Miss Marjorie Joesting, the future Mrs. Arthur Lange, was both Miss Washington, D.C., and a Miss America runner-up.
Ilargi: Yes, it is still crazy after all these eight years to hear W. say that he will turn the US into communist Bulgaria, by buying up and buying out the part of the banking system that put him where he is, in order to "preserve the free market". I’m going to have to kill you to keep you alive. It’s one or the other, one would think.
In perverse absurdity, though, Hank Paulson does him one better. I saw this quote this morning, where he talked about the nine banks the US bought into, and then I had to look again. And again:
"These are healthy institutions, and they have taken this step for the good of the U.S. economy..."
I must admit, I still don’t think I get it. They are not healthy, they have supposedly not taken "this step" (the Fed and Treasury have), and they neither care for the good of the US economy nor do any good for it. Maybe what I get least of all is that they have the gall to say these things, and nobody reacts.
To see why all these plans, we’re closing in on $4 trillion globally now, won’t work, look no further than Fitch’s downgrade of Morgan Stanley yesterday. MS stock went up over 80% after a $9 billion cash injection (another Treasury guarantee), but Fitch realizes that it’s still a sick company. Because of the downgrade, MS will have to seek more capital. Rinse, lather, repeat.
The Federal Accountancy Standards Board seems unwilling to withdraw its new rules related to mark-to-market, fair-value, accounting, so now the American Bankers Association demands the Securities and Exchange Commission overrule them. I’ll bet if even that doesn’t work, they’ll go straight to Paulson and Bush, and they'll get what they want.
Which is very bad for the US economy, but gives the banks a little more time to squeeze more of your money out of the system. You may feel poor, but there’s still pension and 401k plans that can be milked. And did you catch that the FDIC will now back all new bank debt?
Iceland stocks were down 76% this morning, and its stores face empty shelves. The goverment response: it raises income taxes. Iceland may come back threw a buy out, since it only has 300.000 people, but it’ll have to live on borrowed money. Debt slaves. Take a good look, that'll be you.
The whole world guarantees everything now, Japan and Hong Kong, among others, chimed in with unlimited plans. I was surprised to see that Holland, with 16 million inhabitants, provides $300 billion to their banks. In US terms, that would be almost $6 trillion. What is that, despair?
The next step is easy to predict: the weaker ones will be picked off by big investors and hedge funds. First those who dare not guarantee, then the ones who do but can’t afford it. It’s pure global economic warfare.
I’ll leave you with a light note:
"It's worse than a divorce. I've lost half my net worth and I still have a wife."
Paulson Plans to Invest in 'Thousands' of U.S. Banks
Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market. "Leaving businesses and consumers without access to financing is totally unacceptable," Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell-off since 1933. Paulson told companies getting the government funds to "deploy" the money in loans.
The Treasury chief was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash and send money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks.
The Treasury's stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be disbursed in days: Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and a combined Bank of America Corp./Merrill Lynch & Co. each will get $25 billion, while Morgan Stanley and Goldman Sachs Group Inc. will get $10 billion each. Bank of New York Mellon Corp. said it will receive about $3 billion and State Street Corp. said it's getting $2 billion.
"These are healthy institutions, and they have taken this step for the good of the U.S. economy," Paulson said. "These institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending," President George W. Bush's working group on financial markets said in a separate statement.
Bush today said "this is an essential short-term measure to ensure the viability of the U.S. banking system," after meeting with Paulson, Federal Reserve Chairman Ben S. Bernanke and other members of the working group, which includes the Securities and Exchange Commission and Commodity Futures Trading Commission.
Stocks rose around the world on expectations the rescue will help alleviate the credit crisis. The Standard & Poor's 500 Index rose as much as 4.1 percent today, after an 11.6 percent surge yesterday. The index lost 18 percent last week. Japan's Nikkei jumped 14.2 percent as trading resumed following yesterday's public holiday.
With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on Oct. 3. Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank's share price at the time of issuance.
The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks' common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.
The government expects to purchase equity in the nine banks within days and to use the full $250 billion by year-end, a Treasury official told reporters on condition of anonymity. While banks would not be forced to cut existing dividends, there would be some restrictions on raising them, the official said.
The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders. Banks have struggled to regain the confidence of investors, counterparties and clients after bad loans caused $637 billion of writedowns and losses across the industry. A Treasury official urged banks to use the funds to increase lending.
"It's in their economic interest," said David Nason, the Treasury's assistant secretary for financial institutions, in an interview with Bloomberg Television. "When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend."
Last week, the International Monetary Fund estimated that banks around the world would need $675 billion in fresh capital over the next several years to recover. The IMF also said Oct. 7 that financial losses would total $1.4 trillion, an almost 50 percent increase from a prediction in April.
Under the plans announced today, the FDIC said it would fully guarantee newly issued, senior unsecured debt and non- interest bearing deposits. The expanded coverage applies to all senior unsecured debt issued on or before June 30, 2009, and deposits in FDIC-insured banks until Dec. 31, 2009. The Fed said in a separate statement that its previously announced program to buy commercial paper will start on Oct. 27. Officials haven't indicated a limit for the total size of the fund.
Financial firms participating in the U.S.'s so-called voluntary capital purchase program will need to step up their efforts to stem mortgage foreclosures, Paulson said today. That targets the original spark of the crisis, caused by lax lending terms on subprime home loans. "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," the Treasury chief said.
About 100 or fewer of the 7,000 U.S. banks with less than $10 billion in assets may consider taking advantage of the program, said Camden Fine, president of the Independent Community Bankers of America, a Washington trade group representing about 5,000 banks. "The headline in the local paper that everybody's going to read is, `Local Bank Seeks Government Assistance,"' Fine said in an interview. "That doesn't look real good to the folks in the local towns."
Taleb's 'Black Swan' Investors Post 50%+ Gains as Markets Take Dive
Investors advised by "Black Swan" author Nassim Taleb have gained 50 percent or more this year as his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades.
Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The Standard & Poor's 500 Index lost 39 percent in the same period.
"I am very sad to be vindicated," Taleb said today in an interview in London. "I don't care about the money. We're proud we protected our investors." Taleb's book argues that history is littered with high- impact rare events known in quantitative finance as "fat tails." As the founder of New York-based Empirica LLC, a hedge- fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.
Mark Spitznagel, Taleb's former trading partner, opened Universa last year using some of the same strategies they'd run since 1999. Pallop Angsupun manages the Black Swan Protection Protocol for clients and is overseen by Taleb and Spitznagel, Universa's chief investment officer. "The Black Swan Protection Protocol is designed to break even 90 to 95 percent of the time," Spitznagel said. "We happen to be in that other 5 to 10 percent environment."
The S&P 500 dropped 18 percent last week, its worst week since 1933, on concern that the credit crunch would cripple the financial system and trigger a global recession. "We got a lot of giggles when we said we're targeting 20 percent moves," Spitznagel said. He and Taleb declined to confirm the investment returns listed in the documents, which were reviewed by Bloomberg News.
Taleb's strategy is based on buying out-of-the-money options -- puts and calls whose strike price is either lower or higher than the market price of the underlying security. A put option gives the buyer the right, though not the obligation, to sell a specific quantity of a particular security by a set date. A call option gives the right to buy a security.
The Black Swan Protection Protocol bought puts and calls on a portfolio of stocks and S&P 500 Index futures, along with some European shares. The Black Swan Protocol doesn't rely on commodities, currencies or insurance on bonds known as credit default swaps, Taleb said. "We refused to touch credit default swaps," Taleb said. "It would be like buying insurance on the Titanic from someone on the Titanic."
The Black Swan strategies are designed to limit losses to a few percentage points. Some investors did better than others depending on when they decided to lock in profits, Taleb said. The returns have enabled Universa to line up more money from investors in the next month, Taleb said. As a trader turned philosopher, Taleb has railed against Wall Street risk managers who attempt to predict market movements. Even so, Taleb said he saw the banking crisis coming.
"The financial ecology is swelling into gigantic, incestuous, bureaucratic banks -- when one fails, they all fall," Taleb wrote in "The Black Swan: The Impact of the Highly Improbable," which was published in 2007. "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup."
Taleb said the current crisis is a "White Swan", not a Black Swan, because it was something bound to happen. "I was expecting the crisis, I was worried about it," Taleb said. "I put my neck and money on the line seeking protection from it." Taleb is angry that Wall Street is continuing to use traditional tools such as value at risk, which banks use to decide how much to wager in the markets.
"We would like society to lock up quantitative risk managers before they cause more damage," Taleb said.
The Ownership Society
In an effort to restore confidence to the ailing financial system, President George W. Bush on Tuesday announced plans to directly inject billions of dollars of capital directly into banks and expand the role of the Federal Deposit Insurance Corporation.
The plan--part of the $700 billion bailout package passed by Congress last week--will allot $250 billion for purchase of preferred shares in banks of all sizes and states of economic health. Nine banks have already agreed to take cash injections: Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon, State Street and Merrill Lynch (which is being acquired by Bank of America). Treasury officials would not confirm the amounts that each bank will receive.
"These measures are not intended to take over the free market, but to preserve it," Bush said. Making direct, perpetual preferred stock investments in the biggest U.S. banks is the government's most aggressive move yet to stop the carnage in the credit markets. The move follows the heels of similar action by European countries, including France, Germany and Great Britain, Monday. If the U.S. did not act, there was a risk of capital fleeing the United States for safer havens in Europe.
Still, the U.S. move has the potential to divide winners from losers in the world of commercial banking, because the government wouldn't put taxpayer dollars at risk, presumably, by investing directly in an ailing bank that could otherwise be merged with a healthy bank or closed. It also puts the biggest banks squarely in the hands of federal regulators, and taxpayers, for several years, a stunning reversal of thinking for an administration that had championed free-market capitalism before this crisis erupted.
Under the Capital Purchase Program, the Treasury will purchase senior preferred shares in banks. The shares will pay a 5% dividend, and will rank senior in a firm's capital structure to common stock. After five years, the dividend will reset to 9%, if the bank has not repurchased them. The government's stakes in banks will be non-voting. The Treasury will also receive warrants to purchase common stock, comprising up to 15% of the senior preferred investment. In order to participate, firms will have to agree to executive compensation restrictions, for as long as Treasury holds stakes in the firm.
The senior preferred shares will be callable at par after three years, under the Treasury program. Treasury will also have discretion to transfer its shares to a third party at any time. The program will be available on the same terms to other banks across the country that elect to participate before 5 p.m. Nov. 14. Under the program announced this morning, the FDIC will insure new bank debt in the Temporary Liquidity Guarantee Program. New senior unsecured debt issued on or before June 30, 2009 is fully protected if a bank fails or its holding company files for bankruptcy. This coverage is limited for three years.
The FDIC will also expand deposit insurance for non-interest-bearing transaction accounts used by many small businesses. Many businesses that had accounts larger than the Federal Deposit Insurance limit, currently $250,000, were pulling accounts from smaller banks and moving them to larger, safer banks. Under the new program, the FDIC will provide full insurance coverage for non-interest- bearing accounts until the end of next year. Banks will pay a new premium to cover the expense of the program. "Today's actions are not what we ever wanted to do--but today's actions are what we must do to restore confidence to our financial system," said Treasury Secretary Henry Paulson.
Federal Reserve Chairman Ben Bernanke added: "We will not stand down until we have achieved our goals of repairing and reforming our financial system, and thereby restoring prosperity to our economy." The actions taken by the Treasury Tuesday fall under the rubric of the Troubled Assets Relief Program that is the centerpiece of the bailout bill Congress passed earlier this month. Treasury still has in place plans to purchase toxic assets to clean up banks' balance sheets, but the administration's primary goal now seems to be direct injection of capital into banks. Also Tuesday, President Bush took the next step in the bailout measure, by officially asking Congress for $350 billion to help banks. He can request an additional $350 billion as needed, subject to Congress' disapproval.
A Treasury official said Tuesday that $250 billion will be spent to buy preferred shares in banks by the end of the year. The amount that will go to the nine banks mentioned above will be doled out in a matter of days. The official said the Treasury arrived at the $250 billion figure in consultation with finance industry leaders. However, the figure is not based on a specific data point. Since the program is voluntary, Treasury will be able to learn of its success largely by the number and type of banks that elect to participate.
Bush: bank buyout needed 'to preserve free market'
President Bush today confirmed a $250 billion plan for the US Government to buy shares in America's largest banks, insisting that the move was "not intended to take over the free market but to preseve it".
Following a model first adopted in Britain last week and copied across the rest of Europe, the partial nationalisation will be accompanied by a series of measures designed to break the credit logjam paralysing lenders. The $250 billion (£142 billion) will come from a $700 billion bailout package already agreed by Congress. "This is an essential short-term measure to ensure the viability of America's banking system," Mr Bush said in a statement from the lawn of the White House.
The initial plan for the bailout, negotiated by Hank Paulson, the Treasury Secretary, was for the money to be used to purchase "toxic" sub-prime assets from lenders to allow them to clear up their balance sheets. It quickly became apparent, however, that that might not be enough to end the credit crunch. Instead, the United States will follow the path already taken in Europe and combine a partial renationalisation of nine banks with a package of loan guarantees.
Mr Bush said that the Federal Deposit Insurance Corp will insure most new debt issued by banks to get interbank lending started again. It will also expand insurance to cover non-interest-bearing accounts, as used by small businesses for day-to-day operations. At the moment such deposits are covered only up to $250,000, so many businesses have been forced to operate multiple accounts to protect their funds.
Mr Bush said that the Federal Reserve would "soon finalise work" on a new programme to serve as a buyer of last resort for commercial paper. By restoring confidence in the system, the hope was to "return our economy back to the road of growth and prosperity". "It will take time for our efforts to have their full impact, but the American people can have confidence about our long-term economic future," he added.
Executives of the country’s biggest banks were summoned to a remarkable meeting at the Treasury Department yesterday to be briefed on the plan. During that meeting Mr Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the US economy.
Mr Paulson said that the Administration planned to spend up to $250 billion on stock purchases, initially in nine large banks.
Among the initial banks participating will be all of the country’s largest institutions, including Citigroup, Wells Fargo, JPMorgan Chase, Bank of America and Morgan Stanley.
Paulson Urges Banks to Deploy Capital to Spur Economy
Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth. "We must restore confidence in our financial system," Paulson said at a press conference in Washington. "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it."
With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on Oct. 3. He didn't identify any of the lenders. People familiar with the plan said nine companies will get $125 billion: Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp.
The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Goldman and Morgan Stanley will each get $10 billion, while State Street and Bank of New York will get injections of about $3 billion each, people said.
"These are healthy institutions, and they have taken this step for the good of the U.S. economy," Paulson said. Stocks rose around the world on expectations the rescue will help alleviate the credit crisis. Paulson made the remarks in advance of a press conference in Washington with Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair.
