Walter Wellman's hydrogen dirigible America just before being abandoned by its crew near Bermuda, 1,370 miles into an attempt to cross the Atlantic from New Jersey. Its engines having failed, the America drifted out of sight, never to be seen again
Ilargi: It’s time for a stiff drink: the House just approved the $800 billion Paulson plan. Lucky you. You now have a dictator. Who needs money when you have no say over it anymore anyway?
Dictator was a political office of the Roman Republic. The dictator was above the three branches of government in the constitution of the Roman Republic as no other body or officer could check his power.
A legal innovation of the Roman Republic, the dictator (Latin for "one who dictates (orders)") — officially known as the Magister Populi ("Master of the People"), the Praetor Maximus ("The supreme Praetor"), and the Magister Peditum ("Master of the Infantry") — was an extraordinary magistrate (magistratus extraordinarius) whose function was to perform extraordinary tasks exceeding the authority of any of the ordinary magistrates.
The Roman Senate passed a senatus consultum authorizing the consuls to nominate a dictator, who was the sole exception to the Roman legal principles of collegiality (multiple tenants of the same office) and responsibility (being legally able to be held to answer for actions in office); there could never be more than one dictator at any one time for any reason, and no dictator could ever be held legally responsible for any action during his time in office for any reason. The dictator was the highest magistrate in degree of precedence (Praetor Maximus) and was attended by 24 lictors.
The reasons which led to the appointment of a dictator required that there should be only one at a time and great power was visited upon them— the imperium magnus, having the ultimate imperium maius (a higher degree of imperium), which was the ability to overrule or remove from office the other curule magistrates upon whom imperium was conferred, including the ability to order their death.
The dictators that were appointed for carrying on the business of the state were said to be nominated rei gerundae causa (for the matter to be done), seditionis sedandae causa (for the putting down of rebellion), or ironically in the case of Sulla, considering his actions set precedents that contributed to the end of the Republican system, as "dictator legibus faciendis et rei publicae constituendae causa" ("Dictator for the making of laws and for the settling of the constitution").
Ilargi: If you’d ask around, nearly everyone would say that it’s impossible for a country to go bankrupt. Yet, hard as it may be to imagine, we soon could see a few exceptions to this immovable truth.
After Ireland, under a threat of bank runs, guaranteed all deposits in its banks, which have liabilities that are 300% of the country’s GDP, more events in Europe follow at the speed of light. Greece also gave a 100% guarantee. These are empty promises; if all banks would fail, governments would be incapable of living up to them. These are made to prevent bank failures. But that leaves the cause for those failures unattended. And there lies the rub. The Netherlands, only days after it bought 49% of Fortis with the Belgians for $16 billion, just fully nationalized the bank’s Dutch branches. Price tag: $24 billion.
Iceland is the prime princess of them all. Its banks have liabilities at 800% of GDP. The country bought one of the banks, and the rest are falling. Iceland has been turned into a casino in the past decade, and now the house is broke. It’s just a waiting game by now.
Still, at least Iceland has a central bank. The countries in the European Monetary Union, the ones that use the Euro, do not. And that may have dire consequences. Greece’s example will probably soon be followed by Portugal. That can be managed. But if right afterwards, larger nations like Italy and Spain join the hand-out choir, the ECB will no longer be able to help.
It will be up to the governments, directly, to buy banks left and right, for there is no doubt they will be falling like an avalanche of boulders. To have any chance of success, that will require control over currency and interest rates. Which they no longer have. So now the question is: Will the EU survive till Christmas? Will its member nations start defauling on their debt before then? Can they make a smooth transition back to true nationhood in time?
Along the same line: the US government won’t go broke soon (though we can argue that in theory it already is), but the separate states can. They have no central bank either. California needs $7 billion within days, just to pay state employees’ salaries. Other states have cancelled road building projects, and who knows what else. And we haven’t even started the crisis. Neither will the $700 billion alleviate their problems.
Governments at state, county and town levels face a multifold whammy. They can’t get access to credit, since the bond market died. They have lost billions through faulty investments. Their tax revenues are starting to plummet. And their budgets are all based on insanely positive economic expectations. And this is where we all will first see the crisis turn from a somewhat detached far-away one into a force that hits us smack upside our heads.
We will very soon see widespread cancellations of services, multi-million lay-offs, defaults of pension funds, crumbling roads and even serious challenges to essential provisions such as water treatment. There is no way the federal government can bail out every lower level of government that needs money. It is simply not going to happen. The only remaining option is sharp increases in taxes, but that is a dead end: citizens are already broke, their home values are sinking, they are losing their jobs, and the last thing they’ll accept is rising taxes across the board.
Meanwhile, in dreamland, the Dow is rising, and there are actually people out there who think the Paulson bail-out will restore confidence in the markets. But next week, the next bail-out will be needed. We are in a state of permanent emergency, and there is nothing in sight that can stop the bleeding. We do what we always do, because we are so darn good at it. We make everything worse. Hey, it’s a talent.
Paulson's Reasons for Delaying Day of Reckoning
If you think this bailout is expensive, just wait until you see the next one.
The $700 billion rescue plan approved by the U.S. Senate won't fix the core problem with the nation's ailing financial institutions. And it almost guarantees that you and I will have to pony up for an even costlier bailout someday, maybe soon, if the House of Representatives passes it tomorrow.
Treasury Secretary Hank Paulson has correctly identified the quandary: Lots of shaky banks and insurance companies are showing strangely high values for assets that aren't worth squat in the market. Many need more capital and can't raise it. And he's right in saying the outlook is grim if we don't get this fixed.
What's stunning is how little the taxpayers would get in return for their money under Paulson's package, and how illusory much of the banks' newly minted capital would be. Under the plan, Treasury would buy some companies' troubled assets at above-market values. To boost their capital, Paulson would have to pay the companies more than what their balance sheets say the assets are worth.
Then other companies would use the rigged prices to write up, or avoid writing down, the values of similar holdings on their own books. So, the taxpayers get hosed on the asset purchases. Other banks use the trumped-up prices to cook their books. And investor confidence supposedly is restored. That brings us to this question: Why would a smart guy like Hank Paulson -- the former boss of Goldman Sachs -- advance such a dumb, shady plan? Let us count the reasons:
- It delays our national reckoning until after the presidential election.
Paulson first floated a bailout Sept. 18, at the very hour when shares of Goldman Sachs Group Inc. and Morgan Stanley looked like they might go into a death spiral. It's not so much a bailout, as it is a timeout. He had to follow up with something, anything, to stop the freefall from resuming. It didn't have to make sense.
So it doesn't. The plan is about creating the illusion of stronger financial institutions, not strengthening them. The banks know this. Otherwise, they would have stopped charging each other near-record rates for three-month loans by now. The reason they haven't is because they're still afraid their customers -- other banks -- might go broke.
- The reckoning will be worse than you can imagine.
If Paulson were serious about recapitalizing rickety U.S. banks, he would infuse them with hundreds of billions of dollars of fresh government money, in exchange for ownership stakes. And if he wanted to create market liquidity for all those troubled assets on their books, he would be ordering banks to disclose everything there is to know about them, so Mr. Market could figure out their present value.
He can't let that happen. Not now. If everyone could see how much the toxic waste is worth, the writedowns would be so huge that many banks would have to be declared insolvent. Better to let the next administration deal with the clean- up. The trouble is, the longer the government waits to address the banks' lack of capital, the worse it gets, barring a miracle.
- He's helping his friends.
Is there any doubt? Let's see. As of yesterday, Morgan Stanley Chief Executive John Mack owned 2.75 million shares of his company's stock, valued at about $67 million. If Mack can get Morgan Stanley to trade reams of sketchy paper for billions of dollars of our Treasury's cash, without diluting any of his stake in the company, who benefits? Paulson would have us believe it's you.
- There's an excellent chance the Congress will pass it. Leave someone else to figure out the costs another day.
Buffett: $700 Billion Not Enough
Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise.
