Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The German QuestionAn interesting take on a conundrum all-too-rarely faced in discussions of the crisis: how to revive demand without pumping up the kind of credit excess that will almost certainly lead to another crisis. Bertrand Benoit, the Berlin correspondent for the Financial Times, writes that this issue has turned into a big point of contention between Germany's (and hence, to a not inconsiderable degree, the entire Eurozone) policymakers and Anglo (US, UK, etc) ones.Why the Germans just hate to spend, spend, spend By Bertrand Benoit Published: November 28 2008 19:24 | Last updated: November 28 2008 19:24 To the German radio presenter, the real news about the measures announced by Washington on Tuesday to jolt banks into lending again was not so much the astronomical costs, but a little-noticed comment in Hank Paulson's statement. "Millions of Americans," croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, "making it more expensive for families to finance everyday purchases". The notion that families should finance everyday purchases on credit, the anchor commented, "suggests Washington has still to understand what brought us there in the first place". Read the rest of the article Labels: Angela Merkel, bailout, Bertand Benoit, financial crisis, Financial Times, Germany, Henry Paulson The Other Crisis: More Bad NewsFrom The Independent. Main point: "Their findings--which contradict a widespread belief that the atmosphere would recover quickly once humanity stopped polluting it..."Greenhouse gases will heat up planet 'for ever' New study shows the effects of CO2 pollution will be felt for hundreds of thousands of years By Geoffrey Lean, Environment Editor Sunday, 30 November 2008 Global warming is for ever, some of the world's top climate scientists have concluded. Their research shows that carbon dioxide emitted from today's homes, cars and factories will continue to heat up the planet for hundreds of thousands of years. Their findings--which contradict a widespread belief that the atmosphere would recover quickly once humanity stopped polluting it--come at the beginning of the most crucial week for the climate this year. Tomorrow Britain's powerful Climate Change Committee will lay out a road map to put the country on track to slash its greenhouse gas emissions by 80 per cent by 2050. At the same time, the world's governments will meet in Poznan, in Poland, to try to set the world on the path to agreeing a new international treaty next year, billed as the last chance to keep global warming to tolerable levels. Read the rest of the article Labels: climate change, Geoffrey Lean, The Independent Commercial Loans: Another Soft Spot?Note the threat to JP Morgan Chase. By Henny Sender, in FT Weekend (via The Penninsula):Economy bears brunt of the biggest banks' miscalculations Web posted at: 11/29/2008 1:14:57 FINANCIAL TIMES By Henny Sender Economic forecasts are being revised down with each new data point. On Wednesday, durable goods orders became the latest harbinger of gloom--down more than 6 percent last month. Most economists believe there is worse to come. "We are not even in the eye of the storm yet," says David Rosenberg, chief economist of Merrill Lynch. That means there has to be far worse to come for the banks, which inescapably mirror the economy. So far, it is banks like Citigroup that have been hardest hit. That's because this recession has been led by cash strapped homeowners and consumers. But as the downturn continues, the next phase will hit corporate America as demand for products dries up and cash flows diminish. That in turn means banks that have so far been relatively less vulnerable to the slowdown may well falter. "As the credit crisis ripples through the real economy, perceptions about strength and risk management will change," says Charles Peabody of Portales Partners, a research boutique. Peabody predicts that losses from commercial loans can increase up to six-fold. He says he is especially concerned about JPMorgan Chase, so far the symbol of prudence. JPMorgan has a far bigger book of corporate loans than Citi, far bigger exposure to the commercial real estate market and it is at continuing risk from its exposure to leveraged buy-out deals. Indeed, according to the calculations of Peabody, those exposures amount to some $288bn. Read the rest of the article Labels: bailout, Commercial banks, financial crisis, Financial Times, Henny Sender, JP Morgan Chase Hedge Funds: All You Need To KnowA fine basic history and survey of hedge funds, including a disturbing concluding outlook. From Donald MacKenzie in the London Review of Books:LRB 4 December 2008 An Address in Mayfair Donald MacKenzie on Hedge Funds You could walk around Mayfair all day and not notice them. Hedge funds don't--can't --advertise. The most you'll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you're serious, and have the money and confidence to pay the world's most expensive commercial rents. A nondescript office no larger than a small flat can cost 150,000 pounds a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It's fortunate therefore that hedge funds don't need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer. These small organisations control substantial amounts of capital. If a hedge fund manages less than $100 million it isn't seen as a big player; $1 billion is quite commonplace. The capital managed by the world's ten thousand or so funds amounts to around $2000 billion. (Hedge funds don't have to divulge the details of their finances and operations, so no one knows the exact numbers.) About a fifth of this money is managed by funds based in London, and two fifths by those based in the US, mostly in New York and its upmarket suburbs, especially Greenwich, Connecticut. Read the rest of the article Labels: bailout, Donald MacKenzie, financial crisis, hedge funds, London Review of Books Michael Perleman's Thanksgiving RantCute piece, especially for a rant. From his Unsettling Economics siteMatter and