Paulson said the Treasury will dedicate $250 billion for boosting bank capital through preferred stock purchases. The regulators said in a statement that "thousands" of financial companies would participate. Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank's share price at the time of issuance.
The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks' common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.
The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders. Europe's Dow Jones Stoxx 600 Index today climbed 5.2 percent. The MSCI Asia Pacific Index surged 9.3 percent today, the most since 1998, with Japan's Nikkei jumping 14 percent as trading resumed following yesterday's public holiday.
Last week, the International Monetary Fund estimated that banks around the world would need $675 billion in fresh capital over the next several years to recover. The IMF also said Oct. 7 that losses tied to U.S. loans and securitized assets would total $1.4 trillion, an almost 50 percent increase from a prediction in April. The move marks a change in the Treasury chief's strategy to alleviate a global credit crunch after he initially said the focus of the plan would be buying up illiquid mortgage-related assets.
Banks have struggled to regain the confidence of investors, counterparties and clients after bad loans caused $637 billion of writedowns and losses across the industry. "This is an essential short-term measure to ensure the viability of the U.S. banking system," President George W. Bush said at the White House after meeting with his Working Group on Financial Markets, which includes Paulson and Bernanke.
Fitch cuts ratings on Morgan Stanley
Fitch Ratings on Monday cut its long-term issuer default rating on Morgan Stanley and said it expects the current stresses on the bank's core businesses to continue for some time.
Fitch cut the ratings by two notches to "A", or sixth-highest investment grade. It also downgraded the long-term senior debt to "A" and the subordinated debt to "A-minus," or seventh-highest investment grade. The move reflects "continued expected challenges in profitability and funding despite the additional capital injection from Mitsubishi UFJ," the agency said in a statement.
Japan's biggest bank earlier closed a deal to buy a 21 percent stake in Morgan Stanley for $9 billion after renegotiating the original terms. Mitsubishi bought only preferred stock instead of the common stock it had earlier agreed on after Morgan shares tumbled by more than 50 percent last week. Fitch said Morgan is also facing continued challenges in its transition from investment bank to financial holding company.
The rating outlook is negative, "to reflect the weakened earnings potential of investment banking operating in this tumultuous economic period." Fitch is expecting revenues to fall sharply as the bank's prime brokerage business is hit by deleveraging and uncertainty about the protection of client assets. At the same time, the bank's investment banking division and commodities trading business are facing headwinds.
Sweeping bank bailouts unite Europe
Like soldiers falling into step, governments across Europe offered up a series of sweeping bailout plans for their banking systems Monday, pushing past $2 trillion the amount of taxpayer money that has been pledged to shore up the continent's floundering financial sector.
Markets responded positively to the news, with stock exchanges gaining back some of the ground lost in last week's selling binge. The bourses in Paris and Frankfurt, Germany, both closed up more than 11%, while London's index climbed more than 8%.
The rescue packages announced by the leaders of Germany, France and other European nations combine massive infusions of capital with guarantees for short-term loans. The rolling wave of bailout announcements was the continent's first coordinated response to the global financial crisis after days of squabbling and dizzying drops in global markets. "The time of going it alone is, fortunately, over," French President Nicolas Sarkozy declared. Though the proposed bailouts are not guaranteed success in restoring investor confidence, "the highest risk in our times would be not to dare," Sarkozy said.
The combined rescue packages of France and Germany, continental Europe's two largest economies, exceed $1 trillion, far more than the $700-billion package approved by the United States nearly two weeks ago. Sarkozy said France would make as much as $490 billion in state funds available to keep the country's banks afloat, including $54 billion for capital injections.
In Berlin, German Chancellor Angela Merkel proposed a $653-billion bailout package, the largest emergency program in Germany's postwar history and more than 1 1/2 times the government's entire 2008 budget. Under the plan, likely to be passed by Parliament this week, $109 billion would be earmarked for recapitalizing the banks, and the remainder would take the form of loan guarantees.
Merkel called the package the "first piece in rebuilding" the health of Germany's financial system, which has been paralyzed by a lack of liquidity for some banks and an unwillingness by others to lend for fear of not being paid back. "The measures we have taken have one objective: They shall help build new confidence," Merkel said "Confidence between the banks, confidence in the economy, confidence of citizens. Confidence is the currency that is valid."
She added that the government would not necessarily end up spending the price tag's full amount. It was possible, she said, that not all the funds for loan guarantees would be called on for use. The same applies in other countries.
In addition to France and Germany, the Netherlands proposed a $272-billion rescue plan and Austria offered a similar package worth $116 billion. Spain set aside up to $136 billion to back up debt issued by banks this year, and Portugal pledged about $27 billion in guarantees. "United Europe has pledged more than the U.S.," Sarkozy told reporters after an emergency Cabinet meeting.
The commitments were made a day after leaders of the 15 countries that use the euro currency announced a common game plan to attack the financial crisis at an emergency summit in Paris. In effect, the rescue packages partially nationalize banks across the region in a collective act of state intervention on an unprecedented scale. Though not a member of the so-called eurozone, Britain also attended Sunday's summit. Britain, one of the economic powers of Europe, pioneered the bailout path its neighbors followed Monday.
Earlier in the day, Britain identified the first banks to receive handouts from the $87 billion it had earmarked for recapitalization out of an overall $435-billion rescue package unveiled last week. The Royal Bank of Scotland, considered on solid footing just a few months ago but whose shares dropped precipitously in recent days, will receive $35 billion from the government in return for preferential stakes that give the state a majority share in the bank and first dibs on profits. Lloyds TSB, which has agreed to take over giant lender HBOS, will receive $30 billion.
It was a remarkable turn of events for two of Britain's biggest financial institutions after years of increasing freedom from government. In a warning that was also sounded in other European capitals, British Prime Minister Gordon Brown said the government's assistance would surely come with strings attached.
Mindful of voters who view the rescue package as a taxpayer-funded lifeline for rich bankers, Brown insisted there would be no "rewards for failure." As controlling shareholder, the government would demand that irresponsible executives and board members be sacked and executive bonuses be denied for at least this year. "The guiding ideal is fair reward for hard work, for effort and for enterprise, not incentives for irresponsibility or excessive risk-taking for which the rest of us have to pay," Brown said.
The chief executive of the Royal Bank of Scotland, Fred Goodwin, resigned, effective immediately, and the beleaguered banking company's chairman will retire at the annual meeting in April. The CEO and chairman of HBOS will also step down from their posts after the merger with Lloyds is complete. In Berlin, German Finance Minister Peer Steinbrueck grew emotional at a news conference as he spoke of the government's responsibility to rein in those perceived as "fat cats."
Although specific measures were still under discussion, "I can tell you my personal suggestions," Steinbrueck said. "Not more than 500,000 euros [$680,000] annual salary. No bonus payments. No severance payments. And no dividends."
US Treasury to unveil $250 billion recapitalisation push
The US is expected to unveil a comprehensive rescue package today that includes about $250bn for recapitalisation of financial institutions, a form of sovereign guarantee for new bank borrowings and further protection for bank depositors.
The $250bn (€184bn, £145bn) would represent the entire first tranche of the $700bn appropriated by Congress under the emergency rescue legislation. Hank Paulson, the Treasury secretary, is likely to inform Congress that he will draw down the next $100bn for use in asset purchases. The recapitalisation fund will be open to non-bank financial firms as well as banks. Meanwhile, the US government is expected to provide a sovereign guarantee for new bank borrowing - something it did not want to do as recently as a few days ago.
This is expected to take the form of a guarantee for certain categories of new bank debt, provided by the Federal Deposit Insurance Corporation, and/or a sovereign backstop for the interbank market. The FDIC is also expected to exercise a systemic risk exemption to guarantee all non-interest bearing deposits, and possibly all deposits. Some experts believe that the US may also take equivalent steps to shore up non-banks, such as a blanket guarantee for money market mutual funds or a commitment to fund non-banks via the commercial paper market, to ensure that the aid for the banking sector does not collapse the non-bank sector.
Charles Schumer, the Democratic chairman of the joint economic committee, said there would be "broad bipartisan support" for a recapitalisation push. But he said banks taking part in the scheme should be forced to reduce or eliminate their dividends and be prevented from investing the new capital in risky complex financial activities.
Mr Schumer told the Financial Times that the government should take preferred stock, not common stock. "I would like to see the government come first," he said. The senator faulted Mr Paulson for initially focusing on asset purchases instead, and warned against making the terms too attractive for the banks. Companies taking government capital should be subject to restrictions on executive pay under the rescue legislation passed by Congress, he added.
Neel Kashkari, the Treasury official who is running the US financial bail-out, said yesterday: "We will complete the design of these tools and deploy them as soon as they are ready." Mr Kashkari, 35, said the Treasury would buy equity in a "broad array of financial institutions". The programme would be "voluntary and designed with attractive terms to encourage participation from healthy institutions", he said, adding that it would seek to foster private capital-raising alongside the injection of public money.
The Treasury also disclosed that it had hired lawyers at Simpson Thacher & Bartlett, a specialist firm in mergers and acquisitions advisory work, to advise it on the equity purchases. Mr Kashkari, who worked as an aerospace engineer and Goldman Sachs technology banker in California before joining the Treasury in 2006, said that "in the next few days" it would announce the identity of several private asset managers contracted to hold the securities and loans purchased by the government. "As you can see, we have accomplished a great deal in just 10 days," Mr Kashkari said. "But our work is only beginning."
A Host of Measures Across Europe
A round of far-reaching announcements came from European capitals Monday, with Britain effectively taking control of two of its largest banks, and leaders in Paris, Berlin, Madrid and elsewhere offering more than a trillion euros in loan guarantees and other support intended to restore trust between banks and thaw frozen credit markets.
While the moves represented an effort to act in concert, they fell short of the unified action of the sort France and the Netherlands had advocated and Germany had opposed. “Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed,” the British prime minister, Gordon Brown, said in London in a speech calling for the adoption of a new Bretton Woods-style agreement among major countries. “We must now create the right new financial architecture for the global age.”
The British government said it would buy controlling stakes in the Royal Bank of Scotland and the newly combined bank Lloyds TSB and HBOS in exchange for a $64 billion capital infusion. In Berlin, German leaders unveiled a 480 billion euro package ($651 billion) of mostly loan guarantees. It represented a reversal of earlier German claims that the financial situation could be dealt with on a case-by-case basis.
“We’re taking measures in order to prevent a repeat of what we’ve just experienced,” said Angela Merkel, the German chancellor. “These are sweeping steps, but they’re necessary to restore market confidence.” Unlike the British blueprint, the German plan does not call for Berlin to acquire direct stakes in German banks.
Instead, the German approach offers 400 billion euros in guarantees for interbank loans and an additional 80 billion euros for direct injections of capital to restore weakened balance sheets and buy the weakened, illiquid assets that have already forced several German banks to the brink of collapse. “This package is about stability and trust,” said Peer Steinbrück, Germany’s finance minister. “I cannot exaggerate the crisis in the global financial system.”
In Paris, where President Nicolas Sarkozy of France had convened gatherings of his European counterparts for two weekends in a row to help put together a coordinated response, the French government detailed its own 360 billion euro effort. The French government will create a fund that will raise money to guarantee debt for up to five years in a move to make cash available to banks unwilling to lend to each other.
The banks will then be able to obtain these funds in exchange for putting up their own collateral, including debt currently not accepted as collateral by the European Central Bank. In addition, a second state-sponsored company will provide up to 40 billion euros in direct capital injections to banks that request it, in exchange for giving equity stakes to the government.
While the actions were coordinated among Paris, Berlin, London and other capitals, the moves did not represent the pan-European bailout initially favored by the French and Dutch but opposed by Germany. Instead, it was a common strategy in each country determining the magnitude of its effort, underscoring how much European leaders have struggled to unite in the face of the worst financial crisis since the Depression.
Nevertheless, Mr. Sarkozy could not resist lauding what seemed like a vindication of his common approach, while suggesting Europe had now leapt ahead of the United States in addressing the crisis.
“Europe, a united Europe, has done more than the United States in total amounts,” Mr. Sarkozy said, though he failed to take account of the vastly larger sums the United States has committed outside its $700 billion bailout program. “The time of everyone for themselves is over.” Even as investors cheered, some experts questioned whether the plan was big enough to stave off a broader worry: a prolonged recession across Europe.
According to Capital Economics in London, the bailout packages are roughly similar in economic impact: 3.3 percent of gross domestic product in Germany, 2.1 percent in France, and 2.9 percent in Britain. While Europe’s biggest economies led the way, Austria also made 100 billion euros available for recapitalizations and loan guarantees; Spain will insure up to 100 billion euros in bank debt; and the Netherlands threw 220 billion euros into the pot.
“These amounts involved qualify as serious money by any yardstick,” said Holger Schmieding, chief European economist for Bank of America in London. Mr. Schmieding calculated that for Germany, France, the Netherlands and Austria state guarantees and capital injections reach 1.3 trillion euros. Despite the scale of the European efforts, the Capital Economics report said, “we are skeptical as to whether they will on their own be enough to prevent the growth of bank lending from slowing sharply and causing a more prolonged slowdown.”
Still, there were indications that the plan was increasing the willingness of banks to lend to one another. The three-month Libor rate fell to 4.75 percent, from 4.82 percent Friday. While it is not clear how long European governments will hold their new bank stakes, they began moving to exert control over who sits in the corner office and what they are paid. Mr. Sarkozy, for example, said that if a bailout is required, “management will be changed. There cannot be rescue without punishments.”
In Britain, Mr. Brown announced limits on bonuses and dividends. At the Royal Bank of Scotland, which will receive $34 billion in the bailout, the chief executive, Fred Goodwin, resigned, ending the tenure of one of Britain’s best-paid executives.
Netherlands launches $300 billion rescue plan
The Netherlands will provide state guarantee to inter-bank loans of up to 200 billion euros (270 billion U.S. dollars) in a bid to increase market liquidity by restarting capital flows among banks, Dutch Prime Minister Jan Peter Balkenende said Monday.
The measure is intended to restore trust between financial institutions and to enable companies to borrow money necessary to fund their business, Balkenende was quoted by the Dutch media as saying at a press conference. The decision to offer guarantee to inter-bank loans was made after Sunday's meeting of leaders from 15 countries of the euro zone in Paris.
The 15 countries, which use the single European currency, vowed to take concerted actions to shore up confidence in the financial markets, including buying shares of banks and guaranteeing loans for banks. The guarantee scheme will be operational within a few days, the Dutch government said in a statement on its website.