Buffett, the chairman and CEO of Berkshire Hathaway, called the problems facing world markets "unprecedented" and warned of a "disaster" if Congress does not move faster to shore up the economy. "We had an economic Pearl Harbor hit," he said during an appearance at Fortune's Most Powerful Women Summit in Carlsbad, Calif. "For a couple of weeks we've been arguing about who's at fault [and] fooling around while things have gotten a lot worse."
On Wednesday, the Senate passed a $700 billion bailout package. The House is expected to vote soon on the revised bill after rejecting an earlier version Monday. Buffett said the bill isn't perfect, but it's a crucial step in the right direction. He then warned it will take a while to work and that the economy is going to struggle even with its passage.
"It will cost more to solve this problem today than it did two weeks ago," said Buffett, referring to when Treasury Secretary Henry Paulson's first proposed that Congress help rescue Wall Street after Lehman Brothers went bankrupt, Merrill Lynch was sold to Bank of America, and American International Group had to be rescued. "If we don't get it solved next week," added Buffett, "I may go back to delivering papers."
Buffett didn't estimate how much more money would be needed to buy enough toxic mortgage investments in order to create a more stable market and get credit flowing again. But he described a plan he thought of Thursday morning on the way to the Summit that would allow Treasury and private investors to buy assets together. He said his proposal would kickstart demand for mortgage-backed securities, help find a market price for these troubled assets and make it more likely that taxpayers would be made whole or even come out ahead in the bailout.
Under Buffett's plan, Treasury would lend hedge funds, Wall Street firms or any other investors 80% of the price for distressed assets. Investors would benefit from borrowing at lower rates available to the Treasury. But the government would get first claim on the sale of those assets, which means it would get its loan back plus interest and possibly turn a profit. Only then would investors see a penny.
"Now you have someone with 20% skin in the game," explained Buffett. "Believe me, I won't be overpaying if I'm buying with that kind of leverage. And you have someone [the investors] to manage the assets to the extent they need to be managed." Buffett also noted that the presence of the government in the transactions would raise the price of assets above the absolute firesale levels for which they could now be sold. That would benefit the banks trying to unload them.
Since the credit crisis started, Buffett has made a $5 billion investment in Goldman Sachs and a $3 billion investment in General Electric. He said he was able to give an immediate answer Wednesday morning when GE called to request the cash infusion, suggesting he agreed to the deals without even consulting his own board of directors. Buffett also said that, in return for his investment, top executives at Goldman Sachs and GE both agreed not to sell their stock in their respective companies for three years.
"There's an enormous advantage to being to act fast at a time like this," said Buffett. "People know they can call me and they can get an answer in 10 seconds....And we try to make them pay for the fact that it's an advantage to them."
The credit crisis has increased the volume of calls he's gotten from companies looking for Buffett to invest, he told the Summit.
"The fellow on the other end, usually the CEO, says 'The market looks at us as a toad. Berkshire Hathaway is looked at as a princess. And if you would just kiss us, we would turn into this handsome prince,'" said Buffett. "And I say, 'No, we would turn into a toad.'" Even so, he added, "we've kissed a few." Buffett suggested he is still looking for deals and thinks it is a good time to be buying in the market.
He also praised some government officials dealing with the current crisis. He said Treasury Secretary Henry Paulson, who he described as a friend, is the right man to be guiding the government's rescue efforts and that he hopes whoever is elected president asks him to stay on.
And he singled out Federal Deposit Insurance Corp. Chairman Sheila Bair for particular praise for her work dealing with recent crises at Washington Mutual and Wachovia. Washington Mutual collapsed and, in a deal brokered by the FDIC, was immediately sold to JPMorgan Chase . Similarly, regulators orchestrated the sale of Wachovia's banking assets to Citigroup in order to prevent a failure there. "In my book she stands higher than any CEO I know of in America today," he said, a statement met by applause by the women executives attending the Summit.
In a subsequent interview with CNNMoney.com, Buffett said he wasn't interested in placing blame for the crisis.
"I don't worry too much about pointing fingers at the past," he said. "I operate on the theory that every saint has a past, every sinner has a future."
He said the problem boils down to widely-held assumption during the housing boom that prices could only go up. And while the theory's flaws are all too apparent now, the misconception is understandable, said Buffett, pointing to previous asset bubbles going back centuries. "There are not bad guys in that situation," said Buffett. "It's a condition of human nature."
Moment of truth for default derivatives
The credit derivatives market, worth some $54 trillion, began its biggest test yesterday as an unprecedented round of settlement operations on derivatives contracts began,including those covering the debt of Lehman Brothers, Fannie Mae and Freddie Mac.
At stake is how much will be paid out on credit default swaps (CDS) – a type of insurance contract against acompany defaulting on its debt which is sold by investment banks and major insurers such as AIG. The "auctions" to decide the value of bonds in default and the amounts the derivative insurance will have to pay out on them are organised by theInternational Swaps and Derivatives Association (ISDA), based in New York.
ISDA has held only nine auctions since 2005, but this month will see five that will include many of the former giants of the US financial scene. The CDS market is opaque because contracts are only registered between the buyer and seller of the insurance, with no central record of the value or whereabouts of outstanding contracts.
With massive debt defaults taking place, and more predicted as the economy slows, the lack of clarity has raised fears of mounting losses at issuers of CDS paper who may not have the capital to pay out on their guarantees. The auctions will also be a big test of investment banks' procedures when the authorities are scrutinising certain securities firms for lapses.
"It is significant because it is probably going to be a good opportunity for investment banks to prove to regulators that they have their house in order. Any big investment bank will want to make sure that nothing is dropped on the floor," said an analyst at oneinvestment bank.
A record 409 firms had already registered for the Fannie and Freddie auction yesterday, with 300 having signed up in the previous 24 hours and hundreds more in the pipeline. The value of derivatives contracts covering the two US mortgage finance agencies, which were effectively nationalised last month, is estimated at between $400bn and $600bn.
The size of the Fannie and Freddie auction dwarfs the previous biggest default in credit derivative markets, which was for Delphi, the US car-parts producer that went bankrupt in 2005. The auction system was put in place seven years ago to centralise agreement of the recovery rate on company bonds in default. ISDA calculates an average value for the underlying bonds from various submissions by market makers. If the average is 40 per cent, for example, then the issuer of the protection pays the "lost" 60 per cent to the CDS buyer.
Before the system was brought in, the buyer of protection had to physically find some bonds and present them to the insurer in return for the payment. The insurer then had to get back as much as possible from the defaulting company. The system has become increasingly important because, as the CDS market has grown, for many companies the value of outstanding CDS contracts vastly exceeds the value of the actual bonds issued.
A spokesperson for ISDA said: "It is really a straightforward process. The only difference here is the volume, and we don't see any reason why itshouldn't go smoothly despite the anticipated high volumes of trade." Freddie and Fannie will be settled on 6 October, with Lehman on 10 October and Washington Mutual on 23 October. First up in the process yesterday was Tembec Industries, a US business of Tembec Inc, the Canadian paper and timber producer.
Washington, You're Fired
Schwarzenegger To Paulson: California Needs $7 Billion; More States Need Loans
California Governor Arnold Schwarzenegger told the U.S. Treasury that his and other states may need emergency federal loans if turmoil in the credit markets continues to impede their access to financing.
"This credit crisis has the power to grind the U.S. economy to a halt," Schwarzenegger wrote in a letter e-mailed to Treasury Secretary Henry Paulson last night, Treasury spokeswoman Jennifer Zuccarelli said in Washington today.
"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal Treasury for short-term financing," Schwarzenegger wrote.
Rising borrowing costs and declining investor appetite for anything but the safest bonds are forcing states, cities and towns to deter spending on projects from road improvements to maintenance on schools. California may run out of cash at the end of the month if the state can't sell billions in short-term debt, Treasurer Bill Lockyer said Oct. 1.
Schwarzenegger said in his letter that California, the most populous U.S. state, expected to sell $7 billion of revenue anticipation notes in "a matter of days." "While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash-flow needs exceed the entire budget of some states," Schwarzenegger wrote.