Antimatter: How to Create a Crisis: A Thanksgiving Rant Posted November 27, 2008 Filed under: economics Skilled physicists do not know how to take nothing and turn it into matter and antimatter, but finance behaves as if it had the capacity to do something similar. Imagine a simple market economy about to create a bubble. I want to tell the story of this bubble, only to put the current, crazy stimulus package into perspective. Somebody says to me they have a piece of paper worth $1 million. I can buy for half the price. I borrow the money to cover most of the cost. People are willing to lend me the money confident in the belief that my paper will increase in value. Other people are engaging in the same transaction, spreading confidence that these papers are now increasing in value, say to $600,000. The seller of the paper now has a half-million dollars, having given up nothing but blank piece of paper. I have a capital gain of hundred thousand dollars. My lenders have a credit with a half-million dollars. We are all better off, even though nothing has been produced. Feeling secure in the increasing value of our paper, I along with the other "investors" now start consuming more, spreading prosperity for the economy. Virtually everybody is enjoying the benefit of the bubble. Within a short period of time, people throughout the economy making decisions based on the increasing appearance of health and the economy. At some point, people realize that this paper is nothing more than a blank sheet of writing paper. The bubble may have stimulated some investment that is capable of producing real economic benefits, but mostly it has induced people to consume and commit themselves to pay back debts. Remember, this prosperity was built out of nothing. In the end, matter and antimatter collided. The lenders have lost their money. The speculators and consumers are in debt. Most lack the wherewithal to repay their debts. But in the case of the current bubble, the economy does not have the productive capacity to put everything together. The loans came from abroad and so did many consumer goods. At the same time, the government loans are ultimately dependent on another set of loans, also largely from abroad. How will these loans ever be repaid? Will new loans keep coming as the bubble engulfs the rest of the world? Should the government come in and give me a half-million dollars so that I can repay my loan? Should I be rewarded for my stupidity and naivete? Will that policy really make the economy healthy? Or will it policy just facilitate the creation of even greater bubbles? Obviously, the most sensible decision would be to put the money into making a more healthy economy, one less susceptible to speculation--something impossible under capitalism, but that is another question. Eventually, somebody will have to pay the piper. The policy today seems to be an effort to shield the very people who created the crisis, placing the burden on the most innocent. The graphic picture of the stimulus package that I posted yesterday suggests a government response just as foolish as the speculations that set off the bubble in the first place. Happy Thanksgiving. Labels: bailout, derivatives, financial crisis, Michael Perleman Interesting Piece on MobilityFrom the December issue of Britain's Prospect magazine. A pretty good, easy-to-read treatment of some of the complications of measuring mobility over long periods involving much political, economic and demographic change.More mobile than we think December 2008 | 153 Essays Britain has more upward social mobility than is often assumed--on some measures more than Germany. But there is least movement where it matters most for the idea of meritocracy, at the very top and the bottom. Can Gordon Brown help out? David Goodhart America has elected not just a black president but a leader who is the son of a single mother who was, at least briefly, dependent on food stamps. It couldn't happen here, says the political and media consensus in Britain which alleges that social mobility ground to a halt sometime in the 1980s, after a brief golden age in the 1950s and 1960s. Not everyone agrees with that consensus. "There really has been a lot of nonsense talked about the death of mobility," says the eminent sociologist John Goldthorpe. He is himself a beneficiary of social mobility, having been born 73 years ago in south Yorkshire, the son of a colliery clerk. He rose via Wath on Dearne grammar school (attended 25 years later, then a comprehensive, by William Hague) to University College, London. As a young sociologist he wrote a famous study of affluent workers in Luton and went on to become one of the world's most respected academic analysts of social mobility. One of the people who is most responsible for the "death of mobility" consensus is the businessman Peter Lampl. By chance, like Goldthorpe, Lampl spent some of his early years in the Yorkshire coalfield--the son of an immigrant Czech mining engineer. When his father moved south to the National Coal Board office in London, Lampl went to Reigate grammar school and thence on to Oxford and business success in America. When he returned in the 1990s, Lampl was horrified to find fewer bright children from state schools going to Oxbridge than had been the case in the 1960s and 1970s and set up the Sutton Trust to try to do something about it. Read the rest of the article Labels: Class, David Goodhart, Moblility, Prospect Magazine More on the Fed's Balance SheetFrom Credit Writedowns via Yves Smith at Naked Capitalism:If the Fed were a commercial bank, it might be declared insolvent Recently, I have written quite a few posts highlighting the U.S. Federal Reserve's ballooning balance sheet. It has increased purchases of assets at an unprecedented clip. In fact, that balance sheet had $900 billion in assets just this past year. By year's end, we should expect it to have risen more than three-fold to $3 trillion. This is a wild experiment without parallel in modern history. But, there is a cost to all of this. One cost, hidden