The latest rescue plan comes after the 20-billion-euro (27- billion-dollar) liquidity support to financial institutions the Dutch government announced last Thursday. Both measures are designed to help "fundamentally healthy banks" instead of mismanaged, weak institutions, said government officials. Supported by the financial rescue measures, the Amsterdam Exchange share index grew by 10.6 percent Monday.
Bank of Japan to Offer Unlimited Dollar Funds to Ease Credit
The Bank of Japan said it will offer lenders an unlimited amount of dollars, joining European counterparts in attempting to lower borrowing costs in money markets and freeing up credit worldwide. The central bank will "introduce U.S. dollar funds- supplying operations whereby funds are provided at a fixed rate set for each operation for unlimited amount against pooled collateral," it said in a statement in Tokyo today.
Japan's decision came a day after the Federal Reserve said the European Central Bank, Bank of England and Swiss National Bank will offer European banks as many dollars as they want at fixed interest rates against "appropriate collateral."
Flooding the global financial system with the world's reserve currency helped stock markets rebound after last week's 20 percent slide in the MSCI World Index. Japan's Nikkei 225 Stock Average surged 14.2 percent today, its biggest-ever gain.
The policy board held the key overnight lending rate at 0.5 percent in a unanimous decision at today's meeting. The Bank of Japan didn't participate in last week's coordinated rate cut by central banks in North America and Europe, saying the country's borrowing costs are already "very low."
Hong Kong Guarantees Deposits, Sets Up Fund for Banks
The Hong Kong Monetary Authority will use its foreign exchange reserves to guarantee bank deposits, shoring up confidence in lenders after the first run on a bank in the city in more than a decade. The government will also set up a fund from which banks can access additional capital if needed, John Tsang, Hong Kong's financial secretary, told reporters today. HKMA Chief Executive Joseph Yam said the city's banks have "very low" levels of bad loans and are unlikely to need assistance from the government.
"These two measures are precautionary and pre-emptive," Tsang said. "They show our determination to safeguard our depositors and banking system." The collapse of Lehman Brothers Holdings Inc. last month deepened turmoil in credit markets that has forced European governments to take over some banks and prompted Indonesia, Australia and New Zealand to extend deposit guarantees. Hundreds of Hong Kong investors have protested at possible losses on Lehman-linked investments, while Bank of East Asia Ltd. last month suffered a brief run on deposits at branches in the city.
"It's likely to improve liquidity step-by-step," said Sebastien Barbe, a strategist at Calyon, the investment banking unit of France's Credit Agricole SA, in Hong Kong. "It's doing the same thing as all the big central banks in the world." The run on Bank of East Asia, Hong Kong's third-biggest lender by assets, was sparked by rumors spread by text message questioning the institution's financial health. The bank and the monetary authority have said the lender is healthy, and police investigating the rumors arrested an 18-year-old man.
Money market rates have risen as the deepening global financial crisis makes banks reluctant to lend to each other. Hong Kong's benchmark three-month interbank offered rate, or Hibor, was 4.4 percent today, almost double the rate a month ago. Some smaller banks are offering high interest rates to woo deposits. The new capital facility will provide funds on a case-by- case basis if any bank needs it, Yam said today, declining to say how big the fund will be.
Both measures are effective immediately and will remain in force until the end of 2010, when Hong Kong will decide whether they need to be extended in light of international financial conditions at the time, Tsang said. "The measures are precautionary, and as such, they do not expect to have to inject capital," Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong, wrote in a research note to clients. "The move augments international initiatives and is aimed more at the consumer sector than the wholesale sector."
Hong Kong had $160.6 billion foreign currency reserves as at end of September, according to the HKMA's Web site. Deposits in the city totaled HK$6 trillion ($773 billion), Yam said at the briefing. "There is a very low possibility of local banks failing," Yam said. "I hope the measures we roll out today can help strengthen our banking system."
Hong Kong depositors managed to get back all their savings, plus interest, when the Bank of Credit and Commerce Hong Kong Ltd. went into liquidation in 1991, the last major failure, Yam said. The bank failed after its Luxembourg-based parent collapsed. Today's measures come two weeks after the HKMA said it will provide more liquidity to banks by accepting more securities in repurchase transactions. The central bank is providing lenders with additional funds through the three-month repurchase window.
Yam also said the likelihood that today's measures will trigger an attack on the Hong Kong dollar by speculators isn't high, as the city has "clearly" demonstrated its determination to defend the currency's peg to the U.S. dollar. The currency has been fixed at about HK$7.80 per U.S. dollar since 1983, a year before the U.K. signed an agreement to transfer Hong Kong to Chinese sovereignty in 1997, and is allowed to trade at 5 cents on either side of that level.
In 1998, Yam directed $15 billion of government stock purchases to defend the Hong Kong dollar, aiming to stop speculators by causing losses on their short positions on local shares and the currency. A short position profits from declines.
Europe stuns with $2 trillion bank rescue, as France plays role of saviour
Germany, France, Italy, Spain, Holland and Austria have joined forces to launch the greatest bank bail-out in history, offering over €1.5 trillion in guarantees and fresh capital in a "shock and awe" blitz to halt the credit panic. The move – unveiled simultaneously in the six states to maximise the show of unity – throws the full weight of the eurozone behind global efforts to stem the crisis.
The move gave a tremendous boost to bourses across Europe, lifting the Euro Stoxx index by 9.53pc in the biggest one-day rally ever. The pan-European plan – totalling over $2 trillion, or £1.17 trillion – completes the third leg of a dramatic restructuring of finance across the Western world. Sovereign states have now absorbed the brunt of the credit risk in half the global economy.
"The greatest risk is inertia," said French President Nicolas Sarkozy, now basking in glory as the man who refused to give up after the first emergency summit of EU leaders ended in discord. "The French state will not let a single bank fail. We have to unblock the interbank market because money has stopped circulating, but it is a reasonable bet that by offering this guarantee, it won't actually be needed," he said, unveiling a French package worth €320bn in guarantees for fresh interbank loans and a €40bn bank rescue fund.
Sarkozy has emerged as the statesman of the hour, shaping events as others dithered. He appears to have understood intuitively that credit paralysis would set off a dangerous downward spiral. Germany's rescue package totals €500bn, far bigger in per capita terms than America's scheme. The bulk is to guarantee interbank lending, while €100bn is for a stabilisation fund to recapitalise banks and cover losses – with strict pay limits for executives.
"We have placed the first foundation stone of a new financial order," said chancellor Angela Merkel, underlining that nothing would ever be the same again in banking. She also warned that the US government's "massive support" for the Detroit car industry would create a major headache for Germany's producers, who are already struggling. BMW said yesterday that it would idle plants in Leipzig, Regensburg and Munich as demand fell.
Italy's finance minister Giulio Tremonti said Rome would provide as much money "as necessary" to stabilise credit markets. Italy's plan includes the injection of up to €40bn in fresh capital into the banks on a "case by case" basis, through preference shares. The Netherlands is offering a €200bn guarantee; Austria is putting up €100bn, as is Spain – as a "preventive measure". Debts issued before the end of next year will be guaranteed for five years under all the national plans.
Diplomats say the world owes a great deal to France's finance minister, Christine Lagarde. A former chair of the US law firm Baker McKenzie and a friend of US Treasury Secretary Hank Paulson, she has been a bridge between the EU and Washington, helping to end the transatlantic sniping that has damaged market confidence over the past year. The close co-operation is in stark contrast to the catastrophic rift in October 1931, when France set off a wave of US bank defaults by pulling its gold out of New York.
The Sarkozy accord was not enough to shield Société Générale yesterday, as reports circulated that it might be the first to tap into the French bank rescue fund, perhaps needing as much as €10bn. The share price collapsed 17pc at one point on fears of losses in its structured credit unit. Investors are concerned that it may suffer from exposure to Eastern Europe, where it has played a role in providing foreign currency mortgages. The shares ended down 2pc in Paris.
This week's dramatic action by the eurozone states has gone a long way to reassure investors that EMU can weather a severe crisis, even though it lacks an EU treasury or fully fledged lender-of-last resort. The EU Stability Pact rules on budget deficits have been shunted aside by invoking the "special circumstances" clause of the Maastricht treaty, opening the way for fiscal stimulus. The Dutch-Belgian rescue of Fortis and the French-Belgian rescue of Dexia were not without friction, but at the end of the day the system was able to come up with creative solutions.
IMF chair Dominique Strauss-Kahn said the monetary union had faced its "ordeal by fire" this week. With French leadership, it survived.
Bank Group Asks S.E.C. To Override Guidelines
The American Bankers Association asked the Securities and Exchange Commission on Monday to override accounting rule makers’ new guidelines on mark-to-market accounting, saying they still relied too heavily on distressed asset values.
The staff of the Financial Accounting Standards Board released guidelines on Friday intended to formalize a Sept. 30 joint clarification with the S.E.C. that said banks could rely on internal estimates, rather than deeply discounted market prices, to value assets in illiquid markets. In a letter to Christopher Cox, the S.E.C. chairman, the bankers association said the board’s guidance was “circular” and refused “to recognize the realities of the current situation” by requiring companies to still evaluate liquidity risk in their calculations.
“Given the importance of this issue, the impact it has on the crisis in the financial markets, and the seeming inability of the FASB to address in a meaningful way the problems of using fair value in dysfunctional markets, we believe it is necessary for the S.E.C. to use its statutory authority to step in and override the guidance,” Edward L. Yingling, the president and chief executive of the bankers’ association, said in the letter.
The guidelines, titled “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” differed slightly from the original Sept. 30 statement. The changes reflected concerns raised in more than 90 comment letters sent to the board last week on the change. Mr. Yingling also said in the letter that FASB’s guidelines were “too narrow and too complex,” making them extremely difficult for large banks and their auditors to apply and requiring too many resources of smaller banks.
He also requested that the S.E.C. provide guidelines on when “other than temporary” impairment charges needed to be taken on illiquid assets, and he asked that the S.E.C. suspend any work FASB was doing on other standards using fair value until Congress had completed its study of the rules as required by the Emergency Economic Stabilization Act.
Iceland shares plunge 76% as trading resumes
Shares on the Reykjavik stock exchange plunged by 76 per cent when trading resumed after three days of closure as Iceland’s economy continued to teeter on the brink of collapse. Shares later recovered to leave the OMX Iceland 15 index down 47 per cent in morning trade.
Trading in six financial stocks — Kaupthing, Landsbanki, Glitnir, Straumur-Burdaras, Reykjavik Savings Bank (Spron) and Exista — remain suspended. Iceland last week took control of the operations of Kaupthing, Landsbanki and Glitnir. The exchange had been suspended since Thursday with the last official trade coming on Wednesday.
A delegation of Icelandic officials began talks in Moscow today over a €4 billion loan to help the country's financial sector. The head of the Icelandic delegation said that there had been no discussion so far on a Russian loan amount to Iceland but the group had received an "excellent reception." However, the party does not included any ministers or the Icelandic central bank's chief, suggesting that negotiations have some way to go before politicians become involved.
Iceland needs Russia's money to help rebuild its battered economy after the country of 300,000 people became the most potent symbol of the damage wrought by the global credit crisis. The UK has also offered to lend up to £100 million to Landsbanki, one of three banks taken over by the Icelandic Government, to help facilitate prompt compensation for British savers whose money has been trapped in Icesave's administration.
Iceland has turned to oil-rich Russia for help, where a €4 billion loan would be worth around one per cent of Russia’s gold and foreign exchange reserves. Moscow has unveiled a rescue package for the Russian market worth more than $210 billion, but analysts say capital flight may not stop until global financial markets stabilise.
Helping Iceland could help to ensure that happens, although Russia’s move is widely regarded as politically motivated. Last week, Iceland said the loan could be for between three and four years at an interest rate of between 30 and 50 basis points above Libor.
Icelandic Shoppers Splurge One Last Time as Currency Woes Reduce Food Imports
After a four-year spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports. "We have had crazy days for a week now," said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik's main shopping center. "Sales have doubled."
Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally. Iceland's foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate.
Many banks won't trade the krona and suppliers from abroad are demanding payment in advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil. The crisis is already hitting clothing retailers. A short walk from Bonus in the capital's Kringlan shopping center, Ragnhildur Anna Jonsdottir, 38, owner of the Next Plc clothing store, said she can't get any foreign currency to pay for incoming shipments and, even if she could, the exchange rate would be prohibitively high.
"We aren't getting new shipments in, as we normally do once a week," Jonsdottir said. "This is the third week that we haven't had any shipments." Iceland's 320,000 inhabitants have enjoyed four years of economic growth in excess of 4 percent as banks and businesses expanded abroad, buying up companies from brokerages to West Ham United soccer club. Now, the three biggest banks, Kaupthing Bank hf, Landsbanki Island hf and Glitnir Bank hf have collapsed under the weight of about $61 billion in debts, 12 times the size of the economy, according to data compiled by Bloomberg.
The central bank, or Sedlabanki, ditched its attempt to peg the krona to a basket of currencies on Oct. 9, after just two days, citing "insufficient support" in the market. Nordea Bank AB, the biggest Scandinavian lender, said the same day that the krona hadn't been traded on the spot market, while the last quoted price was 340 per euro, compared with 122 a month ago.
"There is absolutely no currency in the country today to import," said Andres Magnusson, chief executive officer of the Icelandic Federation of Trade and Services in Reykjavik. "The only way we can solve this problem is to get the IMF into the country." The International Monetary Fund sent a delegation to the island last week. Prime Minister Geir Haarde said on Oct. 9 his country may ask it for money after failing to get "the response that we felt that we should be able to get" from European governments and central banks. The state will also start talks with Russia over a possible 4 billion-euro ($5.5 billion) loan.
Iceland's rugged, treeless terrain, a barren stretch of volcanic rock, geysers and moss, means the country imports most food, other than meat, fish and dairy products. Magnusson said last week that one of Iceland's largest supermarket chains was unable to get any foreign currency to make purchases abroad and another retailer's electronic payment didn't go through. Iceland will begin to see shortages of "regular goods" by the end of the week if nothing changes, he said.
"We are struggling to make the economy survive from hour to hour," Magnusson said. "There is an enormous amount of capital that wants to get out of the country." Sedlabanki told lenders on Oct. 10 that residents who want foreign currency should first prove they need the money for traveling by providing documentation for their trip.
Wholesalers are demanding that importers pay before any goods are shipped, said Knutur Signarsson, head of the Reykjavik-based Federation of Icelandic Trade. Under normal circumstances, wholesalers abroad would extend credit for 30 to 90 days, he said. "Many of them ask us to pay cash before they send the goods to Iceland," Signarsson said. "Because of the situation, Iceland has become a country that no one trusts any longer."