Without the short-term funding, the state may be forced to halt or significantly delay payments for teachers' salaries, nursing homes, law enforcement and "every other state-funded service," Lockyer said. Tax-exempt issuers have postponed more than $12 billion in note and bond deals since Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15, according to data compiled by Bloomberg.
Louisiana postponed plans to sell $500 million of bonds this month, while in Chicago, school officials will have to decide which improvements will go forward after delaying a similar offering. Erie County, New York, has delayed dozens of capital projects.
IMF Says U.S. Faces 'Sharp Downturn' as Market Crisis Worsens
The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said in its most pessimistic outlook for the world's largest economy since the credit crisis began last year.
"The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," the fund said in a section of its semiannual World Economic Outlook released in Washington today. There is "a substantial likelihood of a sharp downturn in the United States," the fund said.
By contrast, the IMF in July projected the U.S. would "contract moderately" in the second half of 2008 before recovering in 2009. Officials also said in a July update of economic forecasts that the global growth outlook was more "balanced." "Strong actions by policy makers to deal with the stress and support the restoration of financial system capital seem particularly important," the lender said today.
Next week, the IMF will release updated projections for gross domestic product for the U.S. and other economies. The warning came as the U.S. Congress worked to pass a $700 billion bank rescue package to reassure financial markets. The Senate passed the legislation late yesterday, and the House of Representatives may vote tomorrow after rejecting a different version three days ago.
The 15 countries that use the euro may be able the weather financial shocks and slowing growth, the IMF said. "In the euro zone, by contrast, the relatively strong position of households offers some protection against a sharp downturn," the report stated. IMF Managing Director Dominique Strauss-Kahn said as recently as Sept. 17 that "we may be seeing the end of the financial-sector crisis."
Last week, IMF First Deputy Managing Director John Lipsky said the global economy may skirt a recession if policy makers respond with "effective" measures to ease financial stress. "The latest challenges have not altered our core expectation of a gradual 2009 growth recovery" and "a global recession can be avoided," Lipsky said Sept. 24. Since then, the Dow Jones Industrial Average suffered its biggest point decline, plunging 777 points to 10,365.45 on Sept. 29 after the House initially rejected the rescue plan.
In today's report, the IMF warned that stress in the banking sector tends to deepen recessions, based on comparisons with previous periods of market instability. Slowdowns or contractions preceded by a banking crisis tended to double or triple the size of the downturn, the fund said. The threat of a recession was increased by "the extent to which house prices and aggregate credit have risen prior to the stress episode," the fund said.
Earlier this week the S&P/Case-Shiller index showed home prices in 20 U.S. cities declined in July by 16.3 percent from a year earlier -- the most on record. "The current situation of the United States bears some resemblance to previous episodes of banking-related financial stress episodes that were followed by recessions," the fund said. In a press briefing today, IMF Deputy Director of Research Charles Collyns called the financial crisis "the most dangerous shock to the financial sector since the 1930s."
"I cannot think of an example of a country that had a major banking system failure and not suffered serious economic consequences as a result," Collyns said. "When the banking system suffers major damage -- as in the current episode -- the likelihood of a severe and protracted downturn in activity increases."
Citigroup Demands Wachovia, Wells Fargo Terminate Merger Deal
Citigroup Inc. demanded that Wells Fargo & Co. and Wachovia Corp. terminate a $15.1 billion takeover agreement announced today, saying it breached an exclusive deal the New York-based company reached earlier this week.
Citigroup, led by Chief Executive Officer Vikram Pandit, dropped as much as 15 percent in New York trading after San Francisco-based Wells Fargo said it would buy Wachovia in an all- stock transaction. Citigroup announced a $2.16 billion offer for parts of the company four days ago.
"Citi has substantial legal rights regarding Wachovia and this transaction," the New York-based company said in a statement. "Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia."
The Citigroup deal, which included assistance from the Federal Deposit Insurance Corp., would have pushed the New York- based lender to third place among U.S. bank networks, behind Bank of America Corp. and JPMorgan Chase & Co. The proposal didn't include Wachovia's brokerage and mutual-fund businesses.
"Citigroup loses an attractive, accretive deal, complete with government assistance," David Trone, an analyst with Fox- Pitt Kelton Cochran Caronia Waller in New York, wrote in a note today. "The deal was struck at the 11th hour and clearly had not been formally completed." Shares of Citigroup fell $2.50 to $20 in composite trading on the New York Stock Exchange at 10:24 a.m. The stock had gained 12 percent since the Wachovia deal was announced on Sept. 29.
"The FDIC stands behind its previously announced agreement with Citigroup," FDIC Chairman Sheila Bair said in a statement today. "The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest." U.S. bank regulators said they haven't evaluated Wells Fargo's deal.
"We have not yet reviewed the new Wells Fargo proposal and the issues that it raises," the Federal Reserve and Office of the Comptroller of the Currency said today in a statement in Washington. "The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability."
Citigroup's proposed deal with Wachovia "has undergone extensive review" by the Fed and OCC, the statement said. The Wells Fargo transaction values Charlotte, North Carolina-based Wachovia, led by CEO Robert K. Steel, at $7 a share, the companies said in a joint statement today. Wachovia traded at $6.80, up 74 percent from yesterday. Wells Fargo rose 8 percent to $38.16.
"It provides superior value compared to the previous offer to acquire only the banking operations of the company," Richard Kovacevich, 64, chairman of San Francisco-based Wells Fargo, said in a statement. "Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies."
Wells Fargo to Buy Wachovia in $15.1 Billion Deal
Wells Fargo said early Friday that it would merge with Wachovia — including the troubled Charlotte bank’s banking operations — in a $15.1 billion all-stock merger.
The announcement comes only four days after Citigroup reached an agreement in principle to buy Wachovia’s banking operations for about $1 a share, at the government’s behest and with a guarantee to absorb most of the losses on Wachovia’s massive loan portfolio. That deal, which Wachovia now appears to be spurning, would have left the Charlotte bank with only its securities and retail brokerage businesses.
Wells Fargo, based in San Francisco and considered one of the strongest banks amid the market turmoil, said that the deal requires no assistance from the Federal Deposit Insurance Corporation or any other government agency. It will raise up to $20 billion by issuing new shares, primarily common stock.
“Today’s announcement creates one of the strongest financial firms in the world and is great for all Wachovia constituencies: our shareholders, customers, colleagues and communities,” Robert K. Steel, Wachovia’s chief executive, said in a statement. “This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support.”
Wells Fargo had expressed interest in buying Wachovia as late as Sunday, but suddenly withdrew from negotiations to buy the company, citing concerns over some of the bank’s loan portfolio. Citigroup then received the blessing of the FDIC to acquire Wachovia’s banking operations — but the government agency allowed the banking giant to absorb only the first $42 billion of Wachovia’s riskiest mortgages, in return for $12 billion in preferred stock and warrants.
In its statement, Wells Fargo trumpeted its intention to buy Wachovia without such assistance. “This agreement is an outstanding opportunity for Wachovia common and preferred shareholders and debt holders, team members and customers, for the Charlotte and St. Louis communities and indeed all of the communities that Wachovia serves, and for the U.S. government and our banking system,” Richard Kovacevich, Wells Fargo’s chairman, said in a statement.
By acquiring Wachovia, Wells Fargo will now gain the big retail banking network it has long sought. Though it has long been well-regarded by bank analysts and observers — and counts Warren E. Buffett as one of its largest shareholders — the firm has not had a significant presence east of the Mississippi.
Wachovia’s retail banking management team is also considered among the strongest in the industry, so much so that Citigroup said earlier this week that it had planned to consolidate its own operations into Wachovia’s. Under the terms of the deal, Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock. Based on Wells Fargo’s Thursday closing price of $35.16 a share, that amounts to $7 a share. In addition, three Wachovia directors will join Wells Fargo’s board.
Wachovia shares, which had plummeted below $2 before its Citigroup deal was announced, climbed back, closing at $3.91 on Thursday. They surged more than 53 percent in premarket trading on Friday to $6.53. The big question about Wachovia has been its loan portfolio, which has been saddled with billions of dollars in troublesome adjustable-rate mortgages it acquired from its merger with Golden West Financial in 2006.