behind much of the chatter about bailouts, loans to lending institutions, and debt guarantees, is the damage to the Fed's balance sheet. If the Federal Reserve were a commercial bank, any regulator would declare the institution insolvent due to inadequate capital and shut it down. The Federal Reserve now has leverage of over fifty times capital and this figure is expected to rise. The Fed needs $48 billion in capital just to get back to the capital ratios it had last year. How this experiment ends is anybody's guess. However, below is an article in this week's Barron's pointing out how extreme things at the Federal Reserve have become. Notice the sharp reduction in U.S. treasuries and the huge increase in securities lent to dealers and overall assets. Very worrying. Read the rest of the post Labels: bailout, Federal Reserve, financial crisis He's Making a List, and Checking It TwiceNot Santa (yet), but New Labour's loathsome Peter (now Lord) Mandelson. The idea of Lord M. being turned into some sort of industrial Dr. Mengele is not a salubrious thought. He's also saying some pretty stupid things, like "Internationally people say to me your prime minister has been transformed. His standing has soared. People really do look to him like some Moses figure who is going to lead them away from this economic mess to the promised land..." From today's Guardian:Mandelson plans list of firms to save from bankruptcy Patrick Wintour, political editor guardian.co.uk, Saturday November 29 2008 00.01 GMT Lord Mandelson is drawing up plans to choose which businesses and industries are important enough to be saved in the event of their going bankrupt as the recession bites, the Guardian can reveal. In his first newspaper interview since returning to the cabinet, the business secretary said he planned a more interventionist policy for industry. Company data such as the number of employees, the importance of the firm's research and development and its performance were likely to be factors in deciding which businesses should be given government aid. Read the rest of the article Labels: bailout, financial crisis, Peter Mandelson Weaponizing Credit Default SwapsAnother lovely investment strategy for tough times. From Friday's Financial Times:Speculators are being armed by banks to hurt Main St By Mark Sunshine Published: November 28 2008 02:00 | Last updated: November 28 2008 02:00 Warren Buffett called credit default swaps "financial weapons of mass destruction" and they are about to annihilate Main Street. In a disturbing new trend, international banks are creating syndicated credit facilities that "weaponise" credit default swaps (CDS) by using the trading price of a borrower's CDS to set the interest rate paid by the borrower. Unfortunately, banks don't understand that they are arming speculators to ambush and kill unsuspecting and otherwise healthy companies. Regulators are oblivious to this danger as are the victims. CDS are unregulated derivative instruments that are essentially a bet on the creditworthiness of a company. CDS are traded in an unregulated, opaque over-the-counter market, where prices have questionable value and can be easily manipulated and misrepresented. Recently, it was reported that banks have started tying commercial loan interest rates to the price of a borrower's CDS. This seemingly innocuous loan provision allows speculators to bet that a borrower's stock price will go down while insuring that the bet pays off by manipulating the borrower's CDS prices upward. Read the rest of the article Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Financial Times, Mark Sunshine Bank of America Next?Found this Reuters link on LBO Talk:After Citi, is Bank of America next? Mon Nov 24, 2008 6:52pm EST By Elinor Comlay NEW YORK (Reuters) A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers. Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression. The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage. If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels. Read the rest of the article Labels: bailout, Bank of America, Citibank, Countrywide, financial crisis Crowds trample Wal-Mart workerThis story is beyond words.NEW YORK -- A Wal-Mart worker was killed Friday when "out-of-control" shoppers desperate for bargains broke down the doors at a 5 a.m. sale. Other workers were trampled as they tried to rescue the man, and customers shouted angrily and kept shopping when store officials said they were closing because of the death, police and witnesses said. Labels: consumerism, Wal Mart Geithner & Kissinger Associates--pt. 2From Bob Feldman:Treasury Secretary Designate Geithner's Kissinger Associates Connection--Part 2 Between 1986 and 1989, U.S. Treasury Secretary-Designate Timothy Geithner was employed at Henry Kissinger, Brent Scowcroft and Lawrence Eagleburger's Kissinger Associates influence-peddling firm, which also employed George W. Bush's former special envoy to Iraq, L. Paul Bremer, during the early 1990s. Commerce Secretary-Designate Bill Richardson also is a former employee of Kissinger Associates. Among the political influence-peddling firms in the United States, "Mr. Kissinger and his associates are by all accounts the most successful of this new breed of former senior Government officials," according to the April 20, 1986 New York Times Magazine article, titled "Kissinger Means Business: Corporate America is eagerly seeking Henry Kissinger's insight and celebrity." The "Kissinger Means Business" article also implied that the motive of these former and current senior Government officials for moving back-and-forth between U.S. foreign policy-determination roles and private influence-peddling position was generally a mercenary one, asserting that "many of these former Government leaders asked themselves, why not capitalize on our stardom, international contacts and insider knowledge to make large incomes on our own." In 1986, U.S. Treasury Secretary-Designate Geithner's former colleagues at Kissinger Associates—Kissinger, Scowcroft and Eagleburger—peddled