Bogi Thor Siguroddsson, owner of Johan Roenning, an import and retail business which has about 7 billion krona ($71 million) in annual sales, says he's instructed his purchasing managers to only import the core goods, including light bulbs, lamps and electrical cables, they need to serve their customers. "It's enough to have the credit crisis," he said. "Then you have the currency crash. Unfortunately, we have shown that we can't handle it ourselves."
Icelanders, whose per capita gross domestic product is the fifth highest in the world, according to the United Nations 2007/2008 Human Development Index, will have to tighten their belts. Shoppers are paying more for the goods they do get. The cost of fruits and vegetables, nearly all of which are imported, have gone up about 50 percent in recent months, said Steinunn Kristinsdottir, a 33-year-old Reykjavik resident who was leaving the Bonus store with her cart full. "This situation really has been a bit troubling for people," she said. "They don't know what's going to happen."
Goldman Sachs Seeks New York Bank Charter
The financial company long known for investment banking has applied for a New York State bank charter, Gov. David A. Paterson announced on Monday. The announcement does not mean a move for Goldman Sachs, which has been based in New York City since it was founded in 1869. But it does provide glimpses of Goldman’s roadmap as it repaints itself into a commercial bank, as it decided to do when its stock came under siege in September.
Goldman’s state charter, if approved, would set it apart from its direct competitors — Morgan Stanley, Citigroup, JPMorgan Chase and Bank of America. Those banks operate under a national banking charter, allowing them to open branches across states without separate applications. Goldman’s decision could indicate that the firm is not interested in national consumer-focused business — which will differentiate it from its peers.
Goldman is expected to focus on managing assets for high-net-worth individuals rather than providing retail banking services. The bank would have $150 billion in assets, making it one of the largest regulated by the state, along with the Bank of New York Mellon and M & T Bank. The state’s banking department is reviewing Goldman’s application and business plan and did not release such details as whether Goldman would offer savings and checking accounts.
Richard H. Neiman, the state’s superintendent of banks, said Goldman’s decision throws support behind the state banking system, which has fallen into question in the last decade as large banks applied for national charters. “There’s been some concern as to whether the dual-banking system is alive and well,” Mr. Neiman said.
GMAC Tightens the Auto-Finance Screws
The Federal Reserve and U.S. Treasury may be moving to buttress America's banks and keep the loans flowing. But General Motors Acceptance Corp., the finance company that is 51%-owned by Cerberus Capital Management and the rest by General Motors, didn't get the memo.
Instead, the auto- and home-loan company sent a letter to GM dealers on Oct. 13 saying that the company won't loan money to car buyers with credit scores lower than 700. Consumers with credit scores above 680 are considered prime-credit borrowers. That means even some would-be car buyers whose credit is considered sterling would be nixed by GMAC. GMAC isn't the only lender that's tightening credit. Data from the Federal Reserve Board shows that almost 70% of banks this year have tightened lending standards to non-credit-card customers.
GMAC's tighter purse strings also show how GM's options are dwindling. When the auto giant was GMAC's sole owner, it could set lending policies to help dealers sell more cars. But given the losses GMAC has taken on mortgage loans and leases, it has had to get stingy. "When GM gave up control to Cerberus, they got in a pickle," says Mark Rikess, president of the Rikess Group, a consulting firm for dealers. "It has taken away flexibility from dealers."
Now, dealers have to go to several banks to get some borrowers a loan. Banks are lending, Rikess says, but only to borrowers with strong credit. The shame of it, says Rikess, is that some buyers with above-average credit are fearful of getting denied. So they won't even shop for a car until they hear banks are loosening up.
As if selling cars wasn't tough enough anyway, with consumers worried about their jobs and losing home equity and other sources of cash. Before GMAC started tightening standards in recent months, the credit company loaned money to about half of GM's buyers. "We're going to have to utilize open markets," says Mark LaNeve, vice-president of GM North America Sales and Marketing. "Dealers are accessing outside banks."
This isn't the first time GMAC has pulled on the reins. LaNeve says the company has been getting tougher on borrowers for months. He says tighter credit has cost GM at least 10,000 buyers a month. Chad Eddlemon, general manager of Ron Tonkin Chevrolet in Portland, Ore., says that in some markets such as the Northwest, banks and credit unions are bigger players than GMAC anyway. Still, he says, "Within the last six months, GMAC has shifted their lending model so they did not help dealers sell cars."
In its letter to dealers, GMAC said it will restrict approval of loans with terms longer than 60 months. LaNeve said that won't hurt GM because the automaker had already pulled back on 72-month loans, unless they were extended as part of a special incentive program.
In the letter, which was sent by Barbara Stokel, executive vice-president of GMAC North American Operations, the company also said it will suspend bonuses to dealers who earned the lender's Platinum designation for bringing the firm strong buyer volume. One Chevrolet dealer in Dallas said the bonuses amounted to $200 to $400 a car. Many dealers used that bonus money to pay off the interest on their own inventory.
Gordon Brown calls for 'new Bretton Woods'
Gordon Brown has called for a "new Bretton Woods" international agreement to prevent a repeat of the global financial meltdown. He said that British wartime spirit could be crucial in securing such a deal and added that world leaders must show the courage of Sir Winston Churchill to deal with the current crisis. In a speech to business leaders, the Prime Minister warned that the coming days would be a "crucial time" for the world economy.
The Bretton Woods agreement - named after the American hotel where it was agreed - was a historic deal signed in 1944 to shore up the global economy after the Second World War. Under the deal, exchange rates were fixed for almost thirty years and the value of the dollar was linked to gold, ensuring its status as a global currency. This brought the global economy under control and stopped reckless economic activity. The agreement also established the International Monetary Fund (IMF), World Bank and other international bodies.
The Prime Minister said that we "must have a new Bretton Woods - building a new international financial architecture for the years ahead". "During the second world war, far sighted leaders like Roosevelt and Churchill were already thinking about the framework that would be needed for the future," he said. "Whilst in the heat of the battle - taking steps to forge the reconstruction and peace that was to come.
"With the same courage and foresight of [these] founders, we must now reform the international financial system around the agreed principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders." Mr Brown is travelling to Brussels on Wednesday to hold further talks with European leaders about a co-ordinated global response. He is also involved in discussions about holding an emergency meeting of world leaders to discuss the new Bretton Woods proposal.
He said: "The coming days will be a crucial time for the future of the international financial community and the world economy, and that, in turn, makes it a crucial time for British families and British businesses. The stakes are higher than ever before. "The resolve of leaders and nations across the world will be put to the test over the coming days."
It is understood that the Prime Minister wishes to see the IMF reformed to become a "global central bank" closely monitoring the international economy and financial system. There may also be global rules to prevent conflicts of interest and to boost transparency in the financial system. Mr Brown's comments are the strongest public sign yet that he is approaching the financial crisis as if it were a military conflict. He has also established a "war cabinet" of ministers to co-ordinate this country's policies.
"The character of our communities is being tested," he said. "The British people have always risen to the challenge of a crisis and we must do so again. To pull together as a community - and show that spirit, resilience and determination which has defined Britain as a nation for generations."
The Prime Minister has won international plaudits for his approach. Paul Krugman, an American economist who was today awarded the Nobel Prize for Economics, said: "Mr. Brown and Alistair Darling, the chancellor of the Exchequer, have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up. "This is an unexpected turn of events. The British government is, after all, very much a junior partner when it comes to world economic affairs.
"But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn't been matched by any other Western government." However, the Conservatives have accused Mr Brown of being triumphalist over the financial crisis. Shadow chancellor George Osborne said today's package was "no triumph" and accused the Prime Minister of "presiding over the biggest economic disaster of our lifetime".
UK house sales fall to less than one a week
The dismal state of the housing market was highlighted today as mortgage lending to first-time buyers plunged by 55 per cent to a record low and estate agents reported that they were struggling to sell even one home a week. Banks and building societies approved home loans for just 15,600 first-time buyers in August, compared to 34,800 in the same month last year and the lowest figure since records began in 2002, according to the Council of Mortgage Lenders (CML).
The lack of first-time buyers in the market is having a disastrous effect on estate agents as sellers struggle to complete sales. The average number of sales per agent hit a 30-year low of 11.5 in the three months to September. However, London was far worse hit with estate agents in the capital saying they sold an average of just eight properties between July and September, based on data from the Royal Institute of Chartered Surveyors (RICS). One surveyor said nearly all the sales were of repossessed properties.
Overall, total mortgages, which also includes remortgaging and loans to existing homeowners, fell by 63 per cent to £6 billion during August. Loans to people moving house fell by 61 per cent in volume and 64 per cent in value. While the number of loan for remortgaging fell by 20 per cent. Both the CML and RICS welcomed yesterday’s move by the Government to bailout out leading UK banks. But Michael Coogan, director general of the CML, said: "The package of measures announced yesterday will have a positive effect, but it will take time for it to feed through to the mortgage market."
House prices are also continuing to fall, according to RICS. Across the country, 84.2 per cent more chartered surveyors reported seeing further price slides during the month compared with those who saw price rises, compared with 81.8 per cent more who reported falls in August. RICS said sellers had been forced to drop their asking prices, but despite this the percentage of their asking price that they achieved was continuing to fall.
Elsewhere in Britain, house sales are picking up despite falling prices The increase in demand was particularly marked in the South West, where 12 per cent more surveyors reported a rise than a fall in demand- the highest level since May 2007. Estate agent Knight Frank had more bad news on the property market yesterday when it said it expected house prices to fall to the same levels of 2003 leaving more than two million people in negative equity. Under the estate agent’s estimates average house prices would fall a further £45,000 to £140,687.
The Nationwide Building Society, Britain’s biggest independent mortgage lender, announced yesterday that it was raising rates and withdrawing deals for all but the most cash-rich buyers. The lender said that it was increasing its rates by up to 0.61 percentage points and said that it would offer new deals only to borrowers who had a 15 per cent deposit.
Commodity Prices Tumble
The global financial panic and the economic slowdown have put at least a temporary end to the commodity bull market of the last seven years, sending prices tumbling for many of the raw ingredients of the world economy.
Since the spring and early summer, when prices for many commodities peaked amid fears of permanent shortage, wheat and corn — two cereals at the base of the human food chain — have dropped more than 40 percent. Oil has dropped 44 percent. Metals like aluminum, copper and nickel have declined by a third or more.
The swift turnaround is the brightest economic news on the horizon for consumers, putting money into their pockets at a time they need it badly. Gasoline prices in the United States are falling precipitously — by about 24 cents over the last five days, to a national average of $3.21 a gallon on Monday — and analysts said they could go below $3 a gallon nationally this fall, down from a high of $4.11 a gallon in July.
Prices for most commodities remain elevated by past standards, and they rose a bit on Monday amid the broad market rally. But the trend seems to be downward as traders weigh the prospect that the global economic crisis will lead to sharp drops in demand. The big question is whether prices will drop all the way to long-term norms or whether Asia’s continuing economic boom has set a floor.
The rapid commodity decline has eased fears of inflation, a reason central banks were able to lower interest rates around the world last week in an effort to salvage economic growth. It also represents a fundamental shift of view that is driving markets these days.
A scant few months ago, Americans were seen as participants in a bidding war with the emerging Chinese, Indian, Russian and Brazilian middle classes for a basket full of products. But that was before an extreme slowdown in demand for things as diverse as gasoline and aluminum and the retreat of investment money from commodity futures into safer havens like government bonds.
The commodity bust began before last week’s broad market declines, though the panic has exacerbated the pressure on commodities. Oil dropped by 10 percent on Friday alone, but then recovered some of that loss Monday to settle at $81.19 a barrel, far below its high in July of $145.29.
“Commodities followed the euphoria cycle that we had along with housing,” said Robert J. Shiller, an economist at Yale who specializes in market bubbles. “We had the idea that the world is growing very fast, people are getting very rich and, by the way, we are running out of everything. That theory doesn’t seem so good when the economy is collapsing.”
Some analysts, while welcoming the recent declines, say they believe that prices are likely to remain above long-term norms. Food, in particular, could be a continuing problem: today’s prices are still too high to allow many people in developing countries to afford adequate diets. Nor have the recent declines been passed along in American grocery stores, at least as of yet. The United Nations has projected that global food prices will remain elevated for years.
The price increases of recent years served their economic function, calling forth additional supplies of many commodities — farmers planted every acre they could, mining companies opened new mines and oil companies went to the far corners of the earth to drill wells. In many cases, the prices also caused demand to decline even as supply started rising.
Americans, the world’s largest fuel consumers, have been cutting back on gasoline all year, and the decline is approaching double digits. Motorists pumped 9.5 percent less gasoline for the week ended Oct. 3 compared with the same week a year earlier, according to MasterCard Advisors, which tracks spending. In a report on Friday, the International Energy Agency cut its forecast for global oil consumption yet again, projecting that 2008 would end with the slowest demand growth in 15 years.
Big increases in world wheat production because of increased acreage in the United States, Canada, Russia and much of Europe have brought wheat prices to less than $6 a bushel today from nearly $13 in March. Soybean prices have dropped to $9 a bushel from $16 since July, in part because of a record crop in China and a slowdown in Chinese imports. Corn prices are also easing amid expanded supply.
A theory among economists is that commodity prices are still at the beginning of a steep fall as the credit squeeze takes the world economy into a deep recession. “When you have a seven-year bull run, you are going to have more than a four-month correction, and we are just beginning our fourth month,” said Richard Feltes, senior vice president and director of commodity research at MF Global Research. “We have got more deflation coming in the housing sector, in capital assets, and it’s going to continue in commodities as well.”
But many economists say a lasting price collapse is unlikely because the emerging middle class and growing populations in developing economies will continue to have strong appetites for fuels and metals. Some say that the other commodity bull markets in modern history — approximately spanning 1906 to 1923, 1933 to 1955 and 1968 to 1982 — lasted more than twice as long as the current run. They included some sharp corrections before they ran their course, suggesting that the current drop, however precipitous, could be temporary.
Though the picture is slightly different for every commodity, prices generally hit a low point for the decade soon after the terrorist attacks of Sept. 11, 2001, then rose as the global economy strengthened in the following years. From late 2001 until mid-2008, the price of oil rose 800 percent, copper rose 700 percent and wheat rose 400 percent.
The decline of recent weeks has taken virtually every major commodity more than halfway back to its late 2001 price, adjusted for inflation. The recent drop has been so rapid that if the pace continued, it would take only a few more weeks to erase the gains of the bull market entirely. That suggests to some analysts that prices could hit a floor fairly soon. “The underlying fundamentals of strong demand for energy, food and industrial commodities will come back,” said Michael Lewis, global head of commodities research for Deutsche Bank.
Many analysts think oil could fall to $70 a barrel in the next few months, if not sooner. But it is hard for them to believe it will go much lower: oil is not becoming easier to find, as fields in Mexico peter out and suppliers like Iran, Nigeria and Venezuela remain unreliable. The costs of finding oil in deep waters or mining oil sands in Canada remain high, in the $60 to $70 a barrel range — and since those are now vital sources of supply, they could help put a floor under the oil price.
