financial crisis bailout, GM, Sheila Bair Explaining Yesterday's Mega-RallyMany people may still be a little puzzled by the impressive surge on Wall Street yesterday, despite the clear preopnderance of gloomy news (though taking into account the near-certainty of a big Fed cut today). The answer involves the yen carry trade, about which we posted a couple of items last weekend. Today's Financial Times takes up yesterday's story:Overview: Relief-rally but worldwide uncertainties persist By Dave Shellock in London and Michael Mackenziein New York Tuesday Oct 28 2008 16:30 Global equities staged a big rebound led by Asian and US markets as a sharp fall in the Japanese yen infused bargain-hunting for risky assets and offset grim US economic data. The improvement in investor risk appetite also extended to emerging market assets - which have come under severe pressure lately - as the yen registered sharp declines against its leading rivals amid talk of currency intervention and even a possible rate cut by the Bank of Japan. Ashraf Laidi, chief currency strategist at CMC Markets, said: "Yen-selling intervention would not be successful as long as Japan does not cut interest rates." Read the rest of the article Trying to jumpstart carry trades when a lot of emerging markets are still experiencing exceptional currency volatility is risky. Accordingly, the FT noted a just today: Yen rallies as growth fears return By Peter Garnham Wednesday Oct 29 2008 06:45 The turmoil on global currency markets continued on Wednesday as the yen advanced amid fears over a global economic slowdown. The yen's rally erased some of its losses during a volatile trading session on Tuesday. Maurice Pomery at IDEAGlobal said predicting moves on the currency market was close to impossible amid a lack of liquidity and increasingly volatile price action. Read the rest of the article Right now, Wall Street is pretty much flat. The Fed will cut later in the day, and China has already done so, so there may be a continued upside. But, to quote the latter article again, from Maurice Pomery, "Expect the unexpected and we see wild swings through this week continuing," Labels: currencies, Emerging markets, financial crisis, Financial Times, stock markets, The Fed Was Wall Street's Banking Crisis Predictable?This is from former D&S collective member Bob Feldman:If you check out back issues of D&S and books like The Trouble With Capitalism: An Enquiry Into The Causes of Global Economic Failure by Henry Shutt, Origins of the Crash by Roger Lowenstein and American Theocracy by Kevin Phillips, you can see that Wall Street's banking crisis and crash of 2008 was a predictable one. Of course Clinton Administration Treasury Secretary, Robert Rubin (who's apparently been advising the 2008 Democratic Party presidential candidate on how to solve the current crisis), played a big role in pushing for more U.S. banking industry deregulation in the 1990s. As Roger Lowenstein observed in his 2004 book, Origins of the Crash: "In the spring of 1998, when...the Commodity Futures Trading Commission proposed a study...to revisit the question of whether to regulate derivatives, Greenspan, along with Rubin, quashed the idea... Coincidentally, under the recent bipartisan corporate welfare bailout plan that both the Republican and the Democratic presidential candidates endorsed, $25 billion of U.S. Treasury tax dollars is to be invested in Citicorp stock. And, coincidentally, the fourth-largest source of 2008 campaign contributions ($499,598) for even the Democratic Obama presidential campaign came from executives of Rubin's failing Citicorp firm. Labels: Bob Feldman, financial crisis, Henry Shutt, Kevin Phillips, Robert Rubin, Roger Lowenstein A Financial Meltdown 30 Years in the MakingThis is from the fantastic Labor Notes:By Mark Brenner They break it, and we're stuck with the bill. In less than two weeks Congress lined up $700 billion to bail out the nation's bankers, leaving millions of homeowners on the sidelines, facing foreclosure, bankruptcy, or both. Somehow the argument that "it may seem unfair, but it was necessary" just doesn't cut it. It’s no wonder that the most popular sign at labor's September 25 protest on Wall Street said "Bailout = Bullsh*t." For union members, it sounds all too familiar. Management's perennial argument for concessions—take the cuts or say goodbye to your job—hasn't exactly saved U.S. manufacturing, whether in the 1980s or today. In past recessions, it's been each union for itself, and the companies always came out ahead. Corporations are already using the deep hole they've dug for themselves to demand even more from workers. Teamsters at the Minneapolis Star Tribune bucked the trend, refusing mid-contract concessions on September 10 and prompting newspaper executives to suspend a $9 million payment to their creditors. "The company is asking us to slash our own throats to save their profits," said Kevin Bialon, a 27-year pressman who served on the bargaining committee. "Management made the mistakes and they want workers to pay for it." Read the rest of the article. Labels: bailout, financial crisis, Labor Notes, Mark Brenner Closures & Layoffs (Oct. 19-25)Hat-tip to Bob Feldman for letting us know about the excellent regular updates on layoffs and closures from Mark Heschmeyer of Co-Star Group. We hope to link to this every week, starting this week.Closures & Layoffs (Oct. 19-25): Canning Plants: We're Not Talkin' Vegetables A Weekly Report on Future Corporate Downsizings In this week's issue: * Pepsico to can six plants. * Tesla Motors is pulling the plug in Michigan. * Lear to cut costs through next year. * Plus we report on company closures and layoffs in: Alabama, Connecticut, Iowa, Maryland, Michigan, New Jersey, Ohio, Virginia, Washington and Wisconsin, which includes BuildersFirst exiting New Jersey. Read the whole report. Labels: closures and layoffs, co-star group, Mark Heschmeyer, recession Something Has To GiveThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Last week global markets sold off big-time on Friday, and observers of the financial scene were puzzled due to the fact that no specific event seemed to set off such panic. Today, on the contrary, as of one PM Eastern time, stocks remain in positive terrritory, despite huge gyrations in the US, UK and Europe. And this in spite of these headlines, which I've just taken off Reuters: Consumers gloomiest ever as home prices plunge Iceland hikes rates massively W.House: Autos may be eligible for rescue package Emerging Europe scrambles to contain crisis threat OPEC officials say ready to act again to boost oil Industry bailouts risk unfair trade challenge And though shares are being boosted by a long-awaited stretch of bargain hunting (fuelled also by the certainty of a one-half percentage point interest rate cut by the Fed this week) the bad news does not end there. Trade expert Dani Rodrick published this salutary thought on his website on 26 October: "I have a feeling that this will be the make-it-or-break-it week for emerging markets. I hope the IMF will make an announcement in time to make a difference." Let's hope (against hope?) the news settles down a little before then. Or maybe not? Labels: Dani Rodrick, financial crisis, financial crisis bailout, Larry Peterson Bank of England Doubles Bailout EstimateApologies for the error in the first sentence (they had a US dollar figure in the original article, which is contradicted by the title). From The Independent:BoE warns credit crisis losses could hit 2.8trn Pounds By Sean O'Grady, Economics Editor Tuesday, 28 October 2008 Global bank losses as a result of write-offs on mortgage-backed and other badly devalued securities will spiral to $2.8 trillion before the credit crunch is over, according to the latest estimates produced by the Bank of England. The figure is around double the Bank's previous estimates and calculations by the IMF. It suggests that, while the recent injections of bank capital by governments may help stabilise the financial system, it is far from fully over the ravages of the credit crisis. The Bank says that the losses for the UK's banks will run to 122.6bn pounds, against a forecast of 62.7bn pounds made in April. For the US and the euro area, it gives figures of $1,577.3bn (was $738.8bn) and 784.6bn (previously 344.1bn euros) respectively. Read the rest of the article Labels: Bank of England, financial crisis bailout, The Independent Letters of Credit and Trade Finance FreezeFrom Naked Capitalism, another excellent, sobering post. Gives you an idea of the increasingly all-embracing extent of the crisis:Confirmation of the Role of Financing Difficulties in Collapsing Trade Volumes One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released). Some readers scoffed at the idea that a fundamental element of trade could be breaking down and yet attract more notice; a few argued that the L/Cs were being used as an excuse for buyers to break commodities deals struck when prices were higher. However, as has been discussed in gruesome detail, banks are reluctant to take credit exposures to other banks on the most plain vanilla. short term exposures, namely interbank lending. It has been a struggle for central banks to get banks to lend to each other for longer than overnight. Trade financing is a backwater, operationally intensive, low profit area that simply does not register on senior managements' or regulators' radars. And problems in this area would have virtually no impact on banks, so even acute problems here would simply not register, particularly in comparison to all the other fires that central banks are struggling to smother. Read the rest of the post Labels: Baltic Dry Goods Index, financial crisis, letters of credit, Naked Capitalism, Trade, Yves Smith The Alchemy of FinanceA truly wacky story, from today's Financial Times:VW vies for title of world's biggest company By Richard Milne in London Published: October 28 2008 09:34 | Last updated: October 28 2008 11:02 Volkswagen briefly became the world's largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to 150bn euros. Shares in Europe's largest carmaker soared as high as 1,005 euros in early trading, having closed at about 210 euros on Friday. That gave it a market capitalisation of around 296bn euros ($369bn), higher than that of ExxonMobil, the oil company that closed on Monday with a value of $343bn. Read the rest of the article Labels: financial crisis, hedge funds, Porsche, Volkswagen Dumb (Ideology) and Dumber (Modelling)Fine piece by the Financial Times' exceptional Gillian Tett:Insight: Volatility returns with a vengeance By Gillian Tett Monday Oct 27 2008 11:25 A couple of years ago - or before banks started to go bust - economists sometimes liked to talk about a