their special influence to 25 to 30 corporate clients in exchange for payments from their clients that totaled $5 million in Kissinger Associates gross income. Each political influence-purchaser paid Geithner's former employer between $150,000 and $420,000 per years for its services because, as former New York Times national security correspondent Leslie Gelb observed in 1986: "The super-star international consultants were certainly people who would get their telephone calls returned from high American Government officials and who would also be able to get executives in to see foreign leaders." When I telephoned the Kissinger Associates office in Manhattan in early 1991 to ask who some of its clients were at that time, a spokesperson for Kissinger Associates replied: "That's all confidential." The April 20, 1986 New York Times Magazine article indicated, however, that besides the Kuwaiti government-owned Midland Bank of Britain, the Kissinger Associates client list--at the time Treasury Secretary-Designate Geithner was employed by Kissinger Associates--included H.J. Heinz, American Express/Shearson Lehman, Fiat, Volvo, ASEA, L.M. Ericsson of Sweden, Montedison of Italy, the International Energy Corporation, Atlantic Richfield/ARCO and the Fluor Corporation. Although Henry Kissinger was the sole owner of Kissinger Associates when Geithner was employed by his firm, former National Security Affairs Adviser Brent Scowcroft and former Deputy Secretary of State Lawrence Eagleburger each received hefty salaries when they worked as Kissinger's partners in influence-peddling, prior to assuming their influential posts in the Bush I Administration in 1989. To further attract foreign government-owned corporations like Midland Bank of Britain as influence-purchasing clients, Kissinger Associates also established a board of directors that included the following international corporate establishment figures around the time that Treasury Secretary-Designate Geithner was employed by Kissinger Associates: former U.S. Treasury Secretary William Simon; former Citibank Chairman of the Board Edward Palmer; former U.S. Under-Secretary of State William D. Rogers; then-S.F. Warburg Chairman Lord Roll; then-Atlantic Richfield/ARCO Chairman Robert O. Anderson; then-Volvo Chief Executive Office Pehr Gyllenhammar and former Japanese government foreign minister Saburo Okita. (end of part 2) --bf Labels: Bob Feldman, Kissinger Associates, Timothy Geither, Treasury Department This Just In...From (I haven't seen this story reproduced elsewhere yet, even in the British press. This is strange, considering it's 8.00 pm in the UK as I post) the International Herald Tribune:U.K. takes over Royal Bank of Scotland By Julia Werdigier International Herald Tribune Friday, November 28, 2008 LONDON: The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector. Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS. The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about 20 billion pounds, or $31 billion. The investment leaves taxpayers already with a paper loss of more than $3 billion, based on the closing share price Thursday. RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis. Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown. But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued. Read the rest of the article Labels: bailout, financial crisis, HBOS, International Herald Tribune, Lloyd's TSB, Royal Bank of Scotland 3 Links on Global DemandReviving demand in the face of unprecedented deleveraging on the part of consumers and corporations (leaving governments--many already indebted to an at least problematic degree) worldwide was always going to be tough. These articles pinpoint in numerous ways exactly how difficult the process will be. First, from Stephen Roach, who writes in the New York Times (thanks to Economist's View for link) about the US consumer:Worse, millions of homeowners used their residences as collateral to take out home equity loans. According to Federal Reserve calculations, net equity extractions from United States homes rose from about 3 percent of disposable personal income in 2000 to nearly 9 percent in 2006. This newfound source of purchasing power was a key prop to the American consumption binge. So, somehow, The United States cannot afford to squander this opportunity. Runaway consumption must now give way to a renewal of saving and investment. That's the best hope for economic recovery and for America’s longer-term economic prosperity. Meanwhile, China's economic meltdown (and thereby ability to transform itself into more of a consumer-led economy, reducing the likelihood of a serious overhang of supply and investment worldwide) may be worse than its exceptionally rapid decline over even the last few weeks suggests. Brad Setser looks at the details. Finally, Nouriel Roubini on the increasingly desperate measures authorities will have to take to put it all together. I'd like to say "happy reading!", but will content myself with the wish that you (US readers anyway) had a happy holiday... Labels: aggregate demand management, bailout, Brad Setser, financial crisis, Nouriel Roubini, Stephen Roche Why Should We be Surprised? (Yves Smith)We noticed the article in today's NY Times that the GAO will be releasing the first audit of the TARP program. Here is what Yves Smith of Naked Capitalism has to say about it:Here's what the Times had to say: Read the rest of the article. Labels: bailout, financial crisis, GAO, Naked Capitalism, TARP program, Yves Smith Change Immigrants and Labor Can Believe InBy David BaconThe Nation, web edition, November 26, 2008 Since 2001 the Bush administration has deported more than a million people--including 349,041 individuals in the fiscal year ending just prior to the election. It has resurrected the discredited community sweeps and factory raids of earlier eras, and started sending waves of migrants to privately run jails for crimes like inventing a Social Security number to get a job. Every day in Tucson 70 young people, including many teenagers, are