Additionally, the Organization of the Petroleum Exporting Countries could cut production to try to shore up prices, probably at an emergency meeting it will hold Nov. 18. Analysts note that the credit crisis and economic slowdown will inevitably stall new industrial projects, reducing demand for metals. But the falling prices will also discourage new mining and drilling. When economic growth resumes, that could produce metal shortages that would drive prices back up.
The biggest single factor that will decide whether a prolonged bull market in commodities is over, or just in a lull, is the Chinese economy. The industrial development of that country in recent years was responsible for much of the world’s increased consumption of copper, aluminum and zinc, and almost a third of the increase in oil consumption.
Chinese growth has slowed but is still running above 12 percent, and that country is expected to undertake some huge projects in coming months as it repairs damage from earthquakes and storms. Kevin Norrish, a senior commodities researcher at Barclays Capital, said that in a recent visit to China he found that domestic demand for copper was still strong but that exports were weakening. Chinese copper wire manufacturers, he said, “are very depressed indeed because their export orders have fallen a long way.”
He said that as high as prices for commodities rose in recent years, the bull run in the late 1970s and early 1980s was even more buoyant. Of all the major commodities, only oil at its peak in July traded at a higher price than in the last bull market, adjusted for inflation. That previous bull run, stimulated by years of high economic growth and inflation, was followed by nearly two decades of weak prices that accompanied the transition in the United States from an industrial to a service economy.
Then China and India appeared on the world stage as major economies at the turn of the new century, followed by the oil-driven economy in Russia and greater consumption in the Middle East the last four or five years. Mr. Norrish is one of many commodities analysts who think that the story of China, India and other developing countries’ spurring commodity demand is not over. “What we are seeing is a pause in what we see as a very, very long bull run,” Mr. Norrish said.
Calpers fund loses 25 percent in one year
The largest public pension fund in the U.S. lost almost $67 billion in 12 months, more than 25 percent of its value, as stock markets tumbled. The market value of the California Public Employees' Retirement System declined to $193.7 billion as of Oct. 9, from $260.6 billion a year earlier.
Between Sept. 15, when Lehman Brothers Holdings Inc. filed for bankruptcy, and last week, the fund's stock holdings declined by $12.4 billion to $36.8 billion, according to data compiled by Bloomberg. Pensions and retirement accounts, which tend to be heavily invested in stocks, may have lost as much as $2 trillion since 2007, the Congressional Budget Office reported Oct. 7. In the 12 months through Friday, the Dow Jones Industrial Average dropped 40 percent, the Standard & Poor's 500 Index, 42 percent.
Calpers reported that it lost 2.6 percent for the fiscal year ended June 30, its worst performance in six years. Retirement benefits promised to retired state workers in California are guaranteed and won't change when stock markets decline. The pension fund has said it needs to earn an average of 7.75 percent in a so-called "smoothing policy" that allows it to spread its gains and losses out over 15 years as a way to ensure it doesn't have to ask state and local governments for more money to pay for guaranteed benefits.
It earned an average of 10 percent during the five years ended Aug. 31 and 7.2 percent in the last three years. "We're still applying gains from four years of double-digit returns," said Calpers spokeswoman Pat Macht. "Those will help offset employer rates for next year."
The California State Teachers' Retirement System, the second- biggest U.S. public pension fund after Calpers, lost 3.7 percent for the fiscal year, its worst one-year decline in a decade and the first loss since 2002. The teachers' fund saw the value of its stock portfolio decline 25 percent to $14.9 billion as of Oct. 10 from $20 billion on Sept. 15, according to Bloomberg data.
World May Be Lucky to Get Worst Recession Since 1983
The world may be heading for its worst recession in a quarter of a century -- if it's lucky. A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.
"It's certainly going to be the worst since the 1980s," says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the U.S. Treasury Department from 1993 to 1995. "The hope is that it won't become the worst unemployment business cycle since the Great Depression."
Of special concern: The two big bulwarks of the global economy in recent years -- U.S. consumer spending and the rapid growth of emerging markets -- may be finally giving way in the face of the 14-month-old financial turmoil. That raises the odds that the coming economic decline will be long and deep, despite U.S. Treasury Secretary Henry Paulson's $700 billion financial rescue plan, similar efforts by European leaders and the coordinated interest-rate cuts engineered by Federal Reserve Chairman Ben S. Bernanke and other central bankers last week.
"This is the worst crisis I've seen in my 50-year career," William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. "We still have to deal with the effects on the real economy here and elsewhere."
The International Monetary Fund's World Economic Outlook last week forecast that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's informal definition -- growth of 3 percent or less -- although current IMF chief economist Olivier Blanchard declined to describe it as such.
One of his predecessors wasn't so shy. "It's hard to imagine it not being the worst recession in at least 25 years," says Kenneth Rogoff, who is now a professor at Harvard University in Cambridge, Massachusetts. "You can take most of the official forecasts for 2009 and knock two" percentage points off of them, he adds. That would make it the worst slump since 1982, when the world economy grew 0.9 percent. "We're heading into a global recession," Simon Johnson, also a former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics in Washington, said last month.
Stocks rallied worldwide today after European governments announced measures to shore up financial institutions and central banks pumped unlimited dollar funds into the money markets. The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939. Even if the financial markets settle down soon, the deepening decline will put pressure on central bankers to cut interest rates further and on finance ministers to reduce taxes and boost spending.
"There will be more cuts out of all of the central banks," says Ethan Harris, economist at Barclays Capital Inc. in New York. "We are looking at a global recession, and it isn't going to turn quickly." U.S. lawmakers, who already enacted one economic-stimulus package this year, will reconvene after the Nov. 4 presidential and congressional elections to consider another.
"We are going to do a stimulus," House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said yesterday on the ABC News television program "This Week." The U.S., where the 2 1/2 year-old nosedive in the housing market is now taking down the rest of the economy, is the epicenter of the global slump. Gross domestic product contracted in the third quarter and is set to shrink further in the fourth, according to a survey of 52 economists by Bloomberg News this month.
Consumer spending, after growing uninterruptedly since 1991, finally gave way last quarter in the face of rising unemployment, declining wealth and tightening credit. Further weakness seems to be in store. The jobless rate, already at a five-year high of 6.1 percent, may rise to 8 percent, says Jan Hatzius, chief U.S. economist at Goldman Sachs Group in New York. That would bring the cumulative increase in unemployment during the recession to 3.5 percentage points, second in the post-World War II era only to the 4.1- point increase recorded in the mid-1970s.
Household finances are also being pinched. The steep decline in U.S. stock prices last week alone wiped some $2.16 trillion from investors' wealth. And banks are getting stingier with credit: Borrowing by U.S. consumers fell in August by the most on record as lenders shut access to loans, according to data from the Fed. The consumer pullback is already sending ripples throughout the economy. Vacancies at U.S. neighborhood and community shopping centers rose to a 14-year-high in the third quarter, New York-based real-estate research firm Reis says.
A sharp reduction in household spending could turn what is shaping up to be the biggest contraction since the early 1980s into something worse, Bruce Kasman, chief economist at JPMorgan Chase & Co. told a meeting of the Institute for International Finance in Washington yesterday. The U.S. economy is headed for a "fairly significant recession," and unemployment may peak at more than 9 percent, Microsoft Corp. founder Bill Gates III said at the Harvard Business School in Boston today.
Cracks are also showing up in the emerging markets, until now the dynamos of the world economy. The MSCI Emerging Markets Index fell 20 percent last week as global investors yanked money from countries such as Brazil and Russia. Michael Mussa, another former IMF chief economist now with the Peterson Institute, says he has cut his forecast for emerging-market and developing-country growth next year to below 5 percent from 5.7 percent just two weeks ago. That would be the slowest since the Asian financial crisis in 1998 and would compare with an IMF projection of 6.9 percent growth for this year.
"The credit crunch has taken hold in emerging markets, particularly in central Europe and now in Latin America," Mexican central bank Governor Guillermo Ortiz told the IIF yesterday. "This has happened in a few weeks, even days." Brazilian Budget Minister Paulo Bernardo said in an interview published yesterday by O Globo newspaper that the government may cut spending and postpone social programs as the financial crisis takes its toll on the economy.
Asia is also feeling the impact. Indian central banker Rakesh Mohan says his country's economy faces "downside risks" as global investors turn more cautious. Even China is feeling the effects, as its exporters are pinched by slowing demand from the U.S. and elsewhere. Yi Gan, the deputy governor of the People's Bank of China, sees growth slowing to 9 percent next year from 10.4 percent this year and 11.9 percent in 2007. "The financial crisis really has an impact everywhere in the world," he told investors in Washington yesterday.
That impact will grow the longer the crisis drags on. In a bid to restore calm to the markets, European leaders agreed yesterday to guarantee bank borrowing and use government money to prevent big lenders from going under. The Fed announced today an unprecedented push by central banks to flood the financial system with dollars. "Time is of crucial importance," JPMorgan Chase's Kasman says. "The longer we wait to implement the strategies, the more damage we can do to the world economy."
Financial History in the Making
So much has happened this month, where to begin? It's been a month to end all months with one monumental crisis following another. At times, events were moving so quickly it was hard to keep up. Many analysts we know stayed up all night, several times, as developments and markets spiraled out of control in what's being called a financial tsunami.
What lies ahead is unknown because massive changes are still taking place as the worst financial crisis since the Great Depression unfolds. We do know that this is clearly the end of an era and the beginning of a new one, and we'll all be affected in one way or another. For now, opinions are running rampant and although we can make some valid assumptions, no one actually knows how this will all end up. Here's why...
As you all know, the bailouts this month were massive and truly mind boggling, but the big spending actually started before. First, there was the $150 billion in stimulus checks, booming money supply, super low interest rates and the Bear Stearns bust.
Then came the takeover of Fannie Mae and Freddie Mac, which made the government responsible for about half of the mortgages in the U.S., totaling about $5 trillion. This amounted to the biggest bailout ever, costing $200 billion. But if just 10% of those loans have to be covered, it would mean another $500 billion and this alone equals the size of the entire annual defense budget... Then things really intensified.
Lehman Brothers went bankrupt, Merrill Lynch agreed to be bought and the foundation of the financial system took a serious blow. Wall Street started to panic and the Federal Reserve, along with the world's largest central banks, poured unprecedented amounts of money into the banking system to provide ever more liquidity as stocks fell sharply and the banking situation grew more serious.
The government then took over AIG, to avoid the worst collapse in history of the U.S.'s largest insurer. Money market funds, which have always been considered safe, came under pressure. Worried investors started pulling out of these to preserve their savings, resulting in the Fed also having to lend banks about $400 billion in guarantees to meet these withdrawal demands. The bottom line was that in just one week, the Fed spent over $1 trillion to keep things going.
Next, Washington Mutual failed, which was the biggest bank failure in U.S. history. While all this was happening, the bailout package was a top priority. Bernanke and Paulson were desperate to get it passed, and fast. The President pushed for it too as they all warned that the alternative would be far worse. But the House rejected it and this shocked the markets. The Dow plunged in its biggest one day loss ever, dropping $1.3 trillion, which was way more than the $700 billion requested in the bailout.
Seeing the market's reaction, the package then passed quickly but stocks continued falling sharply anyway. The general feeling was that the $700 billion won't be enough and the plan is insufficient. Some feel this could be like the initial low estimates for the Iraq war and the final bailout tally could be $2 to $5 trillion, or more.
Meanwhile, folks on Main Street were generally against the package. They simply didn't trust it or the politicians. Once they saw the stock market's reaction to the no vote, however, many people changed their minds as it became more obvious hat this wasn't simply a plan to bailout the mistakes made by greedy Wall Street big shots. People saw the writing on the wall and realized that this would affect everyone, resulting in a worsening economy, more job losses and no credit.
And since U.S. retirement assets are already down $2 trillion in the past 15 months, dropping 401 and real estate values, bank failures and insecurity are also taking their toll. The economy is the number one concern for most people and they're irritated at the mud slinging direction the election has taken while the priority issues take a back seat. So it'll be interesting to see how the election unfolds too.
There's no question these are dangerous times and the financial world is in uncharted waters. The global financial system is on very thin ice, teetering on collapse. Yesterday's coordinated interest rate drop by seven central banks clearly illustrates this because it was the first time ever that so many central banks lowered rates together and by half a percent. They're literally pulling out all the stops to revive lending and the world economy.
Will these efforts work? Will they be enough? Those are the most important unanswered questions of the day and only time will tell, but we should know much more in the critical month or so ahead. Why?
The Fed is spending money at an astronomical rate. It's creating this money out of thin air by monetizing bad debts and whatever else it has to. Remember, this is on top of all the other ongoing government expenses and it's extremely inflationary.
Normally, there is a lag of about a year or so between money creation and inflation but eventually, what's recently happened will result in massive inflation, a much lower U.S. dollar and a soaring gold price. This is inevitable but as our dear friend Chris Weber points out... not necessarily.
The bottom line is this, if the banks start to lend again, then the economy will be on the road to recovery and inflation. But we know the banks are scared and they're being extremely cautious, for good reason. So if the banks decide not to lend and instead just sit on their cash, then the inflation process will freeze.
In other words, the risk of deflation has greatly increased. Inflation is not a given and much will depend on what the banks do, or don't do in the period just ahead. The Fed is providing the ammunition but the banks have to use it. If they don't, the outcome could be much different than what most analysts feel is a done deal.
At this point, it's best to be prepared for either outcome. That means gold for inflation and cash for deflation, at least until we see how things unfold. For now, important changes are taking place but that also means challenges and opportunities. This may all end up differently than what we initially thought, but we'll adapt and keep an open mind. Whatever lies ahead, the current challenge is getting safely from here to there relatively unscathed and we'll do our best.
Yen Declines Against Euro as Bank Rescues Support Carry Trades
The yen was headed for its biggest two-day decline versus the euro in more than seven years as global government support of banks encouraged investors to buy high-yielding assets funded by low-cost loans in Japan.
Japan's currency was poised for a record two-day drop versus the Australian dollar as a $250 billion capital injection for U.S. banks raised speculation that investors will resume carry trades. The dollar fell against the euro and the pound as governments' efforts to revive bank lending reduced demand for the greenback as a haven. "It's the unwinding of safe-haven positions," said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. "The coordinated government intervention takes the probability of a 1930s-style depression off the table."
The yen fell 1.5 percent to 140.67 per euro at 9:45 a.m. in New York, from 138.57 yesterday. It has dropped 4.3 percent over the past two days, the most since January 2001. The yen dropped 0.6 percent to 102.60 per dollar from 102.01. The euro rose 1 percent to $1.37117 from $1.3581. The pound advanced 1.3 percent to $1.7567 from $1.7341.