Loans like “Pick a Pay” mortgages, which allowed borrowers to defer some of their monthly payments, began to crumble as homeowners fell behind on their obligations. (Wachovia ended the program earlier this year.) Wells Fargo said Monday that it would mark Wachovia’s assets down to fair value, a potential sticking point for other banks because of the charges that would incur. A big-enough capital-raising campaign would alleviate pressure on Wells Fargo.
Wells Fargo will maintain Charlotte as an important hub of Wachovia’s operations, making it the headquarters for the combined company’s East Coast operations. St. Louis will remain the headquarters of Wachovia Securities (as it was the home base of A.G. Edwards, the retail brokerage that Wachovia bought in 2007.) The merger would involve $10 billion in costs, Wells Fargo said.
Wells Fargo's Buy of Wachovia Signals New Aggressive Approach
Wells Fargo & Co.'s surprising move to swoop in and acquire troubled Wachovia Corp., just weeks after the San Francisco-based lender considered an acquisition of failing Washington Mutual Inc., represents an aggressive new shift in strategy for a bank that has long been content with playing it safe.
Chairman Richard Kovacevich signaled the bolder approach during a Sept. 17 speech in Beverly Hills, Calif., saying Wells Fargo would now consider "fixer uppers" that could be obtained at a discount. In June Mr. Kovacevich stepped down as CEO. He is scheduled to relinquish his chairman's seat later this year. "Given the financial conditions today, I feel like a kid in a candy store," he said then.
Formed on March 18, 1852, Wells Fargo is the oldest bank in the West, having financed the California gold rush and operated the western leg of the Pony Express. It became one of the largest financial institutions in the U.S. by gobbling up regional rivals Crocker Bank in 1986 and First Interstate Bancorp in 1996. But since its 1998 merger with Minneapolis-based Norwest Corp., Wells has stayed away from large, transformative deals, preferring in-fill purchases instead.
In August it announced a deal for the $1.4 billion asset Century Bancshares Inc. of Dallas, yet another small community bank and the fourth similar deal for Wells in the past two years. As recently as this summer, Chief Executive Officer John Stumpf and Chief Financial Officer Howard Atkins were dismissing talk that Wells was likely to purchase a large, weakened rival with valuations so cheap. Mr. Atkins said in July that Wells Fargo prefers "good franchises, not broken franchises." "If we have to spend time fixing up somebody else's business, we run the risk of deflecting attention from our customer."
The reason the 106,500-employee Wells Fargo has long been considered a likely acquirer is its relative strength despite the larger problems facing the battered banking industry. As the country's second-largest mortgage lender, it has largely sidestepped the ills afflicting many of its peers. Its profit decline in the second quarter was smaller than expected, and it increased its dividend while many banks slashed theirs.
"This company's opportunities to acquire both other banks and banking relationships not heretofore available to it will be almost unequalled in the industry as this shake-out continues and gains momentum," said Nancy Bush of NAB Research LLC in Annandale, N.J., in a recent research note.
Not that Wells Fargo is entirely immune from the turmoil. The bank long boasted that it avoided risky subprime and adjustable-rate mortgages, but in late 2007 Mr. Kovacevich admitted the bank strayed from sound lending principles in its home equity loan business, buying prime home-equity loans from brokers rather than sticking with loans made to its own customers. During the mortgage boom, Wells heavily promoted the home equity lines as a way to add rooms to a house or redo a kitchen.
The company recently set aside more than $11 billion in such loans to be liquidated as part of a separate portfolio. Defaults in that area continue to rise, and during the second quarter provisions for credit losses more than quadrupled to $3 billion. Wells Fargo now waits 180 days to write off a default, instead of 120. That change in policy last April potentially postpones an earnings hit, although the bank has said the change did not improve its second-quarter results.
Another potential area of concern is $5.28 billion of so-called "Level 3" mortgages disclosed in the second quarter, up from $3.3 billion. These loans can be a problem because they are difficult to value. Wells Fargo also may take more than $600 million in charges relating to its exposure to mortgage companies Fannie Mae and Freddie Mac, as well as the bankrupt Lehman Brothers Holdings Inc.
At the same time, Wells Fargo appears to be benefiting from the turmoil in its home state, which was rocked by the failure of IndyMac Bank earlier this summer. Its net retail checking accounts were up 5.5% in the second quarter, the largest increase in more than three years. In California, consumer checking accounts were up a net 6.7%.
The tsunami will hit European banks harder
From Copenhagen to Reykjavik, governments have been forced to take stakes in banks, underwrite credit and guarantee bank deposits. As the credit crunch bites deeper and bad debts mount, more European banks may have to raise additional capital or merge.
On the face of it, the capital position of European banks looks reasonably sound. Citigroup estimates the average Tier 1 capital ratio to be 7pc. But balance sheets have grown over the last year and tangible equity has fallen. The ratio of tangible equity to assets has slipped from 3pc to 2.7pc. Capital adequacy concerns caused Unicredit’s share price to fall 20pc in 24 hours.
Not that an apparently bullet-proof Tier 1 ratio has been much protection.
Of the recent stricken banks, Dexia’s ratio was 11.2pc, Fortis’ 8pc and Hypo Real Estate’s 6.4pc. As with Northern Rock, HBOS and Bradford & Bingley in the UK, and Glitnir in Iceland, the liquidity drought has been a critical contributor to these banks’ difficulties. Euro libor rates have soared to record highs.
But underlying economic conditions are taking their toll too. Rapid growth in the Baltic countries, for example, has screeched to a halt. Swedbank and SEB – both of which are heavily exposed to these economies – expect their bad debts to increase sharply.
In Spain, banks face one of Europe’s most precipitous property crashes. If their growing bad debts reached 1993 levels, according to Morgan Stanley, the earnings of mid-sized Spanish banks could be wiped out. Spanish banks’ loan to deposit ratio is 180pc – well above the European average.
Fear about a combination of inadequate capital, a liquidity shortage and bad debts have spread into retail markets. Ireland has guaranteed bank deposits, and the UK plans to raise its deposit protection limit. It’s hard to see how Europe can avoid further capital raising – possibly from governments – and more bank bail outs before the flood waters recede.
Europe's Real Estate Slump May Spark Wave of Local Bank Mergers
When Denmark's central bank bailed out Roskilde A/S and its 24 branches in July, there was barely a ripple in Europe's financial industry. Today it looks like the sign of a tsunami of soaring funding costs and falling house prices now crashing over banks from Iceland to Spain.
That may force some of the region's smaller banks to merge, after a week in which governments rescued lenders ranging from Brussels-based Dexia SA to Bradford & Bingley Plc of the U.K. "There are some institutions that are weaker than others and they will suffer," said Antonio Ramirez, an analyst at Keefe, Bruyette & Woods in London. "Some of these institutions will have to consider M&A as an option for survival."
In Ireland, Spain and the U.K., among the countries hardest hit by the housing slump, 14 banks with 2.7 trillion euros ($3.7 trillion) of assets have at least 50 percent more loans than deposits, according to data compiled by Bloomberg. That may put them at risk because they have to borrow to fund lending as credit markets seize up and interest rates rise.
Things are even more precarious in Denmark, where the central bank says loans outstanding equal 2.4 times deposits.
Smaller banks are most at risk because they tend to have lower credit ratings and have a harder time borrowing to fund their operations, said Simon Maughan, an analyst at MF Global Securities Ltd. in London. "It will be them that feel the funding pressure," he said. "And that could well trigger them to seek mergers."
Fionia Bank A/S in Odense, Denmark, finalized a plan to sell debt in June and so far hasn't been able to do so. Instead, it is offering 5.75 percent interest on time deposits to attract customers and is reducing real estate loans. "We have the weapons ready, but at the moment it's not possible for us to go," said Chief Executive Officer Finn Sorensen. "We're just looking for an open window."
Sorensen declined to speculate on mergers. Fionia is down 57 percent this year on the Copenhagen Stock Exchange.