brought before a federal judge in heavy chains and sentenced to prison because they walked across the border. It's no wonder that Latinos, Asians and other communities with large immigrant populations voted for Barack Obama by huge margins. People want and expect a change. Ending the administration's failed program of raids, jail time and deportations is at the top of the list. National demonstrations have called for a moratorium on raids since the summer, and one big reason why Los Angeles turned out so heavily for Obama was the anti-raid encampment and hunger strike in the Placita Olvera, which electrified the city. But the raids program has been rejected by more than immigrants alone. The election took place as millions of people were losing their jobs and homes. Yet while Lou Dobbs and the talk show hysteria-mongers tried to scapegoat immigrants for this crisis ("What about illegal don't you understand?"), most voters did not drink the Kool-Aid. In fact, every poll shows that a big majority reject raids and want basic rights and fair treatment for everyone, immigrants included. The political coalition that put Obama into office--African-Americans, Latinos, Asian-Americans, women and union families, expects change. Read http://www.thenation.com/doc/20081215/bacon. Labels: David Bacon, ICE raids, immigrants, immigration Motor City Meltdown (Thomas Palley)Thomas Palley's latest policy op-ed.The financial crisis that began in 2007 has been persistently marked by muddled thinking and haphazard policymaking. Now, the United States Treasury is headed for a mistake of historic and catastrophic proportions by refusing to bail out America's Big Three automakers. Make no mistake, if Detroit's Big Three go bankrupt, the perfect storm really will have arrived with a collapse in both the real economy and the financial sector. This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers. Treasury's refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America's shores. Proponents of a bailout for the Big Three have emphasized the enormous job losses associated with a bankruptcy scenario, including not only jobs directly provided by the automakers, but also jobs with parts suppliers, auto dealers, and in the transport and advertising industries. Read the rest of the article. Labels: auto industry, bailout, financial crisis, Thomas Palley Neoliberalism, the IMF, Summers, & GeithnerInteresting post by Ken Hanly on lbo-talk, about Obama's new economics appointees: Timothy Geithner (to be Treasury Secretary) and Larry Summers (to be head of the National Economics Council, which coordinates economic policy throughout the executive branch):Both Summers and Geithner worked at the IMF and favored the deregulation that caused the financial crisis and Geithner of course has worked with Paulson and Bernanke and also used taxpayer money to help JP Morgan purchase Bear Stearns. Labels: IMF, larry Summers, neoliberalism, Timothy Geither George Monbiot on the 'Other Crisis'From the fantastic Tuesday morning Guardian columnist's latest. Note in particular this little item: "This approach is challenged by the American thinker Sharon Astyk. In an interesting new essay, she points out that replacing the world's energy infrastructure involves "an enormous front-load of fossil fuels", which are required to manufacture wind turbines, electric cars, new grid connections, insulation and all the rest. This could push us past the climate tipping point."The planet is now so vandalised that only total energy renewal can save us It may be too late. But without radical action, we will be the generation that saved the banks and let the biosphere collapse George Monbiot guardian.co.uk Tuesday November 25 2008 00.01 GMT George Bush is behaving like a furious defaulter whose home is about to be repossessed. Smashing the porcelain, ripping the doors off their hinges, he is determined that there will be nothing worth owning by the time the bastards kick him out. His midnight regulations, opening America's wilderness to logging and mining, trashing pollution controls, tearing up conservation laws, will do almost as much damage in the last 60 days of his presidency as he achieved in the foregoing 3,000. His backers--among them the nastiest pollutocrats in America--are calling in their favours. But this last binge of vandalism is also the Bush presidency reduced to its essentials. Destruction is not an accidental product of its ideology. Destruction is the ideology. Neoconservatism is power expressed by showing that you can reduce any part of the world to rubble. If it is too late to prevent runaway climate change, the Bush team must carry much of the blame. His wilful trashing of the Middle Climate--the interlude of benign temperatures which allowed human civilisation to flourish--makes the mass murder he engineered in Iraq only the second of his crimes against humanity. Bush has waged his war on science with the same obtuse determination with which he has waged his war on terror. Is it too late? To say so is to make it true. To suggest there is nothing that can be done is to ensure that nothing is done. But even a resolute optimist like me finds hope ever harder to summon. A new summary of the science published since last year's Intergovernmental Panel report suggests that--almost a century ahead of schedule - the critical climate processes might have begun. Read the rest of the article Labels: bailout, environmental crisis, George Monbiot, The Guardian Pushing on a String? Or on an Elastic Band?Depends on the future of the dollar. From an indispensable post by Yves Smith:Monday, November 24, 2008 Government Lending Support Pledges and Measures At $7.4 Trillion ... Second, this effort cannot achieve its stated aim. We have said before that the markets are too large for government to salvage. Paul Krugman also made this point in March: ....the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it's usually because of the "slap in the face" effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses. And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face--and