The Brazilian real, South African rand and Mexican peso rallied as global governments' support of banks spurred demand for high-yielding, emerging-market assets. The real rose 4.8 percent to 2.0420 per dollar, the rand gained 3.2 percent to 8.8738 and the peso increased 2.4 percent to 11.96. Against the Australian dollar, the yen plunged 3.9 percent to 74.04, after a 10 percent drop yesterday. Australian Prime Minister Kevin Rudd allotted A$10.4 billion ($7.3 billion) in spending for home buyers, families and pensioners. The yen fell 3.4 percent versus the New Zealand dollar to 65.20 and dropped 3.4 percent to 11.74 South Korean won.
Japan's currency gained 14 percent versus the Australian dollar and 9.5 percent against the New Zealand dollar this month as credit-market losses mounted. Volatility implied by one-month dollar options against Japan's currency declined yesterday by the most since Bloomberg began compiling the data in December 1995, reducing the risk of trades in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 6 percent in Australia and 7.5 percent in New Zealand.
"Volatility has been falling broadly as we move out of a panic mode," wrote analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, in a research note yesterday. "We expect risk appetite to stay strong, putting yen crosses under pressure."
The Swiss franc, another funding currency in carry trades, fell 2.3 percent to 1.2278 Australian dollar and 2.8 percent to 7.8352 South African rand. Investors should sell the franc and buy the Aussie, according to Calyon, the investment-banking unit of Credit Agricole SA. "This is a short-term play to capitalize on the current euphoria," wrote Daragh Maher, deputy head of global currency strategy at Calyon, in a note to clients. "We accept that it may not persist once the reality of economic weakness re- emerges."
The London interbank offered rate, or Libor, for three-month dollar loans dropped 12 basis points to 4.64 percent, reflecting increased willingness of banks to lend. Stocks around the world rallied, with the Standard & Poor's 500 Index rising 3.4 percent after gaining yesterday the most in seven decades.
European countries committed $1.8 trillion to guarantee loans and invest in lenders yesterday. Japan and Australia pumped $9.1 billion today into money markets after European leaders agreed to guarantee new debt from financial institutions and use taxpayer money to rescue banks.
Europe's actions may not prevent the region's economy from slowing, some currency strategists and investors said. Morgan Stanley predicts a decline in the euro to $1.25 by 2009, from $1.3581 yesterday and the all-time high of $1.6038 in mid-July. Strategists at BNP Paribas see weakness after "some support in the near term."
"The euro was overbought, over-owned, over-rated and overvalued," said Stephen Jen, the global head of currency research at Morgan Stanley in London. Jen correctly predicted in July that the euro would slump just as it began to weaken 15 percent from its record. "The strategic view has to be that a global recession will keep seeing the euro sold off."
Obama Offers Steps to Stem Foreclosures, Aid Families
Democrat Barack Obama proposed easing access to retirement accounts and imposing a 90-day moratorium on foreclosures for some homeowners as part of a plan to boost the economy and aid middle-income taxpayers. "At this rate, the question isn't just, are you better off than you were four years ago?, it's, are you better off than you were four weeks ago?" Obama said in a speech today in Toledo, Ohio. "We face an immediate economic emergency that requires urgent action."
Among other measures, Obama wants the Federal Reserve and Treasury to lend money to state and municipal governments that are having trouble raising money and for federal lawmakers to "keep all options open" to help struggling automakers. The Democratic presidential candidate's advisers say all of the measures, including a $3,000 tax credit to companies for each new job they create in the U.S., should be done immediately, either through existing authority or emergency legislation.
The economic crisis is dominating the presidential campaign, and polls show voters are favoring Obama over Republican candidate John McCain to deal with it. The Illinois senator has opened a 10 percentage point lead over McCain, 53 percent to 43 percent, among likely voters nationally in a Washington Post-ABC News poll taken Oct. 8-11. That's up from a 4 point lead in a Post-ABC poll taken at the end of September.
Obama said the nation needs a new "ethic of responsibility" because part of the reason for the current financial crisis is "everyone was living beyond their means, from Wall Street to Washington to even some on Main Street." The foreclosure moratorium would apply to banks that are getting capital through the $700 billion rescue plan approved by Congress. It would impose a 90-day ban on foreclosures on homeowners who are making "good faith efforts" to keep current on their mortgages.
Obama said federal authorities also should ease the way for loans to states and localities that are having trouble borrowing. California, the largest municipal borrower as well as one of the lowest-rated among U.S. states, may need federal help if it can't raise capital amid turmoil in the credit markets to cover a shortfall in tax collections, Governor Arnold Schwarzenegger has said. For the auto industry, Obama said the government should "fast track" the loan guarantees already approved and "provide more as needed" so that the U.S. is leading the manufacturing of next generation fuel-efficient cars.
Obama, 47, "welcomed" a proposal by McCain to suspend rules requiring retirees to begin liquidating Individual Retirement Accounts and 401(k)s at age 70 1/2 to avoid selling assets while markets are down. He would expand it to allow all Americans to withdraw up to 15 percent, with a maximum of $10,000, without facing the tax penalties such withdrawals usually carry.
"At a time when the ups and downs of the stock market have rarely been so unpredictable and dramatic, we also need to give families and retirees more flexibility and security when it comes to their retirement savings," Obama said. He also endorsed suspending taxes on unemployment insurance benefits. McCain, an Arizona senator, held a rally in Virginia Beach, Virginia, today with his running mate Sarah Palin, the governor of Alaska, and sought to further distance himself from Republican President George W. Bush.
"We cannot spend the next four years as we have spent much of the last eight, waiting for our luck to change," he said. "The hour is late, our troubles are getting worse, our enemies watch." McCain didn't present any new proposals on the economy. He repeated his plan to buy up troubled home loans as a way to help beleaguered borrowers.
"I'm not going to spend $700 billion of your money just bailing out the Wall Street bankers and brokers who got us into this mess," McCain said. "I'm going to spend a lot of that money to bring relief to you, and I'm not going to wait 60 days to start doing it." He went on the attack against Obama's economic proposals, saying they would raise taxes and restrict trade. "The American people heard a series of new proposals from Barack Obama today, but what they did not hear was a promise to stop pursuing his massive tax increases," McCain's spokesman Tucker Bounds said.
McCain acknowledged his underdog status in the race and said he would use that to his advantage. "We have 22 days to go. We're six points down. The national media has written us off. Senator Obama is measuring the drapes" in the White House, McCain told the cheering and chanting crowd. "But, you know what they forgot? They forgot to let you decide," he said. "My friends, we've got them just where we want them." The two candidates will stage their final debate before the Nov. 4 election on Wednesday.
How Congress set the stage for a fiscal meltdown
During last week's presidential debate, John McCain and Barack Obama sparred over what caused the financial crisis. "The match that lit this fire," McCain said, came from the government-sponsored mortgage companies Fannie Mae and Freddie Mac, which backed risky home loans "with the encouragement of Sen. Obama and his cronies … in Washington." Obama shot back: "The biggest problem was the deregulation of the financial system. … Sen. McCain, as recently as March, bragged about the fact that he is a deregulator."
It was a classic example of Washington finger-pointing. McCain and the GOP blame Fannie and Freddie — which were taken over by the government last month — because the troubled mortgage agencies' biggest backers were Democrats who said they wanted to increase access to homeownership. Meanwhile, Obama and other Democrats highlight Republicans' longtime focus on limiting regulations for the financial industry.
No single government decision sparked the crisis, but collectively the candidates had a point: Both parties in Congress played important roles in setting the stage for the ongoing financial meltdown. They did so in moves that reflected not just their ideological priorities, but also the wishes of special interests that have spent millions aggressively lobbying Washington and contributing to lawmakers' campaigns.
By not reining in increasingly risky investments made by Fannie and Freddie — and by keeping complex financial instruments known as derivatives free from most government oversight — Congress chose not to impose barriers that economists widely agree could have helped stave off the crisis that continues, even after lawmakers approved a $700 billion emergency bailout package for Wall Street. Here is a look at how Congress' actions on two key fronts became significant factors in the financial crisis:
1. Not checking derivatives
In 2000, a united financial services industry persuaded Congress to allow a vast, unregulated market in derivatives, which are contracts in which investors essentially bet on the future price of a stock, commodity, mortgage-backed security or other thing of value. Derivatives — so named because their value derives from something else — also are known as hedges, swaps and futures. They are designed to lower risks for buyers and sellers, but in some cases, economists now say, they gave investors a false sense of security.
Today, derivatives are compounding the risks to a shaky economy because they are tied to complex mortgage securities that have plummeted in value. Instruments called credit default swaps, for example, were supposed to insure investors against default of mortgage-backed securities. With a mass collapse of those bonds, it's not clear how the swaps can pay off. The ultimate fear, as Fortune magazine put it, is that swaps can cause "a financial Ebola virus radiating out from a failed institution and infecting dozens or hundreds of other companies."
Derivatives are traded privately, and their estimated national value is huge: $531 trillion. Losses from derivatives helped bring down Wall Street powerhouse Lehman Bros., and led the government to spend nearly $123 billion so far bailing out the giant insurer AIG. The bill barring most regulation of derivative trading was inserted into an 11,000-page budget measure that became law as the nation was focused on the disputed 2000 presidential election. It was sponsored by Republican Sens. Phil Gramm of Texas and Richard Lugar of Indiana — with support from Democrats, the Clinton administration and then-Federal Reserve chairman Alan Greenspan. Few opposed it.
Sen. Tom Harkin, an Iowa Democrat who help negotiate the bill for Democrats, says he put aside his qualms because Wall Street and Greenspan were adamant that less regulation would help the stock market. "All of the Wall Street crowd, all of the investment firms, the Morgan Stanleys, the Goldman Sachs … that steamroller just rolled over anything," he says. Wall Street promised to police itself "and Congress bought it."
Better regulation could have provided greater transparency and ensured that enough collateral was in place for derivatives to meet their obligations, says economist Susan Wachter of the University of Pennsylvania's Wharton School. "It's totally obvious in retrospect that this was not good public policy," she says. But a decade ago, many saw derivatives as a way to smooth the gears of free-market capitalism. That's why the financial industry was alarmed in March 1998, when a little-known agency called the Commodity Futures Trading Commission sought to regulate derivatives.
Financiers erupted. They feared the plan would invalidate existing contracts, and they argued derivatives often were uniquely tailored hedges against risk that could not abide one-size-fits-all rules. Greenspan, then-Securities and Exchange Commission chairman Arthur Levitt and then-Treasury secretary Robert Rubin said in a statement they had "grave concerns" about regulating such agreements. A report by President Clinton's economic team recommended against regulation. At congressional hearings, Greenspan argued that sophisticated market players would check one another, and if derivatives were regulated here such investments would go overseas. A bill barring derivatives from being regulated as futures contracts passed the House in October 2000, by a vote of 377-4.
But Gramm, chairman of the banking committee, was not satisfied. Gramm told USA TODAY at the time he wanted language making clear that banking products could not be regulated by the commodities agency. After the fall election, leaders of both parties cut a deal and in December 2000 inserted it in the budget bill. "The work of this Congress will be seen as a watershed, where we turned away from the outmoded, Depression-era approach to financial regulation," Gramm said then.
The wall against regulation was a watershed in another way. Financial services employees and political action committees made $308.6 million in political donations in 2000, up from $175 million in the previous presidential election year, says the Center for Responsive Politics. Wall Street and the banking, insurance and real estate industries spent $3.2 billion on lobbying in the past decade, the center reports. AIG spent $73 million. More than a quarter of the $3.9 million in campaign money Gramm raised from 1997 through 2002 came from the financial services sector, and nine of his top 10 donors, grouped by economic interest, were employees of financial companies that use or trade in derivatives, according to election records compiled by the center.
Gramm, who left office in 2003 and went to work for UBS, was a top economic adviser to GOP presidential nominee John McCain until he stepped down in July after saying the USA had become "a nation of whiners" about the economy. Noting that he has always favored deregulation, Gramm scoffs at the idea he was influenced by campaign money. The derivatives provision didn't cause the credit collapse, he adds.
"The crisis was caused by government," Gramm says. He cites the Community Reinvestment Act, which he says "forced banks to make subprime (mortgage) loans" to people who couldn't afford them. Democrats, including Harkin, and many economic analysts dispute that. As for what he learned, Harkin says, "Don't pay attention to Wall Street when it comes to issues like this."
2. Protecting Fannie, Freddie
In 2005, Congress rejected a Republican-sponsored bill aimed at curbing risky investments by mortgage giants Fannie Mae and Freddie Mac, thanks to resistance from mostly Democrats. It was the latest in a string of unsuccessful attempts to rein in the two agencies. In this case, Congress ignored Greenspan's warning about the financial risks Fannie and Freddie were taking on.
The agencies were designed to expand homeownership by injecting money into the home mortgage market and encouraging banks to lend more. They buy loans from banks and guarantee them, holding some in their portfolios and selling others as mortgage-backed securities. With implicit government backing, Fannie and Freddie have been able to borrow money at below-market rates. In recent years, the companies borrowed to buy billions' worth of complex mortgage-backed securities. The investments earned big returns. Fannie and Freddie's stock soared. Their executives were paid tens of millions of dollars.
Republicans sought to reduce the size of the companies' portfolios, arguing they were too risky. Then the housing bubble burst. Fannie and Freddie didn't cause the financial meltdown, but they fueled it by becoming one of the biggest purchasers of toxic mortgage products, says Harvard economist Kenneth Rogoff. "There was tremendous coddling of Fannie and Freddie in the face of a lot of evidence that they really weren't helping homeowners all that much," Rogoff says. "I think it was very, very clear what was coming, and that they were a huge, huge risk to the American financial system. … It really was criminal neglect."
Fannie and Freddie spent $175 million on lobbying in the last decade, according to the Center for Responsive Politics. The companies' employees and PACs gave nearly $5 million in contributions since 1989, by the center's count. Until they were taken over, Fannie had 13 lobbying firms on its payroll this year; Freddie had 33. Both packed their boards with politically connected people such as Democrat Rahm Emanuel, a former Clinton aide who joined Freddie's board in 2000 before he became a congressman. Both hired well-connected lobbyists such as Rick Davis, now McCain's campaign manager.
In seeking to crack down on Fannie and Freddie, Republicans were encouraged by banks that didn't want government-subsidized competition. But there also was a chorus of warnings that the highly leveraged corporations could pose a risk to the economy. In 2003 and 2004, both companies were wracked by accounting scandals that led to the ouster of top managers. In 2005, Sen. Richard Shelby, R-Ala., sponsored legislation to shrink the agencies' portfolios. McCain later added his name as a co-sponsor. The bill passed the Senate Banking Committee, but every panel Democrat voted against it. That signaled that the bill wouldn't get the 60 votes needed to pass in the Senate. Obama was not on the banking panel; there is no record of him doing anything on the bill.