Denmark's central bank is in talks with the national bankers association to provide liquidity, Deputy Governor Torben Nielsen said in an interview, without offering specifics.
The initiative comes on top of a program that began Sept. 26 to offer credit to lenders with "excess capital adequacy."
"I saw what they did on Friday as a very good move for smaller banks with good solvency where it's only the liquidity situation that could be a problem," said Henrik Lund, CEO of Naestved, Denmark-based Max Bank A/S. He added that he was "comfortable" with the bank's funding and had no plans to seek a merger. Max Bank has dropped 79 percent this year in Copenhagen.
Banks' unwillingness to lend to each other helped force European authorities to rescue five lenders this week. Belgium, the Netherlands and Luxembourg pumped 11.2 billion euros into Fortis, while Belgium and France led a 6.4 billion- euro bailout of Dexia. Bradford & Bingley was seized by U.K. authorities, Glitnir Bank hf was rescued by Iceland's Financial Supervisory Authority, and Hypo Real Estate Holding AG received a German government loan guarantee.
Ireland said it would guarantee the deposits and debts of domestic banks for two years, covering about 400 billion euros in liabilities at lenders such as Allied Irish Banks Plc, Bank of Ireland Plc and Anglo Irish Bank Corp. "It's a triple whammy on the banking sector," said Nick Barnes, head of international research at real estate consulting firm Knight Frank LLP in London. "The interbank lending market is dire, they may have toxic investments or have over-extended themselves, and income streams are drying up."
The cost of borrowing euros for one month at the euro interbank offered rate, or Euribor, climbed 3 basis points to a record 5.12 percent Oct. 2, the European Banking Federation said. "Money is getting more expensive, when you can get it," Roskilde CEO Soren Kaare-Anderson said in an interview. "That's the key -- whether you can get it." Mortgage lenders are also suffering as house prices decline. Danish property prices fell 9.6 percent in the second quarter, the biggest drop in western Europe, a survey by Knight Frank showed. They dropped 8.1 percent in Ireland and 3.9 percent in the U.K.
Spanish prices declined 0.3 percent in the second quarter, after falling 0.4 percent in the first, the National Statistics Institute said Sept. 24. In Spain, delinquent loans climbed to 40.84 billion euros in July from 13.25 billion euros a year earlier, according to the Bank of Spain. Some Spanish savings banks that are most exposed to the construction slump may be forced to merge, said Manuel Romera, director of the financial industry department at Madrid's Instituto de Empresa business school.
Madrid-based Banco Popular Espanol SA, Spain's third-biggest bank, rose 5.5 percent on Sept. 16 on speculation it might merge with Banco Pastor SA. The stock has fallen 28 percent this year. Juan Echanojauregui, Popular's investor relations director, said the lender didn't need a merger. The bank's loan-to-deposit ratio dropped to 1.7 last month from 1.8 a year earlier, as it captured client cash at twice the rate it made loans, he said.
On Sept. 26, Fitch Ratings lowered the ratings on four savings banks, including Caixa Sabadell and Cajasur. A spokeswoman for Sabadell said the lender's liquidity position is "strong." A spokesman for Cajasur wouldn't comment. "People ask me whether this or that bank is safe," Romera said. "I always say I don't know."
Number of new homes being built in UK plunges to 50-year low
New private house-building is at a 50-year low, according to an analysis of the latest official data by The Independent, adding to the evidence that the UK is in recession. Although construction only accounts for 6 per cent of GDP, the weakness in the rest of the economy means the building industry's state is almost sufficient to push the UK into a slump. It also jeopardises the Government's targets for new housing.
The downturn is being fuelled by the credit crisis, which has seen mortgage products disappear rapidly. The decline in the supply of new mortgages again helped pushed the Nationwide house price index down. It fell by a further 1.7 per cent last month, leaving average UK property prices down 12.7 per cent on this time last year, their 11th successive monthly fall and the sharpest decline in the history of the Nationwide's survey. Prices are slipping more quickly now than in the last housing recession in the early 1990s.
The International Monetary Fund yesterday predicted that the US and the global economy might enter recession, while Marks & Spencer announced its worst sales slide in years. Based on the decline in private house- building this year – around 30 per cent lower than in 2007 – 2008 is shaping up to be the worst year for housing starts since at least 1957.
The Office for National Statistics figures suggest that about £5.6bn of private housing will be built this year, beating the previous record low, set in 1992, of £5.7bn. The credit squeeze is throttling the construction industry and the effects of the crunch are likely to spread. The Bank of England said yesterday that "Concerns about the economic outlook and falling collateral values contributed to this tightening in credit availability.
Default rates, and the losses following default, on lending to households and private non-financial corporations had risen over the past three months, and were expected to rise further." The Bank's report also pointed out that demand for credit had fallen, as consumers and companies became more nervous. Michael Saunders, an economist at Citi European Economics, said there was "a consistent and gloomy picture of tightening lending standards, weak credit demand and rising defaults".
He added: "The survey highlights the vicious circle, with banks cutting back on lending to companies and households because of the worsening economic outlook, a reduced appetite for risk and reduced availability of funds. In turn, reduction in the supply of credit exacerbates the downturn – which will reinforce the reluctance of banks to lend."
A run of weak news on the economy – which recorded zero growth in the second quarter – has heightened predictions that the Bank of England will cut interest rates when the Monetary Policy Committee meets next week. Howard Archer, the chief economist at Global Insight, said: "We expect interest rates to be cut from 5 per cent to 4.75 per cent, but would not rule out a 50 basis point cut to 4.5 per cent. Further out, we expect interest rates to come down to 3.25 per cent in 2009 and would not rule out a drop to 3 per cent."
Greece joins bailout stampede as Germany vows no blank cheques
Greek officials said the state would cover "all bank deposits, whatever the amount." The move follows the dramatic decision by Ireland this week to guarantee the deposits and debts of its six biggest lenders in the most sweeping bank bail-out since the credit crisis began.
"The whole of Europe will have to do same thing, otherwise Europe will have a split banking system," said Hans Redeker, currency chief at BNP Paribas. British banks are already facing a haemorrhage of deposits to Irish banks that now enjoy the AAA sovereign rating of the Irish state.
Greece has so far escaped attention as the financial storm breaks over Europe, but the economy is deeply unbalanced. A torrid credit boom has been allowed to run unchecked, leading to a current account deficit of 15pc of GDP -- the highest in the eurozone. While property losses are modest so far, the Greek banks have run into trouble rolling over short-term debts after the near total closure of Europe's capital markets. The liabilities of the Greek banks are roughly €320bn euros.
As rumours flew in another day of fast-moving drama in Europe, the credit system continued to flash warning signs of extreme stress. Three-month Euribor - the benchmark rate used for floating mortgages and financial contracts -- rose to a post-EMU record of 5.33pc. Governments across Eastern Europe were forced to issue statements on Thursday assuring depositors that their banks were safe. Traders said Ukraine is on the brink of a currency crisis.
The Greek move puts fresh pressure on Germany to back the mounting calls for an EU lifeboat fund to shore up Europe's struggling banks, even though such a plans are anathema to Berlin. Chancellor Angela Merkel warned that there would be no "blank cheques" for those who get into trouble.
Berlin fears that any such fund is a Trojan Horse that could ultimately leave German taxpayers footing the bill for a massive bail-out of the southern Europe as the region's booms turn to bust. Key ministers are now frantically trying to stop the idea gaining a serious head of steam.
Finance minister Peer Steinbrueck said German citizens should not have to step in "to stabilize situations for which other countries are responsible. To put it mildly, Germany is highly cautious about such grand designs for Europe. Other countries are free to think about it. I just don't see any German interest in it," he told the Wall Street Journal. The comments are the clearest indication to date that Berlin will resist moves to create a pan-European treasury to back up the single currency, whatever the risk for the stability of monetary union.
Confusion reigned across Europe as different capitals gave briefings and counter-briefings on the lifeboat plans. French finance minister Christine Lagarde backed away from earlier ideas for a €300bn rescue fund to help weaker countries cope with financial panics. "There is no such thing", she said . Separately, The Netherlands has mooted a plan for each EU country to pay 3pc of GDP into a reserve fund.