phenomenon they christened The Great Moderation. This was the idea that the 21st-century financial system and global economy had become so stable and sophisticated that dramatic swings in activity had seemingly disappeared. Volatility, in other words, was supposed to be an issue of the past. These days a new phrase is needed to describe these Not-So-Moderate-After-All times (the Great Panic, perhaps?). On Friday, the Chicago Board Options Exchange Volatility Index, the Vix, rocketed 32.1 per cent to 89.53, as equity markets suffered another dramatic sell-off. The gyrations of the yen, euro, sterling and dollar have also been wild, pushing levels of currency volatility to heights barely seen in decades. Read the rest of the article Labels: financial crisis, Gillian Tett Asia and the Meltdown of American FinanceFrom the fine MRZine site, Japan scholar R. Taggart Murphy provides a breezy, accessible discussion of some important history:Asia and the Meltdown of American Finance by R. Taggart Murphy The boardrooms and finance ministries of Seoul, Bangkok, Jakarta, and Kuala Lumpur are today filled with a fair degree of schadenfreude at America's troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as "unanticipated delight in the sufferings of another." But asking Asia's business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear. The spectacle of the politicians, pundits, and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. Particularly since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian Financial Crisis were being pooh-poohed for their "crony capitalism," "opaque" banking systems, "incestuous" government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators. But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked. But because the crisis could conceivably force Asia's elites to engage in the open political discussions they have largely avoided until now -- discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks. Read the rest of this post Labels: Bretton Woods agreement, currencies, financial crisis, Monthly Review, R. Taggart Murphy Related Post on Fed Balance SheetFrom Brad Setser:One easy thing China could do to help stabilize global markets: buy Agencies! Posted on Saturday, October 25th, 2008 by bsetser There is constant talk -- too much, in my view -- about whether sovereign funds will come to the rescue of western financial institutions. Qatar did put a large sum of money into Credit Suisse recently, but in general the Gulf funds are reeling from large losses on their existing portfolio even as they are facing increased domestic demands (see Mufson and Pan of the Washington Post and Steven Johnson of Reuters) . "Rescuing*" US banks but not your own countries' markets -- and our own countries financial institutions -- is hard. And some Gulf countries' ability to carry out their ambitious local development plans will hinge on the availability of financing from their sovereign funds is oil stays at its current levels. China is still cash rich. But the CIC has yet to prove that it can manage a $100 billion balance sheet (its "frozen" investment in the Reserve Primary Fund is the latest case in point) let alone manage a US or European financial institution with a far larger balance sheet. Moreover, it would seem a bit bizarre -- at least to me --for the US taxpayer to guarantee the liabilities (and thus be on the hook for most future losses) of an institution that is effectively owned by China's government. As Uwe Reinhardt notes, US taxpayers are already on the hook for most of the downside -- and handing over both the upside and control to another country's government (typically a non-democratic government) hardly achieves the goal of keeping major financial institutions in private hands. Read the rest of the post Labels: currencies, Fannie Mae, Fredddie Mac, People's Bank of China, The Fed Fed Balance Sheet and InflationGood piece on Econobrowser --thank you, Yves Smith--on how the Fed is trying to square what is, to many people, an apparent circle. May be tough going for some, but it's worth itOctober 25, 2008 The Federal Reserve's balance sheet On Thursday, the Federal Reserve issued its weekly H.4.1 report, which provides details of the Fed's balance sheet. Once upon a time, this was one of the least interesting of the government's many releases of data. These days, it's become one of the most exciting. The essence of the Fed's balance sheet used to be quite simple. The Fed's primary operations would consist of either buying outstanding Treasury securities or issuing loans to banks through its discount window. It paid for these transactions by creating credits in accounts that banks hold with the Federal Reserve, known as reserve deposits. Banks can turn those reserves into green cash any time they desire, so the process is sometimes loosely summarized as saying that the Fed pays for the Treasury bills it buys or loans it extends by "printing money". Before the excitement began, the Fed's assets consisted primarily of the Treasury securities it had acquired over time (about $800 billion as of August 2007) plus its discount loans (an insignificant number at that time). Its liabilities consisted primarily of cash held by the public (about $800 billion a year ago) plus the reserve deposits held by banks (which again used to be a very small number). Bernanke's overriding goal since then has been