Sen. Chris Dodd, D-Conn., a senior member of the banking committee, is the largest recipient of political contributions from Fannie and Freddie employees and PACs, having received $165,400 since 1989, according to the center. Dodd said he backed Fannie and Freddie because they encouraged homeownership. "I've never ever in my life been affected by a campaign contribution," he said in an interview. He noted that when he became banking committee chairman, he helped pass a bill restricting mortgage agencies' investment practices in 2007. By then, it was too late to stop the financial disaster.
In the House, Republicans and Democrats agreed on a different bill that passed easily. But the Bush administration opposed it, calling it weak. The effort failed. The next year, Freddie Mac paid the largest election fine ever, $3.8 million, after regulators found it used corporate funds illegally to pay for fundraisers. From 2000 to 2003, Freddie Mac held 85 events that raised $1.7 million, mostly for Republicans on the House Financial Services Committee, regulators found.
Rep. Barney Frank, then the ranking Democrat on financial services and now the chairman, says he and his colleagues were not soft on Fannie and Freddie. "Yes, they lobbied strongly, but I was one of the most successful ones in challenging them." Frank had no apologies. Rep. Artur Davis, D-Ala., by contrast, offered a rare Washington mea culpa: "Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie and Freddie," he said in a statement. "Frankly, I wish my Democratic colleagues would admit, when it comes to Fannie and Freddie, we were wrong."
U.S. has history of intervention
If the U.S. government moves ahead with a plan to take ownership stakes in American banks, as seems likely, it would be an exceptional step - but not an unprecedented one. The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, but the practice is sometimes different. Over the past century, the U.S. government has nationalized railways, coal mines and steel mills, and it has even taken a controlling interest in banks when that was deemed to be in the national interest.
The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under government stewardship. Finance experts say that having Washington take stakes in U.S. banks now - like government interventions in the past - would be a promising step in addressing an economic emergency. The plan being weighed by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets. Across Europe, governments rolled out similar initiatives Monday.
In other countries, the government bank-investment programs are routinely called nationalization programs. But that is not likely in America, where nationalization is a word to avoid, given the cultural aversion to anything that hints of socialism. "Putting this plan on the table makes a lot of sense, but you can't call it nationalization here," said Simon Johnson, an economist at the Massachusetts Institute of Technology's Sloan School of Management. "In France, it is fine, but not in the United States."
In times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. Bondholders and stockholders were compensated, and railroads were returned to private ownership in 1920, after the war ended.
During World War II, Washington seized dozens of companies including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industry-wide strike that would cripple the Korean War effort. That forced nationalization did not last long, since the Supreme Court ruled the action an unconstitutional abuse of presidential power.
In banking, the U.S. government stepped in to take an 80 percent stake in the Continental Illinois National Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As one of the country's top 10 banks, Continental Illinois was deemed "too big to fail" by regulators, who feared wider turmoil in the financial markets. Continental was sold to Bank of America in 1994.
Yet the nearest precedent for the plan the Treasury is weighing, finance experts say, is the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks but also bought stock in 6,000 banks, at a total cost of about $3 billion, said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University. A similar effort these days, in proportion to the current economy, would be $400 to $500 billion, Sylla said.
When the economy eventually stabilized, the government sold the stock to private investors or the banks themselves. That program was a good one, experts say, but the U.S. government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis to revive the patient. "The goal is to get the engine of capitalism going as productively as possible," said Nancy Koehn, a historian at the Harvard Business School. "Ideology is a luxury good in times of crisis."
The government plan to buy stakes in banks would be the latest step in Washington's efforts to ease the credit crisis. The government has already spent or authorized $800 billion to keep the investment bank Bear Stearns and the troubled insurer American International Group from collapsing and for the economic rescue package to buy soured mortgage-backed securities from banks and Wall Street companies. The Federal Reserve has cut interest rates and pumped money into the banking system to get the normal business of lending going again. Nothing has turned the tide yet.
After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state role in the economy.
Europe today remains far more comfortable with government's having a strong hand in business. So when Sweden, for example, faced a financial meltdown in the early 1990s, the nationalization of swaths of the banking industry was welcomed.
The Swedish government quickly bought stakes in banks, much as the Treasury is considering, and sold most of them off later, a model of swift, forceful intervention in a credit crisis, financial experts say.
"The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?" said Robert Bruner, a finance expert at the Darden School of Business at the University of Virginia. "The auto industry is in dire straits, and the airline industry is in trouble, for example."
"But the spillover effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense," Bruner said.
Banks dictate conditions of US financial bailout
The 936 point rise on the US stock market yesterday was the American ruling elite’s initial verdict on the extraordinarily favorable terms the government is granting to financial firms in the $700 billion bailout passed by Congress on October 3. Far from heralding improving economic conditions for working people, the Wall Street surge reflects the financial establishment’s success in extorting massive sums of money from taxpayers.
Several factors played important roles in the market’s rise. A technical correction was likely after the massive falls of last week, when the Dow Jones Industrial Average fell 2,236 points, or 21.33 percent, to 8451.19. The announcement of bank bailouts in Europe totaling trillions of dollars—under conditions where national governments are competing to rescue their respective banks—contributed to expectations that Washington would continue to bail out its own banks. Another major factor was undoubtedly a series of announcements by US officials underscoring that US banks would essentially dictate the terms of the bailout.
Late yesterday morning, news broke that the CEOs of the largest US banks would meet with US Treasury Secretary Henry Paulson, the former CEO of Goldman Sachs, to discuss the terms of the bailout. The Wall Street Journal wrote, “Expected to attend were banking executives including Ken Lewis, CEO of Bank of America; Jamie Dimon, CEO of JPMorgan Chase; Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; and Robert P. Kelly, CEO of Bank of New York Mellon.”
A Treasury spokeswoman said, “Treasury and [the Federal Reserve] are meeting today with leading financial market participants to finalize details on a financial market stabilization initiative.” The Journal wrote, “One person familiar with the matter said Mr. Paulson is expected to discuss details of his new plan to take equity stakes in financial firms, among other points.”
The meeting’s roster underscores the social character of the bailout. A handful of current and former top banking executives gathered for a meeting, publicly announced a few hours before it took place and closed to the public, to discuss the conditions under which they will receive hundreds of billions of dollars in public funds. The fact that, in a healthier political climate, these executives would face investigation and prosecution for overseeing the predatory lending practices that led to the housing and credit crises was simply ignored.
In this meeting of the godfathers of American finance, no one was present who represented the overwhelming majority of the American population. Indeed, the participants live in a world of wealth and power that has no resemblance to the existence of ordinary working people. One could start with Paulson himself, whose former bank stands to benefit handsomely from the bailout which he has authored. While at Goldman Sachs, Paulson amassed a personal fortune of $700 million.
The list continues:
According to Forbes magazine, Ken Lewis last year brought in a salary of $20.13 million, and his holdings of Bank of America stock are worth an estimated $112 million. Jamie Dimon received a 2007 Christmas bonus of $14.5 million and holds $190 million in JPMorgan stock. Lloyd Blankfein received a Christmas bonus of $68 million and his holdings of Goldman Sachs stock were worth $414.5 million last year. Vikram Pandit received a $165 million signing bonus from Citigroup last year, together with a $2.7 million salary for a few months of work and $48 million in stock options.
John Mack received $41.8 million in compensation last year, and his 2007 holdings in Morgan Stanley stock were worth $220 million. These firms’ stock, and particularly that of Goldman Sachs and Morgan Stanley, rose rapidly on news of the meeting with Paulson. Goldman stock rose 25 percent to $111 a share, and Morgan Stanley stock rose 87 percent to $18.10 per share.
Other financial stocks also rose significantly. Citigroup rose 13.25 percent to $15.98, Bank of New York Mellon rose 15.77 percent to $30.68, and Bank of America rose 9.2 percent to $22.79. JPMorgan stock fell in initial trading on fears of further write-downs, but after the meeting announcement it rose from just over $40 per share to close at $41.64.
Neel Kashkari, the assistant secretary of the treasury and ex-Goldman Sachs executive who is overseeing the $700 billion bailout, confirmed in a speech yesterday that his goal—in purchasing both equity (shares of stock) and assets of financial corporations—is to concentrate money in the hands of the biggest banks.
Kashkari told a Washington DC meeting of the Institute of International Bankers: “We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs [in the bailout], the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.”
This emphasis on bailing out supposedly “healthy” banks reflects the increasingly shaky position of many of the major banks. They are jockeying for influence over the government handouts that will determine which banks profit, which suffer, and which close.
Writing 125 years ago in the third volume of his masterwork, Capital, Marx noted, “So long as things go well, competition affects an operating fraternity of the capitalist class… But as soon as it is no longer a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another.
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole then comes to the surface…”
This anti-social struggle between the various factions of the bourgeoisie is expressed in the secretive and exclusive character of the planning of the bailout. The Treasury has set up the bailout’s asset purchases—which are to be carried out by private firms—so that only the largest companies will be able to participate and rake in the lucrative fees the government will pay out. Kashkari said: “Our initial procurements set high capability standards: for example, securities asset managers had to have at least $100 billion of dollar-denominated fixed-income assets under management.
This is critical given the magnitude of the program—up to $700 billion. Treasury believes it would not be fiscally prudent to ask a firm that only had experience managing only a few billion to manage $100 billion.” The Treasury is reserving the other roles in the bailout for an elite group of financial and legal firms. Kashkari stated that the Treasury Department had considered only three candidates for the role of “master custodian firm,” whose function, according to Kashkari, would be to “hold and track the assets we purchase as well as run and report on the auctions we use to buy the assets.”
The Treasury also contacted six law firms as potential consultants on the bailout’s stock-purchase program. Kashkari added, “We received two proposals, and selected [top New York law firm] Simpson Thatcher [& Bartlett] on Friday.” The result of this bailout—a major consolidation and restructuring of the US banking industry—will be quite harmful to the interests of the population. The smaller number of surviving banks will have even more market power to set interest rates and control access to credit for working people, students and small businesses.
While the best-connected firms will profit immensely from the bailout, the bourgeoisie and its political representatives insist there is no money for elementary social needs of the working class, such as foreclosure relief, universal health care and the right to a secure retirement. The major presidential and vice presidential candidates have uniformly called for cuts in existing, already inadequate, programs such as Social Security and Medicare. The stock market’s rise today is not the advent of a new era of prosperity for the American people. Rather, the bourgeoisie is celebrating the Great Heist of 2008.
38 comments:
I think there was a typo in one of the headlines. It should have been
"US Treasury to unveil $250 billion recapitalisation putsch"
"It's worse than a divorce. I've lost half my net worth and I still have a wife."
Great one ilargiI Is that yours or from the unexpurgated Pogo? Also quite enjoyed the cheescake you served rather than an old crumpet that might have fleshed out that bon mot.
Ilargi
From Wikipedia: Ilargi, Ile or Ilazki is the name of the Moon in Basque language. In Basque mythology, she is the daughter of Mother Earth, to whom it returns daily.
Perhaps there is a story you'd like to share in that name...?
You have a gift of seeing through these daily announcements and bailouts. First, as I've been watching you do this, I assumed the public, academic economists, and politicians would catch on eventually, but it would just take time. With that would also come an outrage and backlash. Now, I've changed my mind. I don't even think the history books will explain things as they really are. They, too, will use the explanations provided by today's insiders.
The public had some effect on the vote of the House members over the first bailout plan. It's looking like Hank doesn't want to ever see the public have that much power again. And the eventual passing of the $700 billion bailout bill added to the apathy and feelings of powerlessness of the public besides.
A
"It's worse than a divorce. I've lost half my net worth and I still have a wife."
Shotgun marriage.
ROFLOL@GM
Anyone with a 700 FICO doesn't have to buy from them.
Truth is that for the most part the ones that buy from GM/Ford/Chry do so because they can not get financed to buy a choice car.
They are the wheels of the subprime world.
""We would like society to lock up quantitative risk managers before they cause more damage," Taleb said.
"They are the wheels of the subprime world."
Well said. Oy.
Never bought a Ford, but GM is surely the MacDonald's of the auto market. The old saw about the "warranty timer" making the car go lemon was/is no joke: they are designed to fail at a rate which gives GM execs a predictable turnover. One that they got too comfortable with.
If they'd stop marketing to James Dean they'd be a wee bit more ahead, but too late to change that now.
I love your work. I think your names are also inspired choices!
Stoneleigh, you think that being in debt is not a good thing, right? But what if hyperinflation arrives soon? Having a mortgage might be OK in such a circumstance, no?
Second question: would you pay off part of a mortgage on a house in a city (where your job is) or would you buy farmland (enough for a survival type of existence)? Obviously holding cash long term seems like a long term losing proposition.
"The stock market's rise today is not the advent of a new era of prosperity for the American people. Rather, the bourgeoisie is celebrating the Great Heist of 2008."
Right on!
Ahimsa
That is one hot 110 year old lady!
Crystalradio,
I have checked out of the predatory financial system -- no stocks, no treasuries, no bank savings, no debt, no mortgage (house paid for), etc. All done with a family income of less than $60,000, thanks to a simple lifestyle -- and a bit of luck, of course.
It feels wonderful not to be complicitous with the corrupt system.
Ahimsa
On top of backstopping FDIC deposits, the Treasury will now backstop bank debt.
From the Newswire:
FDIC'S BAIR: BANK GUARANTEE PROGRAM WILL COVER $1.4T IN SENIOR UNSECURED DEBT, NO NEED FOR PERMANENT INSURANCE INCREASE ON DEPOSITS
The great thing is, nowadays this can be done digitally.
Maybe what I get least of all is that they have the gall to say these things, and nobody reacts.
One friend who finally got out of the market reacted unhappily when the dow was up MOnday....why did I listen to you rachel?
I reacted with knowing disgust but firm resolve and with a sign at a McCain Rally "ARREST ECONOMIC TERRORISTS"
Keep it up I&S, this may be one of the few accurate historical records of these times!
That old pearl of wisdom:
"Marriage is Grand
Divorce is a Hundred Grand"
Message for kids:
All is permitted.
Northern Rock's window washer breaks glass - he's liable.
Northern Rock's chief executive breaks the bank - um... we have other priorities.
I hear cant- a god awful sound.
For a decade it was Jobs!Jobs!Jobs!
Now the spooked herd bleats
Save the Banks! Save the Banks! Save the Banks!
Will the final roar be Fight! Fight! Fight!?
I love this site! Many thanks, I&S.