A raft of ideas are to be discussed at an emergency summit of the French, British, German, and Italian leaders in Paris on Saturday, though it looks increasingly unlikely that anything of substance will be agreed. The squabbling has exposed the deep flaws in the EU's crisis machinery. While the single currency spans fifteen states, each government controls its own fiscal policy and nationalist reflexes die hard.
Neelie Kroes, the EU competition commissioner, said that Ireland's decision to act unilaterally -- disregarding EU state aid rules -- risked a descent into the beggar-thy-neighbour mayhem of the Great Depression. "When Europe was confronted with a banking crisis in the 1930s, governments decided to go national and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice," she said. Brussels has already been overtaken by events.
David Owen, Europe economist at Dresdner Kleinwor, said Ireland had no choice, given the lighting pace of events on Monday. "Their banks were going down. No government can let that happen. They did exactly the right thing to ring fence this." Angel Gurria, the head of the OECD club of rich nations, said Europe may not have the luxury of trying "piecemeal" responses as the financial storm turns violent. "Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic," he said.
Bank of England May Cut Rate by Most Since 2001
Bank of England policy makers may cut the benchmark interest rate next week by the most since 2001 as the British economy hurtles toward a recession, economists say.
Citigroup Inc., BNP Paribas SA, JPMorgan Chase & Co. and Royal London Asset Management today changed their forecasts to predict a half-point reduction from the current 5 percent on Oct. 9. Investec Securities, Bank of America Corp., Deutsche Bank AG and UBS AG this week forecast a quarter-point cut.
"We've got a severe financial crisis that has worsened in the past week and clear signs the economy is falling off a cliff," Michael Saunders, chief western European economist at Citigroup, said in an interview. "The balance of risks has shifted decisively to the downside."
Services industries from banks to hotels shrank by the most on record in September as the global financial crisis threatened to throw the economy into the first recession since 1991. The Bank of England, which has provided extra funds to the market as banks hoard cash, hasn't lowered interest rates since April on concern about the fastest inflation in a decade.
The last time the U.K. central bank lowered the rate by a half-point was in November 2001, in the aftermath of the Sept. 11 terrorist attacks. The pound fell as much as 0.4 percent today, trading at $1.7565 as of 2 p.m. in London. The currency has fallen 12 percent since the start of July.
The main U.K. rate will fall to 4.75 percent on Oct. 9, the median of 61 forecasts in a Bloomberg News survey showed today. Four economists predict a half-point cut, 42 forecast a quarter- point reduction and 15 said the rate won't change.
The nine-member Monetary Policy Committee voted 8-1 to keep the rate unchanged last month, with David Blanchflower supporting a half-point cut. Blanchflower said he'll argue for a cut again next week, in a newspaper interview published today.
Citigroup's Saunders said Blanchflower may want an even bigger reduction than half a point. "Things have changed dramatically," Ian Kernohan, an economist at Royal London Asset Management in London, said in an interview. "This morning's data from the U.K., plus the run of data we've had elsewhere and events in financial markets, just heighten the risk of a much more severe slowdown."
The U.K. central bank today announced a wider range of collateral in its three-month money auctions to assist banks. The three-month interbank lending rate surged to 6.31 percent on Oct. 1, the highest this year. It was at 6.27 percent today. "In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," Governor Mervyn King said in a statement.
"They're nervous, understandably," said Grant Lewis, an economist at Daiwa Securities SMBC Europe in London and a former U.K. Treasury official. "The less collateral you can use in the private repo, the tighter the liquidity position of financial institutions." He predicts a quarter-point reduction.
Higher money market rates are curbing demand for loans to households and consumers. House prices had the biggest annual drop since at least 1991 in September, Nationwide Building Society said yesterday. British banks plan to scale back loans further in the final quarter of the year, a Bank of England report showed.
"The fallout from the credit crisis is clear," said JPMorgan economist Malcolm Barr in a note. "With the data deteriorating rapidly and prompting a quicker MPC response, we are lowering the forecast for the low in policy rates to 3 percent."
Iceland Savers Fear 'House of Cards' May Collapse
Arni Einarsson looks out over the Atlantic Ocean from his Room With A View Hotel in Reykjavik and offers a gloomy outlook for Iceland after the government bailed out Glitnir Bank hf. "Nobody trusts anyone any more, and in banking trust is everything," says Einarsson, 49, who's managed the hotel for seven years. "As long as people trust you, you can build a very long domino chain. But once that trust is gone things start falling."
That's a common concern on the island the size of Cuba that's home to 320,000 people. Iceland spent a decade punching above its weight as the three biggest banks amassed assets valued last year at nine times the country's $19 billion gross domestic product. The demise of Iceland's third-biggest bank has shaken the economy. Stodir hf, an investment firm that owns 32 percent of Glitnir, has filed for protection from creditors.
The cost of insuring against a default by Iceland's government and the three banks has surged to a record, credit- default swaps show. Glitnir, Kaupthing Bank hf and Landsbanki Islands hf have the worst creditworthiness among European lenders, according to the swaps. "The focus now is clearly on Iceland as a country risk," said Mikko Ayub, Helsinki-based head of investment product sales at Nordea Bank AB.
The krona has slumped 14 percent against the euro since Sept. 29, when the government said it would pay 600 million euros ($842 million) for 75 percent of Glitnir. Inflation, now at 14 percent, is almost five times the central bank's target.
Government Bailout The government bailed out Glitnir after the bank was unable to secure short-term funding. Glitnir had a deposit-to-loan ratio of about 30 percent, the lowest among Iceland's biggest banks, meaning it had to rely on money markets for financing.
"The government's ownership in Glitnir will strengthen further the capital base of Glitnir and remove all doubt that the bank can cope with the current environment," said Bjorn Richard Johansen, an Oslo-based spokesman for Glitnir.
Landsbanki had a deposit-to-loan ratio of 63 percent at the end of the first half, the bank said in a Sept. 29 statement. Andew Walton, a bank spokesman in London, declined to comment.
"Kaupthing is a very liquid bank, our position is strong and we have a light maturity profile in coming quarters," Kaupthing spokesman Jonas Sigurgeirsson said. Outside Glitnir's headquarters in Reykjavik, Anna Vignir said many people are concerned about what happens next. "Because Iceland is so small and because there are extensive cross-shareholdings, if one part collapses, the rest follows like a house of cards," said the 48-year-old Glitnir customer.
That view is shared Bill Blain, who produces a daily market report for bond broker KNG Securities LLP in London. "The whole market is more nervous than ever on Iceland," he said. "For the first time even normally positive commentators have doubts about the competency of the system."
Prime Minister Geir H. Haarde yesterday said the Glitnir bailout wouldn't end the banking "crisis" in Iceland. "The economic situation has in a short space of time changed very much for the worse," Haarde said in an address to parliament in Reykjavik. "Government, companies, households and people have seldom faced such great difficulties." Other politicians have said Iceland, which shares a trade agreement with the European Union but has shunned full membership, may need to seek shelter by adopting the region's single currency, the euro.
Kristinn K. Olafs, a taxi driver in Reykjavik for more than a decade, is worried about the future. Olafs spent about 4.5 million kronur ($40,000) a year ago on a new cab. Today, he says he'd have to pay 8 million kronur. Iceland's banks were sold to investors in the 1990s and were permitted to offer mortgages in 2004, contributing to the island's real-estate boom.
Kaupthing's profit jumped more than 50-fold from 2000 to 2005 after it borrowed abroad to finance expansion. It acquired financial services companies FIH Erhvervsbank A/S of Denmark in 2004 and Singer & Friedlander Group of the U.K. in 2005. Landsbanki purchased Teather & Greenwood and Kepler Equities of the U.K. and Merrion Capital Group of Ireland in 2005, as well as the U.K.'s Bridgewell Group Plc last year.