panic keeps coming back. So maybe the markets aren't hysterical--maybe they're just facing reality. And in that case the markets don't need a slap in the face, they need more fundamental treatment--and maybe triage. The Fed inceasingly has been trying to stand in for private lenders, but it cannot take on the entire private sector. And let's look at orders of magnitude. US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount, but second and third mortgages not included, and perhaps most important, contingent exposures like AIG's credit default swap guarantees). It isn't unreasonable to assume they net out. The Fed's proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG., for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks. That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem. Per Krugman, do we really think this will work? And if it does not work, it will make matters worse by increasing the size of the debt overhang when it needs to contract. Third, as Wolfgang Munchau said today in the Financial Times and others have pointed out earlier, the Fed seems worried solely about deflation, and not about a possible US currency crisis. This is a shocking oversight. The Fed (and many others) keep drawing analogies between the US in the Great Depression and its situation now. That is flawed and dangerous. The US was a massive creditor before the Depression and ran a very large trade surplus, to the point where the gold accumulation by the US was destabilzing to the world financial system. Sound familiar? That is the role China plays now, not the US. What happened to the nations that were in the US's shoes at the onset of the Great Depression, the overconsuming, indebted European customers of the US? They devalued their currencies, defaulted (or partially defaulted and forced a renegotiation) on foreign debts, and suffered milder downturns than the US did. But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans. And if you think recent dollar strength argues against it, think again. The massive dollar purchase are due to unwinding of dollar based debt. Similarly, the massive rally in long-dated Treasuries was due to massive short covering on shorts written many years ago in connection with funky products to lower the cost of the product. A Treasury short that was then so far from recent yields was seen as free money. It turned out not to be). Read the rest of the post Wachovia execs make out like banditsDon't worry about the bankers. They'll be alright.NEW YORK (Reuters) - Wachovia Corp (NYSE:WB - News), which lost $33 billion in the last two quarters, said 10 top executives may be entitled to $98.1 million in severance pay after the bank is acquired by Wells Fargo & Co (NYSE:WFC - News). In Other News: Three More Banks Go DownAnother one of those stories that would normally be front page news for a week but barely registers these days:Two California thrifts (Downey Savings & Loan and PFF Bank & Trust) and one Georgia thrift (Community Bank of Loganville) were closed by regulators on Friday, the highest number of bank closures in a single day since the S&L crisis of the late 1980s. All the banks were put into receivership by the FDIC which then sold all the deposits. Bo depositors lost money, however the FDIC deposit insurance fund is on the hook for an estimated $2.3 billion total for all three banks. So far this year, 22 U.S. banks have failed, the largest being the $307 billion Washington Mutual. All the banks failed due to massive lending in the sub-prime mortgage sector that have since gone sour. [As we mentioned in a post a few days ago, you can follow the bank closings yourself by visiting this page at the FDIC's website regularly.] Labels: bank consolidation, bank failures, FDIC, WAMU, Washington Mutual Bailouts Dwarf Spending on Other CrisesA new report from the Institute for Policy Studies documents how much more money is spent to bail out banks and other financial instutions than to address other global crises, e.g. climate change and poverty. Here's the press release:Washington, D.C.—A new report finds that the approximately $4.1 trillion the United States and European governments have committed to rescue financial firms is 40 times the money they're spending to fight climate and poverty crises in the developing world. Labels: bailout, climate change, financial crisis, Institute for Policy Studies, poverty Another Important Story TodayFrom today's Financial Times. This suggests that the selloffs from pension and other funds, that have followed the massive hedge fund ones, are far from over. And things all the more bleak for PE, or PE financed firms, as well.Investors rush to quit buy-out funds By Henny Sender in New York Published: November 23 2008 19:47 | Last updated: November 23 2008 19:47 Investors in buy-out funds are so concerned private equity returns will slump in the years ahead that they are selling their commitments for as little as 30 per cent of their original value. Eighteen months ago, if such stakes were available at all, they generally traded at a premium. The collapse in valuations reflects growing concerns that many private equity-owned companies will implode as the economic contraction intensifies. Some of the largest deals, struck at the height of the private equity boom that ended in the spring of 2007, now look to be disastrous for the equity holders. Cerberus's investment in crisis-hit Chrysler is among the most high-profile of the boomtime deals. Some investors said Cerberus fundholders were likely to have to accept the sharpest discounts on stake sales in the secondary market. TPG fundholders have been able to sell for slightly higher prices. One investor said he had just bought a piece of a TPG fund in the secondary market for 45 cents on the dollar, reflecting concerns about TPG's stake in gaming company Harrah's Entertainment and other companies hit by the economic slowdown. Blackstone, which bought a small stake in Harrah's from Apollo Management, has marked down that stake