to extend a huge volume of short-term loans to financial institutions. If he'd done that in the usual way, just creating new reserve deposits with each new loan, the supply of cash would have ballooned, bringing worries of inflation. The Fed didn't want to do that, and in fact there was no shortage of funds available for overnight interbank lending. The fed funds rate, an average overnight lending rate between banks, is already quite low, and further reductions seem unlikely to accomplish much. But longer term interbank lending rates remain quite high relative to the overnight rate. Bernanke's first approach to this challenge was to "sterilize" the new loans from the Fed... Read the rest of the post Labels: banking system, Ben Bernanke, financial crisis bailout, The Fed Safe Haven Musical Chairs......in a room with no furniture (or roof)?This is going to really complicate attempts to stop the bloodletting. From Marketwatch LONDON (MarketWatch) -- The U.S. dollar surged against the euro and the British pound Monday, but lost ground against ever-resilient Japanese currency as safe-haven flows trumped a G7 warning over "excessive" yen volatility. "Fear continues to grip global markets and traders are piling into whatever safe havens they can find," said James Hughes, analyst at CMC Markets. The dollar slipped to 93.30 yen in recent trade after touching a low of 92.02 earlier in the day. That's down from 94.18 late Friday. The dollar fell as low as 90.90 yen on Friday, the yen's strongest level versus the dollar since August 1995. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 said in a joint statement issued Monday morning. "We continue to monitor markets closely, and cooperate as appropriate," they said. Strategists said the statement shows high potential for coordinated intervention aimed at arresting the yen's strong rise. Meanwhile, the dollar lost ground against the Swiss franc, a traditional safe-haven, to change hands at 1.1590 francs, a loss of 0.7%. The dollar, however, has enjoyed safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments. Labels: currencies, financial crisis Here We Go AgainFrom today's International Herald TribuneStocks hammered again in Europe and Asia By David Jolly and Bettina Wassener Monday, October 27, 2008 PARIS: Stock markets shuddered Monday in Europe and Asia, with Japanese stocks falling to their lowest level since 1982, as the sell-off that has erased more than 51 percent of the value of global equities this year showed no signs of abating. Currency market traders were keeping nervous watch for central bank intervention, after Group of 7 finance and monetary officials expressed noted concern about the strength of the yen. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 statement said. "We continue to monitor markets closely, and cooperate as appropriate." Bilal Hafeez, global head of currency strategy at Deutsche Bank in London, said any intervention would probably take the form of central banks selling yen and buying dollars and euros. "The yen is the real standout currency at the moment," Hafeez said, "and that's what the authorities want to address." In early trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 5.9 percent, while the FTSE 100 index in London fell 5.4 percent. The CAC 40 in Paris fell 5.9 percent, and the DAX in Frankfurt fell 4.7 percent. Trading in U.S. index futures suggested Wall Street stocks would fall about 4 percent at the start of trading in New York. Read the rest of the article Labels: financial crisis Desperate MeasuresFT.com on what it refers to as "dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector."Goldman chief sought tie-up talks with Citi By Henny Sender in Tokyo and Francesco Guerrera in New York Sunday Oct 26 2008 17:35 Lloyd Blankfein, Goldman Sachs' chief executive, called Vikram Pandit, his Citigroup (NYSE:C) counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector. The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events. They added that the conversation was brief as Mr Pandit rejected the proposal at once. Read the rest of the article Labels: Citibank, financial crisis, financial crisis bailout, Goldman Sachs Good Basic Article on Leverage and the CrisisFrom James Saft of Reuters:October 24th, 2008 Distortion is the new normal for markets Posted by: James Saft Tags: Uncategorized, Credit crisis (James Saft is a Reuters columnist. The opinions expressed are his own.) LONDON (Reuters) - The evaporation of borrowed money has fundamentally changed the way markets function, and what look like crazy anomalies may end up being closer to the new reality. Across financial markets, especially in fixed income, strange things are happening. Take two examples: The U.S. government takes Fannie Mae and Freddie Mac into conservatorship, essentially guaranteeing their debts. Investors first narrow the premium they demand to lend to the two mortgage giants, then stage a strike and send these premiums to all-time highs. Treasury inflation-protected securities (TIPs) hugely underperform standard Treasuries, and are factoring in precious little inflation in comparison to market expectations. And while fundamental explanations and official policy errors may explain some such moves, they probably don't account for all of them. The common denominator is the rapid disappearance from the market of leverage, money borrowed by investors