Glitnir's assets grew more than ninefold from 2002 through 2007 as it acquired Swedish financial services companies Fischer Partners and Tamm & Partners Fondkommission AB, and Finnish money-management firm FIM Group Oyj. The expansion forced Glitnir to rely heavily on wholesale markets, rather than deposits, for its funding needs. As the nation's banks grew, they helped fund a web of investment firms with stakes in other Icelandic companies.
Stodir, the Glitnir investor, also has holdings in insurer TM and real estate company Landic Property. Exista hf, a financial services firm, owns almost 25 percent of Kaupthing. Bakkabraedur Holding BV, owned by the founders of food maker Bakkavor Group, in turn owns 45 percent of Exista. Landsbanki this week agreed to sell its European broking units, including Teather & Greenwood and Bridgewell, to Straumur Burdaras Investment Bank hf for 380 million euros.
Some Icelanders aren't shedding tears for Glitnir. "They thought they could sit around inside all their buildings and keep on generating money on their computers," said Olafur J. Bjarnason, 61, a Glitnir customer. "In the end, it is still hard work and diligence that creates value."
Iceland Says to Announce Rescue Plan 'Very Soon'
Iceland's government will "very soon" announce a plan to inject liquidity into the financial system, the prime minister's economic adviser Tryggvi Herbertsson said. "We're working on a plan," Herbertsson said in a telephone interview out of Reykjavik today. "It's obvious that if you look at the markets that we have to do it very soon."
The krona has plunged 12 percent against the euro this week on a series of rating downgrades and after the government bailed out the No. 3 lender, Glitnir Bank hf. The government is working "day and night" to secure a foreign loan, Minister for Banking Affairs Bjorgvin Sigurdsson told television station Stod 2 late yesterday. The krona gained less than 0.1 percent to trade at 155.69 against the euro as of 1:20 p.m. in Reykjavik. It had fallen as much as 0.5 percent earlier in the day.
"The foreign sources of funding have completely dried up; there's no money market at the moment," said Sunil Kapadia, an economist at UBS Ltd. in London. "The central bank needs to step up the liquidity provision, for sure." The cost of protecting government debt from default soared to a record yesterday, according to traders of credit-default swaps. Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds, CMA Datavision prices show.
Herbertsson declined to provide details of the plan. He ruled out a loan from the International Monetary Fund. "The money that the IMF would be able to provide would be minimal," Herbertsson said. "We're an industrialized country, the fifth-richest country in the world per capita. We are working on various measures to provide liquidity to the economy and you'll see that soon, but the IMF is not an option."
The government's decision to bail out Glitnir through the purchase of a 75 percent stake will probably be the only rescue of a commercial lender, according to Herbertsson. "Glitnir is what had to be done," he said. "The other banks are in a much better position and we don't think we need to go into those banks. But having said that, it's obvious that this can change in a few days."
The government is in "no hurry" to sell its stake in Glitnir, Herbertsson said. "We'll hold a stake until it is certain that the bank is in a good position and until somebody who we trust can come in and buy the bank," Herbertsson said. "If it's one month, then it's one month. If it's two years, then it's two years." In the 24 hours after the collapse of Glitnir, Standard & Poor's and Fitch Ratings lowered the country's rating and Moody's Investors Service put Iceland's national Aa1 rating on review for a potential downgrade.
"The economic situation has in a short space of time changed very much for the worse," Prime Minister Geir H. Haarde said in a speech to parliament last night. "Government, companies, households and people have seldom faced such great difficulties." Iceland's central bank has done little to ease the liquidity shortage, even as central banks across the rest of Europe and in the U.S. pump money into their financial system and help their banks.
"Everybody is basically waiting for the central bank to do something," said Beat Siegenthaler, a senior strategist at TD Securities in London. "They're the only central bank around the world that hasn't stepped in, in some way, to support their financial sector. At the moment the feeling is that they're just nowhere, they're just not present"
The slump in the krona will probably send the inflation rate as high as 20 percent, compared with the central bank's target of 2.5 percent, Siegenthaler said. Consumer prices rose an annual 14 percent in September. "Many traders are saying they've never seen a currency lose as much in such a short time and without the central bank saying anything or attempting any kind of supportive measures," he said
Kaupthing: fears grow over financial strength
A number of London brokers reported that Kaupthing clients had moved positions held via Contract for Differences (CFD) after the Icelandic bank significantly increased the margin that clients had to put up.
"They have told clients they want to deleverage," said one London stock broker who has seen a number of clients transfer positions from Kaupthing. "It's great for me. I'm doing loads of business this morning, but you do wonder what is going on over there". The move has increased the markets fears about the financial strength of Kaupthing, one of Iceland's largest banks, which is reported to be in talks with the Icelandic government.
The cost of insuring against Kaupthing defaulting on its debt jumped 1105.4 basis points to 3,306. Kaupthing is the major backer of several British investors including Robert Tchenguiz, who has significant stakes in supermarket chain Sainsbury and pub operator Mitchells & Butlers. Shares of M&B dropped 16pc in morning trading. Sainsbury was also down as much as 2pc a one stage.
A CFD allows an investor to take a highly leveraged position, by putting up as little as 10pc of the value of their holding in a stock. But Kaupthing is understood to have increased the margin call significantly this morning. Reports circulating the City also claimed that brokerages including MF Global had been told to stop trading with Kaupthing.
One leading broker said: "I'm sure they will be okay - but we are just checking we don't have any exposure anyhow." Another broker reported that Kaupthing had met a number of its own margin calls this morning. A spokesman for Kaupthing said it was in discussions with clients, but refused to comment on specifics.
On Monday, Iceland was forced to nationalise its third biggest bank, Glitnir, in a €600m (£480m) bail-out. In April, Andreas Hakansson, an analyst at UBS, pointed out that the liabilities of Iceland's banks dwarfed the rest of the economy, equating to 800pc of GDP – way beyond the European average of 300pc.
Trichet Poised for Rates 'Volte Face' as Summit Nears
Jean-Claude Trichet is poised to execute his first interest-rate cut since becoming European Central Bank president almost five years ago. Investors yesterday raised bets on a quarter-point rate reduction as early as next month after Trichet said he and the bank's 20 other policy makers debated such a step for the first time since the credit squeeze began.
The shift marks an end to almost three years in which the Frankfurt-based bank cited inflation as its preeminent concern and 14 months of seeking to protect the economy from the financial market turmoil without using monetary policy. A looming recession and five bank bailouts this week have changed the tone in Europe. Trichet and political leaders from the continent's four largest economies are set to hold an emergency summit tomorrow.
"This volte-face from the ECB shows that it has lost complete confidence about the economic outlook and recognizes that an interest-rate cut may now finally be needed," said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc in London.
Trichet's comments came as he and the leaders from Germany, France, Britain and Italy prepare to meet in Paris tomorrow to discuss the crisis. Governments this week bailed out banks including Fortis and Dexia SA. Officials squabbled yesterday over how to respond to the credit crunch with Germany opposing a unified approach and the Netherlands demanding states set aside funds to help troubled banks.
"All authorities have to be up to their responsibilities, particularly in this period," Trichet said yesterday. The euro fell to a 13-month low against the dollar and European government bonds surged after Trichet raised the prospect of lowering the key rate from the 4.25 percent it was increased to in July. "Increasing downside risks" dog the economic outlook with the result that "upside risks to price stability have diminished somewhat," he said in Frankfurt.
That was a reversal from his analysis of last month that growth was in a temporary "trough" and that "upside risks to price stability prevail." Royal Bank of Scotland, Citigroup Inc. and JPMorgan Chase & Co. responded by predicting lower rates when the bank's Governing Council next meets Nov. 6, earlier than they previously anticipated.
Citigroup economist Juergen Michels said the bank may even cut by a half point should markets remain strained and act sooner in concert with foreign counterparts such as the Federal Reserve. JPMorgan's Chief European Economist David Mackie forecast the bank will slash the benchmark to 2.75 percent by the end of 2009. Morgan Stanley today predicted the benchmark rate will drop to 3 percent, which compares with a previous forecast that rates would stay unchanged.