to zero, according to Blackstone investors. The sceptics' view of some TPG investments clashes with more upbeat assessments of the firm, based on the imminent returns from its sale of telecoms company Alltel to Verizon, and TPG's biggest deal yet—the purchase, with KKR, of utility TXU, widely seen as a safe, smart purchase. Nonetheless, the sell-out from private equity funds is gathering speed as pension funds, endowments and family offices realise these funds are likely to fall far short of original target returns. They are already reeling from losses in the stock market and on hedge fund investments. Monte Brem, chief executive of StepStone, which acts on behalf of such investors, says he thinks it may make more sense to buy funds at a sharp discount in the secondary market rather than paying full price for stakes in new funds. Mr Brem is now considering buying stakes in the secondary market for his clients. The growth of activity in the discounted secondary market for private equity fund stakes is compounding problems for firms seeking to raise new funds. Even those firms whose portfolios have held up the best, such as Blackstone, are finding the going very slow. Copyright The Financial Times Limited 2008 Labels: bailout, financial crisis, private equity Some Wise Words on the Citi BailoutFrom Across the Curve:The Citibank story is certainly the top story of the day. I know the news broke in the middle of the night but it seems to me that after 15 months of this and after Bear, and Freddie and FNMA and AIG and Lehman that the markets are inured and somewhat desensitized to news which prior to August 2007 would have been viewed as momentous. Effectively the taxpayers are propping up an outfit with $2 trillion in assets and equity markets are screaming. I guess I think that there should be a deeper concern at our plight and the realization that the problems which infect our system could run so deep. It is also ironic that Citibank is too big to fail and requires rescue. The regulators encouraged them as the firm spread its tentacle across the financial landscape. The new Administration should make its first order of business a review of the risk still inherent in the system. JPMorgan is an aggregation of JPMorgan, Chase, Manny Hanny, Chemical Bank, Texas Commerce Bank, National Bank of Detroit Bank One and First Chicago. That makes no sense and if the new administration wishes to establish "change" then they should begin by splitting up these supersized entities and establishing them as new firms which are not too large to fail. Labels: Across the Curve, bailout, Citibank, financial crisis Citi bonanza for Goldman or Morgan?According to Bloomberg.com:A purchase of Citigroup Inc. would "significantly" add to Goldman Sachs Group Inc. or Morgan Stanley's earnings as long as the U.S. government absorbed losses on the embattled bank’s assets, according CreditSights Inc. ...
In related news, analysts predict that the purchase of Citigroup Inc. would "significantly" add to Dollars & Sense's earnings as long as the U.S. government absorbed losses on the embattled bank's assets... Labels: Citigroup, Goldman Sachs, Morgan Stanley, TARP program, taxpayer ripoff Baker Deflates Deflation-Panic BubbleThere's a lot of talk in the business press about deflation and why we should be worried about it ("like trying to catch a falling knife" is the preferred metaphor).Dean Baker takes issue with much of what's being written in a recent post on Beat the Press. Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question. Baker acknowledges that housing prices are in a serious downward slide, and that this impacts consumer spending, saving, and a myriad of other related industries. But he argues that the housing market is a separate matter, and isn't even factored into the inflation indexes. Labels: Dean Baker, deflation, housing bubble, Inflation Geithner and Kissinger Associates--pt. 1From Bob Feldman:Treasury Secretary-Designate Geithner's Kissinger Associates Background—Part 1 Between 1986 and 1989, U.S. Treasury Secretary Designate Timothy Geithner was employed at Henry Kissinger, Brent Scowcroft, and Lawrence Eagleburger's Kissinger Associates influence-peddling firm, which also employed George W. Bush's former special envoy to Iraq, L. Paul Bremer, during the early 1990s. A leading candidate for Commerce Secretary, Bill Richardson, also is a former employee of Kissinger Associates. An expose, titled "The 'Kissinger Affair': A Look At Henry Kissinger's Kuwaiti Connection," which appeared in the March 27, 1991 issue of a Lower East alternative newsweekly Downtown, began with the following quotation from the April 20, 1986 issue of the New York Times Magazine about Kissinger Associates, during the years that Treasury Secretary-Designate Geithner worked there: "It is very difficult to pin down what Mr. Kissinger and the others are really doing in the business end of their lives. None will say for attribution who their clients are or discuss the specifics of what they do, although they do talk about their work with the understanding that they not be identified…Kissinger Associates requires a clause in its contracts stating that neither the firm nor its clients will divulge a business connection..." In 1991, T. Jefferson Cunningham III, according to Moody's International Manual, was on the board of directors of Treasury Secretary-Designate Geithner's former employer. That same year Kissinger Associates Director Cunningham was also a director of the Midland Bank of Britain and 10.5 percent of Midland Bank's stock was owned by the government of Kuwait. And coincidentally, Geithner's former boss at Kissinger Associates, Henry Kissinger, was not reluctant to use his special influence on behalf of his Midland Bank/Kuwaiti government business associates after August 1990 to push for the January 1991 Pentagon high-technology military attack on Iraq that led to thousands of Iraqi civilian casualties. In the April 20, 1986 New York Times Magazine article, titled "Kissinger Means Business: Corporate