to magnify what they can buy. Read the rest of the article Labels: financial crisis, financial crisis bailout, leverage Crisis Focus Turn: To Currencies, and EuropeYves Smith posted yet another absolutely essential entry on how the focus on the crisis is rapidly turning to currencies, and on what some of the responses might be as the crisis becomes acute. Reuters indicates S&P futures are trading up in early Monday Asian trading. From the post:Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become "the second epicentre of the global financial crisis", this time unfolding in Europe rather than America. ... Yves again. Now the meltdown may resume Monday, but another scenario may play out. Recall 40 nations (EU and Asian) met in Beijing over the weekend, endorsing Nicolas Sarkozy's call for a revamping of international banking regulations and more coordinated, tougher supervision. None of this directly addresses the looming currency crisis, but the markets sold off badly Friday, and if there is any stabilization or reversion on Monday, the backing away from the abyss plus the hope that the next phase of meetings, scheduled for November 15 in Washington DC, might ameliorate the situation, may put the currency crisis in abeyance for a couple of weeks. ... In this fraught environment, for China visibly (and the key is visibly) to start buying other currencies would have a disproportionate effect on psychology (and be rewarding to China, since it would profit from the rally it helped engineer). That might stem the panicked capital flight, and while it is probably insufficient to restore real stability, it could keep a necessary (and painful) revauluation/readjustment process from morphing into a rout. Read the post Labels: currencies, financial crisis, Yves Smith View from UK: US Joins UK on Recession BrinkI don't know which specific government figures the authors are referring to.From today's Observer: America joins UK on brink of recession Fed expected to lower interest rates to 1 per cent Heather Stewart and Richard Wachman The Observer, Sunday October 26 2008 Federal reserve chairman Ben Bernanke is poised to slash American interest rates to just 1 per cent this week, the lowest level since the depths of the dotcom crash, as government figures reveal the US has joined Britain on the cusp of recession. World investors were focused on Britain last week after Bank of England governor Mervyn King and Prime Minister Gordon Brown confirmed recession was looming, and it emerged that the economy had shrunk by a worse-than-expected 0.5 per cent in the third quarter of the year. But all eyes will now turn to the US, as the Fed meets to set borrowing costs and government figures reveal the full scale of the deterioration in the economy over the past three months. Read the rest of the article Labels: Ben Bernanke, financial crisis, The Observer, US economy Wall Street and the Return of the RepressedFrom TomDispatch.com; hat-tip to Claire for this one.The Specter of Wall Street Wall Street's Comeback as the Place Americans Love to Hate By Steve Fraser Wall Street sits at the eye of a political hurricane. Its enemies converge from every point on the compass. What a stunning turn of events. For well more than half a century Wall Street has enjoyed a remarkable political immunity, but matters were not always like that. Now, with history marching forward in seven league boots, we are about to revisit a time when the Street functioned as the country's lightning rod, attracting its deepest animosities and most passionate desires for economic justice and democracy. For the better part of a century, from the 1870s through the tumultuous years of the Great Depression and the New Deal, the specter of Wall Street haunted the popular political imagination. For Populists it was the "Great Satan," its stranglehold over the country's credit system being held responsible for driving the family farmer to the edge of extinction and beyond. Read the rest of the article. Labels: bailout, financial crisis, Steve Fraser, TomDispatch.com, Wall Street Bailedout Cash for Acquisition, Not LoansJoe Nocera, New York Times business columnist, has a particularly interesting piece today. We all suspect that the money being injected by the Treasury Department in order to recapitalize banks is more likely to fund acquisitions than to ease the credit crisis by getting banks to lend again. In fact, we suspect that was part of the plan all along--to encourage (further) consolidation in the banking industry. Nocera helps confirm these suspicions, first by pointing us to the fine print in the bailout bill, which gives a tax break to banks that acquire other banks:In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, "the government wants not only to stabilize the industry, but also to reshape it." Now they tell us. Nocera also managed to listen in on an employee-only phone conference over at JPMorgan-Chase, in which an executive tipped his hand on how the $25 billion injection the bank just took might be used. When someone asked the obvious question: "Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?", here's how the executive responded: "Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase," he began. "What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop." Joe the journalist observes: Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American ec |