My question is: Given the deflation -inflation horizon, what are some alternatives to gold hoarding? I am opposed to the way modern gold mining disrupts so many communities, pollutes vast stretches of waterways that are often sites of livelihood and ruins parts of indigenous cultures.
I need some other options.
Anyone who watched the first Superman movie should remember Lois Lane's line when Superman caught her as she was falling:
SM: I've got you.
LL: You've got me, but who's got you?!
Unfortunately, this is no Superman to the rescue, merely a marionette high wire act done without nets, but with lots of strings. We're all going to end up tangled in the strings our masters are pulling.
Cheers
Denninger has a youtube of US Rep Brad Sherman on the house floor telling how congress critters were threatened that martial law would be enacted if they voted against the No Banker Left Behind Bill.
http://www.youtube.com/watch?v=gnbNm6hoBXc
We are in this precise time period experiencing the death of both democracy and capitalism, IMO. Cynics may dissect this statement and criticize the assumption for any number of valid points, however, I find this realization profound.
A
Are Crony Capitalism and Lazy Fare Capitalism the same thing?
A:
"We are in this precise time period experiencing the death of both democracy and capitalism,"
One of the prominent left-of-center bloggers suggested that JFK was the last legitimately elected President. (I'd guess it was way earlier than that.)
The office of County Dog Catcher is probably filled legitimately in at least half the counties, but more than that?
It's not a provable thing, obviously, but surely in the US, Canada, and Western Europe, democracy applies in only a fraction of selections where voting has taken place. And maybe that's still a good record in a world like ours.
It's better than most anywhere else you can name on the planet, where they vote for practice if they can, just in case it counts someday.
As for capitalism - we teach only school children how great competition is. The competitors have another game. We hide from the kids that the game is monopoly - to be the last man standing, and that we judge character by ruthlessness.
They think capitalism is working just fine, at Goldman Sachs.
RE: NYT article on GS
Goldman is expected to focus on managing assets for high-net-worth individuals rather than providing retail banking services. The bank would have $150 billion in assets, making it one of the largest regulated by the state, along with the Bank of New York Mellon and M & T Bank.
Let's see if I've got this right. GS will use taxpayer $$ to make elites richer, and then provide a special bank for those such persons knowing that it will be the most important target client base available in the not too distant future and those special clients do not want to risk losing their fortunes like bank customers elsewhere.
A
Where are the Scales of Libra for Goldman Sachs?
Sic semper evello mortem Tyrannis
Ilargi wrote, "Yes, it is still crazy after all these eight years to hear W. say that he will turn the US into communist Bulgaria, by buying up and buying out the part of the banking system that put him where he is, in order to "preserve the free market". I’m going to have to kill you to keep you alive. It’s one or the other, one would think."
I too am continually amazed at the Orwellian nature of the Bush administration. I know I should have gotten over it a long time ago, but for some reason every time they use double speak a small part of me is both surprised and disappointed that my "leaders" could be so corrupt. I like to assume the best of others, but I long ago stopped doing that about the Bush administration.
-Clear Skies Initiative - allows greater emissions from coal-fired power plants
-Healthy Forests Act - allows road building into previously unharvested National Forests for logging
-No Child Left Behind - leaves millions with no education adn the loss of even minimal critical thinking ability since teachers now must "teach to the test"
-Free market must be seized to save it - I wish this was all a bad joke...but it isn't.
Anonymous 11:38, 12:18 and /thehangedman/
anon 11:38 RE: death of capitalism and democracy,
We are watching the death of this version of democracy and this version of capitalism. The versions that we are running are not sustainable and that, by definition, means that they cannot last. The death of this version is not the same thing as the death of capitalism and democracy altogether anymore than the fall or Rome was the death of imperialism.
anon 12:28 Re: Crony Capitalism and Lazy Fare Capitalism.
No, the two are different. Crony Capitalism, or the good old boys system, is a framework of institutionalized corruption where those in charge intervene on behalf of their friends.
Laissez-faire is nonintervention. Along the lines of the Thoreau quote 'I heartily accept the motto,—“That government is best which governs least;”... ...and when men are prepared for it, that will be the kind of government which they will have.' It is abundantly clear right now that man isn't ready for it, however that doesn't mean they never will be.
/thehangedman/ Re: "legitimately elected President" and "As for capitalism - we teach only school children"
There hasn't been a "legitimately elected President" in ages, not because the election is rigged, but because we are unfit to choose.
For some in this country democracy is a spectator sport to be small talked at the water cooler and for others it is a ritual that happens once every for years, the devote attend every two years and even vote in primaries, and the fanatics attend local elections and vote on bond issues.
But democracy is poorly measured by turnout. It is not a discreet event that happens on specific days, it is a continuous process. A better measure of democracy is the level of involvement of the individual in community participation, day to day social affairs. The success of democracy is measured by the extant that the average man in the street deliberately strives to cooperate with others to shape the society in which they live.
Capitalism and school children: a good deal of what we teach school children is social conditioning and pointedly not education. We teach them that democracy and capitalism work automatically for the benefit of all. But we don't teach them how to play their role in these organisms. We don't teach participation and critical thought and that, more than anything else, is what will bring the whole system to its knees.
It's useful to go back and re-read Jay Hanson to get a perspective I think.
If you aren't familiar with his work, that link provides a nice summary, along with some relevant links.
I'm not seeing many flaws with his analysis myself, except for something I see a lot of in these circles, failure to grasp that cultures can and do work, and that people are not necessarily self-destructive.
Taboo, cardinal sins, etc, are simply ways to enact biological safe guards. Just because our particular set of cultures happens to be pathological doesn't mean that all human cultures were, or need to be. Greed, pride, arrogance, lust.. get rid of them, make them heavy taboos, and things work fine. Taboo in the technical sense though, not the superficial one. A taboo is something you will simply not do, and if you do do it, everyone will know you are in fact insane and dangerous to the social body, and you will be treated accordingly.
I believe the corporate state loves people to state that negative human attributes like greed and self interest are intrinsic to human nature because it makes their job much easier.
In these days of financial hurricanes, one must not forget the real thing. Omar will be running right over us tonight, and with the fragile state of our telephone system on my tiny island (St. John), I will probably be signing off for a while.
Weasel Dog (from yesterday),
Sorry for the late replies, but I'm just starting a new job and it's much more time-consuming than I'm used to.
The best book I know of on the situation in Argentina is Paul Blustein's And the Money Kept Rolling In (And Out).
There are definitely similarities between the US and Argentina, and I think the resulting banking crashes will be similarly rapid, as opposed to a long and drawn out Japanese-style crisis. (Japan had a stock market and property bubble at a time of huge surplus, that they've spent the last 20 years burning through while trying to avoid the day of reckoning for their banking system). Both the US and Argentina are/were also looking at sovereign debt crises although there is a distinction to be made between a looming banking collapse and the potential for a sovereign debt default.
However, Argentina was a third world country not far removed from chronic inflation, and one that collapsed in isolation as the international financial community pulled the plug on its exploding debt. In contrast, the US is an imperial power with a long-standing global reserve currency. As it should continue to benefit from a flight to safety (as it has done since March when the dollar began to rally), it is not likely IMO to be forced into a sovereign default at this point. Eventually yes, but not now I think.
I do expect the US dollar to go the way of all fiat currencies eventually, but for now we are seeing a very substantial rally. Following that, I would expect a period of time where relative currency values become chaotic, as it's by no means only the US that is facing financial armageddon this time. In Argentina's case it was alone, so it was no surprise that its currency fell relative to others enjoying stability. The current crisis is truly global, hence it's unlikely that we'll find stability anywhere for much longer.
The relative value of different currencies would depend on which currency was deflating fastest in a world of beggar-thy-neighbour competitive devaluations combined with the (very likely) reintroduction of capital controls. Volatility in relative values is likely to be extreme as most nations grapple with debt collapse - often debt permeating their entire social fabric. Britain, Ireland, Spain and many others are in just as much trouble as the US, if not more so.
If the US dollar does fall later on, the extent of that fall on the money supply will be insignificant in comparison with the scale of the debt collapse sending the money supply in the opposite direction. The net effect will still be deflation, until the deleveraging process has run its course. After that I expect hyperinflation to develop over a period of several years (hyperinflation being a much slower process than deflation), but I don't expect the onset of that dynamic for at least a few years.
Wyote,
Gold hoarding isn't where I would start as a strategy - it's more something I might consider if and when I had all other bases covered. Right now you need liquidity - cash and cash equivalents - and you need to be out of debt. Buying a measure of control over the essentials of your own existence would also be a good idea if you can afford to do so.
Stoneleigh,
"Buying a measure of control over the essentials of your own existence would also be a good idea if you can afford to do so."
We live in a co-housing community (60 households, 2.5 miles from center of 35,000 city) where most people are PO aware. There are discussions in our neighborhood about pulling $ out of our bank (most of us use the local bank) and we are worried about contributing to the problem and causing a failure of our community bank. In other words, we don’t want to add to the mess by fleeing. Most people are taking small measures of stocking up on basic supplies. We’re wondering, what can communities do to weather this catastrophe? We realize that just doing what is the best for our own individual families may end up costing other families. What can we do to balance individual interests with common good?
In particular, my family is fortunate enough to have some resources still remaining that my partner inherited from her mom. (Before this we were basically living paycheck to paycheck, paying our reasonable mortgage and saving for retirement and college.) Our financial advisor is STILL recommending that we put these liquid resources in mutual funds. We already have significant resources in mutual funds (socially responsible for what that’s worth)...probably too late to do anything with them. And we are also thinking about our son’s future.
So, should we put $100,000 into our community infrastructure? For example, should we use these resources toward infrastructure such as energy (many of us have solar panels on our houses), wood based heating to back up the gas, water (our water comes from the town now but we have some ponds we use for food production, a greenhouse? There are a few others in our neighborhood who would most likely join us in these efforts. My feeling is, we ought to spend the $$ on infrastructure while we have it. These things also contribute to our local economy...
But, I am also still extremely ignorant of the financial system and this $$ comes from my partner’s family. It still seems risky to spend that amount of money rather than saving for a rainy day. (I do know a lot about organic agriculture since I am one of the few research scientists who has been studying these systems for 20 years! Hopefully this will be of some value in the coming years.)
I want to thank both of you for your efforts. I found your site from the DailyKos where a few diarists were translating your analysis. When I read these I decided I needed to understand something about the financial world. Based on what I learned from reading your site and other financial info that was clearly influenced by your analysis, I convinced my partner to pay off our mortgage with some of the resources she inherited from her mom's passing. We did this 2 months ago even though her financial advisor was recommending investing in the market. Whew! If you need any agricultural advice in the future I will be happy to help you in anyway I can.
I can't get any other choice to work except for "anonymous".
Warmly,
Bluemarble in New York
The actions that have been taken are providing a window into the minds of the participants .Its clear now Paulson simply wanted all the marbles...and then would decide who gets to play.
Could someone comment on how Pauson intends to keep the public at bay?.The anger that I have seen on so very many levels I feel will keep the attention focused on him...and any who follow in such a way to take a bit of wind out of his sails,so to speak.He is now a lightning rod for anything that goes wrong ..
I am looking at this time as "grace time"to continue preparing for the winter...a sort of Indian Summer....The wagon is still rolling,the worlds financial system has a lot of inetia..
snuffy
Blumarble,
The advantage of holding cash is that it gives you options for action in the future. Once you have made any purchase you loose that option. To reduce this to the absurd - say you buy some really good solar panels and they will last a hundred years,solve all your wildest dreams for power and tough enough for your kids to use them for trampolines.
Then, what ho! Over the hill comes Ghengis Kann and other assorted greasers and malcontents. Now what you need is not those damn solar panels but something like this
team10tim:
If we were all whisked off to our own Walden Ponds this instant, Jim Cramer will soon come knocking to cut a deal for firewood.
Utopia without eugenics is suicide.
Bluemarble in New York
Wow, I think alot of us are in similar circumstances. We have been doing what alot of American and Canadians have been doing.
Living an average life!
Pay our bills, keep paying off the house, put some in savings for the vacation and kids education. As well, we follow the herd thinking and put money into Mutuals / RRSP's to try and ensure a future retirement with a little more than the company pension would provide.
Hopefully have enough at the end to give to the kids to get a leg up and have better than we did.
Seems to be the thinking since our ancestors did back breaking menial labour with the idea that tommorro would be better for the family.
To be honest, I feel confused and like I have been taken advantage of. What really pisses me is that I let it happen and suck as a steward of the financial legacy that has been hard fought for by parents, grandparents.
I read that the down cycle occurs after most of those that went through the previous hard times have passed away, and the cautious approach to preserving what you earn turns to making the big money.
Well, I guess this will be my opportunity to learn a very hard lesson and pass the info on to my kids.
Newbie in Manitoba
Our right wing Cdn gov't gathered strength in yesterday's election. I am very depressed to-day.
Our local Greens garnered an unprecedented 21.5% of the vote. Sadly not enough to put a Green M.P. in parliament.
scandia:
"Our local Greens garnered an unprecedented 21.5% of the vote. Sadly not enough to put a Green M.P. in parliament."
How do you retrofit proportional representation into an existing system that the ruling parties adore?
Garth writes today that a US Housing Bubble can happen - why?
Someone else suggested if we go into inflation mode, it may be good to have a mortgage - why?
I also sold my house - like the other nurses who have posted here. I am Canadian and terrified!
I had a mortgage of 180,000 which was ridiculous, but was advised to buy as prices would just keep going up. I also had a good downpayment - that still made for a huge mortgage, unless I wanted to live in a dangerous area, or a poorly built building with a lot of problems.
I started to get scared, and sold.
If housing prices will go up now in the US, why will they decrease in Canada?
It's kind of revolting at what some people earn, when we have to give 110% and more every day at work, while doing 12 hour shifts, caring for critically ill people - nothing that comes into hospital anymore is straightforward - and people are very ill. We seldom get breaks and work HARD.
It has also been said in Canada that CMHC guarantees these mortgages where very little has been put down and therefore we will not see what has happened in the US.
This is all very confusing - I sense I will be renting for the rest of my life - and lack of rent controls will be a destiny of poverty.
I am feeling very confused and frightened at this point - like should I move to some remote hick town and buy a little plot of land and live off it - though there would be little if any work.
Also, the other nurses here indicated they had been laid off during recessions in the past. This also happened to me, so it will probably happen again. But, this time, there may not be anywhere else to go......scary!!!!!
cmh,
I think coming to grips with the reality of the approaching poverty soon to befall most of us is better done now than later. The world isn't big enough to support the expectations of a materially indulgent and demanding species (Homo sapiens). The fallout from the financial sphere is going to be brutal. Take I and S's advice now - it sounds like you already have in that you sold your house. Raise some cash and get some real goods to see you through the winter.
Post a Comment