America is eagerly seeking Henry Kissinger's insight and celebrity," the Times then-national security correspondent, Leslie Gelb, reported that the Midland Bank of Britain was also one of the special influence-purchasing clients of Kissinger Associates that paid Treasury Secretary-Designate Geithner and his colleagues "slightly more than $150,000 yearly for varying services." Gelb also noted that "The other top members of the firm" were "Lieut. General Brent Scowcroft, President Ford's National Security adviser, and Lawrence S. Eagleburger, who was an Under-Secretary of State in the Reagan Administration." In the early 1990s, Treasury Secretary-Designate Geithner's Kissinger Associates colleagues, Scowcroft and Eagleburger, were both high officials in the Bush I Administration. Scowcroft, a former Santa Fe International director who received personal payments from the Kuwaiti government-owned Kuwait Petroleum Corporation (KPC) subsidiary in 1984, 1985 and 1986, was Bush I's national security affairs adviser. And Eagleburger was Bush's Deputy Secretary of State. According to a profile of Scowcroft that appeared in the Times on Feb. 21, 1991, it was the presentation of Geithner's former Kissinger Associates colleague at a National Security Council meeting on Aug. 3, 1990 "that made clear what the stakes were, crystallized people's thinking and galvanized support for a strong response" to the Iraqi military occupation of Kuwait--which has led to the deaths of hundreds of thousands of Iraqi civilians from either Pentagon military operations or U.S. economic sanctions since January 1991. Kissinger Associates was established in 1982, four years before Treasury Secretary-Designate Geithner joined the firm, after Henry Kissinger secured a loan from EM Warburg, Pincus & Company, an investment banking firm. And when Treasury Secretary-Designate Geithner worked for Kissinger in the late 1980s the Kissinger Associates Manhattan office was located at 350 Park Avenue on the corner of 52nd Street—in the same building as Chase Manhattan Bank's Commercial Bank of Kuwait subsidiary local office. The building's lobby at that time contained a computerized building directory of all the building's tenants. But, according to New York Times then-national security correspondent Gelb's April 20, 1986 "Kissinger Means Business" article, "Punch 'K' and you will not find Kissinger Associates, for Henry A. Kissinger still receives threats, so, for security reasons, you have to be invited to learn what floor his firm is on." Kissinger Associates also had an office in Washington, D.C. of three researchers and four clerks which was headed by Scowcroft when Treasury Secretary-Designate Geithner worked for the firm. According to Times correspondent Gelb, only about 25 people worked in both the Manhattan and Washington, D.C. offices of Kissinger Associates in the 1980s, "including Mr. Kissinger's bodyguards" and Geithner. In 1991 a Kissinger Associates spokesperson told me in a telephone interview that Geithner's 1980s employer was "an international consulting firm." But, according to the April 20,1986 New York Times Magazine article, "Kissinger Means Business," although "these consultants are not lobbyists in the strict sense of the word," some of them "are involved in selling their influence at home and almost all do so abroad." (end of part 1) --b.f. Labels: Kissinger Associates, Timothy Geither, Treasury Department Not Looking Good for CitiEven amidst yesterday's stock market rally, Citigroup's shares fell; it lost more than half its value in four days. Here is what today's New York Times has to say:With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company's executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.Read the rest of the article. The fact that there is no run on Citi, though, indicates that there needn't be a government bailout, as Yves Smith has pointed out on Naked Capitalism: The market shrugged off the prospect of a Citigroup meltdown and focused instead on the leak that Timothy Geithner was Obama's pick for Treasury Secretary. Citi fell another 20%, its shares dropping below $4. Have banking catastrophes become so routine that it is now assumed that the officialdom will clean up the broken china and put the bill in the post? I recall when Citi nearly failed in the early 1990s (the big culprit then was junior loans on a lot of commercial development in Texas that wound up being see-throughs) and it was white-knuckle time.Read the rest of the post. Labels: bailout, Citibank, Citigroup, financial crisis, Naked Capitalism, Yves Smith Biggest CEO Losers are WinnersEven when their companies go belly up, Wall Street's former kings won't have to count on their unemployment checks.The Wall Street Journal (we only read it for the articles), has a wonderfully infuriating list of CEOs of failed or failing giants who have made out, quite literally in some cases, like bandits while their investors have been left holding the bag. Some of the highlights: Angelo R. Mozilo, former CEO of the former mortgage giant Countrywide Financial pocketed $470 million. Richard S. Fuld Jr., ex-honcho of the ex-Lehman Brothers walked away with $184 million and change in compensation. James E. Cayne, ex-head of Bear Stearns, only got a whisker over $163 million. The list goes on, but it's too depressing to detail here. Labels: Bear Stearns, Corporate Swindles, Countrywide, Lehman Brothers, Richard Fuld Jr, Wall Street Journal Closures & Layoffs (Nov. 16-22)Mark Heschmeyer's weekly report, from CoStar.Layoffs Hit Sun, AMD and Other Tech Firms A Weekly Report on Future Corporate Downsizings In this week's issue: We give you the latest announcements of major U.S. corporation closures and layoffs including Advanced Micro Devices, Alcoa, Amylin Pharmaceuticals, Brunswick Corp., Comsys IT Partners, Imation, Intersil, Metaldyne, MGP Ingredients, Sun Microsystems, Weyerhaeuser and additional closings in Texas, Wisconsin and Washington. Read the rest of the report. Labels: closures and layoffs, Mark Heschmeyer, recession |