"The bank threw the door wide open for a rate cut," said Holger Schmieding, chief European economist at Bank of America Corp. Until now, the ECB has fought the credit crisis by pushing record amounts of dollars and euros into markets in a bid to jump-start lending. Banks are refusing to lend to each other, propelling money-market borrowing rates to record highs. The ECB said today it's allowing more banks to participate in its quick tender operations.
At the same time, the ECB focused monetary policy on combating inflation that's still almost double its 2 percent limit. It raised the key rate to a seven-year high in July. What changed is that the market turbulence is now roiling the 15-nation economy, pushing it toward the first recession since the single currency was introduced in 1999 and diffusing the inflation threat.
After the economy contracted in the second quarter, unemployment increased to the highest in more than a year in August and the manufacturing, services and retail sectors shrank for a fourth month in September. Oil prices have retreated 35 percent from a July record of $147.27. "The many concerns about the economy have evidentially caused the bank to reappraise the situation," said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt.
The ECB may not be alone in easing monetary policy in coming weeks. Investors bet the Bank of England will reduce the benchmark bank rate from 5 percent next week and that the Fed will cut by half a percentage point to 1.5 percent by the end of the month. Still, with inflation at 3.6 percent and Germany's IG Metall labor union demanding the biggest pay raise in 16 years, Societe Generale SA economist James Nixon said "next month may still be too early for a cut." Kraemer agreed the bank may prefer to wait until December when its staff will have updated economic forecasts.
The risk for the economy is that it is too inflexible to be saved from recession by lower borrowing costs, said Julian Callow, chief European economist at Barclays Capital in London. "The real economy doesn't react all that much to policy easing even in good times, let along when the banking sector is under the biggest stress in post-war history," he said.
U.S. Payrolls Fell by 159,000, Most in 5 Years; Jobless Rate at 6.1%; Misery Index Surges
The U.S. lost the most jobs in five years in September and earnings rose less than forecast as the credit crisis deepened the economic slowdown. Payrolls fell by 159,000, more than anticipated, after a 73,000 decline in August, the Labor Department said today in Washington.
The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964. The world's largest economy may be headed for bigger job losses as the worst financial meltdown since the Great Depression causes consumers and companies to retrench. A sinking labor market and rising borrowing costs raise the odds Federal Reserve policy makers will cut interest rates by their Oct. 29 meeting.
"The financial panic is a body blow to business confidence, and companies are now battening down the hatches," Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. "We're in store for very sizable job losses across many industries. A rate cut by the Fed could come before the next meeting."
Revisions added 4,000 to payroll figures previously reported for August and July. The Labor Department said it was "unlikely" that Hurricane Ike, which struck the Gulf Coast last month, "had substantial effects" on payrolls figures. After today, the total decline in payrolls so far this year has reached 760,000. The economy created 1.1 million jobs in 2007.
U.S. stock-index futures rose, with the futures on the Standard & Poor's 500 Index expiring in December gaining 3.2, or 0.3 percent, to 1,127.6 at 7:57 a.m. in New York. Dow Jones Industrial Average futures added 3 points to 10,591 after earlier rallying as much as 79. Payrolls were forecast to drop 105,000 after declining by a previously estimated 84,000 in August, according to the median of 76 economists surveyed by Bloomberg News. Estimates ranged from declines of 156,000 to 60,000. The jobless rate was projected to remain at 6.1 percent.
The misery index, which adds the unemployment and inflation rates, surged to 11.7 percent in August, the highest level since 1991. The jobless rate is up 1.4 percentage points from September 2007. Since World War II, the rate has risen only twice during similar periods before presidential elections. In both cases -- when Bill Clinton defeated George H. W. Bush in 1992 and when Ronald Reagan beat Jimmy Carter in 1980 -- the incumbent party lost the election.
Americans will go to the polls on Nov. 4 and the October jobs report is due Nov. 7. "Voters are extremely angry, and they want someone to blame," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.
Democratic presidential nominee Barack Obama has opened up a lead over Republican rival John McCain in the aftermath of their first debate and amid growing concerns about the economy, according to a Pew Research Center survey taken Sept. 27 to Sept. 29. A mid-September poll from Washington-based Pew had shown the candidates were in a statistical dead heat.
Earlier in September, a Bloomberg/Los Angeles Times poll showed more respondents said Obama would do a better job handling the financial crisis than McCain, and almost half of the voters believed he had better ideas to strengthen the economy than his rival. Factory payrolls fell 51,000 after decreasing 56,000 in August. Economists had forecast a drop of 57,000.
Today's report also reflected the housing slump. Payrolls at builders declined 35,000 after falling 13,000. Financial firms decreased payrolls by 17,000, the most since November last year. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 82,000 workers after eliminating 16,000 in the previous month. Retail payrolls slid by 40,100 after a 25,400 drop. Government payrolls increased by 9,000, the smallest gain since January.
In the past month, Hewlett-Packard Co., the world's largest personal-computer maker, announced it will cut 24,600 jobs, and auto-parts maker Federal-Mogul Corp. said it would eliminate 4,000 positions globally. The Senate passed a $700 billion financial-market rescue package earlier this week and the House of Representatives may vote on it today.
Marriott International Inc., the world's largest hotel chain, yesterday reported third-quarter profit fell 28 percent as U.S. companies and consumers cut back on travel. "Without action, the resulting credit squeeze could threaten businesses," Chief Financial Officer Arne Sorenson said on a conference call. There are "tens of thousands of jobs at stake in our company alone, and we are typical."
Mounting job cuts will further limit consumer spending, which accounts for more than two-thirds of the economy. A Bloomberg survey in September predicted spending will be unchanged this quarter, the weakest performance since 1991. The Institute for Supply Management's index on Oct. 1 showed manufacturing shrank in September at the fastest pace since the last recession in 2001. The odds the central bank will lower its benchmark rate by a half percentage point, to 1.5 percent, later this month rose to 34 percent that day, compared with no chance a week earlier.
The probability jumped to over 90 percent yesterday as stocks tumbled and borrowing costs surged. The average work week shrank to 33.6 hours from 33.7 hours, today's report showed. Average weekly hours worked by production workers slipped to 40.7 hours from 40.9 hours, while overtime dropped to 3.6 hours from 3.7 hours. That brought the average weekly earnings down by 81 cents to $610.51 in September.
Workers' average hourly wages rose 3 cents, or 0.2 percent, to $18.17 from the prior month. Hourly earnings were 3.4 percent higher than September 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from August and a 3.6 percent gain for the 12-month period.
The payrolls report included the government's preliminary estimate for annual benchmark revisions. The Labor Department said payrolls for the 12 months ended in March 2008 will probably be revised down by 21,000. Currently, government figures show 521,000 jobs were created during the 12 months to March. The final estimate will be issued in February.
AIG May Need More Money From Government Credit Line
Despite receiving an $85 billion line of credit from the Federal Reserve, American International Group Inc. (AIG) is still seeing tightness in the marketplace, said Edward Liddy, the company's chairman and chief executive Friday. The insurance giant has already drawn down $61 billion of the amount, and about $53 billion or $54 billion of that has gone toward collateral calls on its derivatives business, Liddy said.
Other cash has been used for other needs, particularly as the credit market has frozen, Liddy said. "Our CP (commercial paper) lines have dried up," which has happened throughout the market, he said during an investor update that was Webcast Friday.
He said he could "never say never" to a potential need for more money. Borrowing on the Fed credit line will go up. "It will be very much driven by market considerations," he said.
"The Treasury bailout would be helpful to us," Liddy said, though details on the potential bill are still vague. "Until we can see exactly how the Treasury will be purchasing assets, there is not enough information to know how that would work. What is important is that we would be able to access that." Assets that it will sell include its private lines property/casualty insurance business, and a minority share of its foreign life insurance business, Liddy said. All non-insurance businesses, such as its aircraft leasing business, are on the market, he said.
As it rushes to sell off its non-insurance businesses around the world, American International Group (AIG) will focus on avoiding franchise erosion and will try to sell its operations to "brand-name" buyers who have strong ratings and balance sheets, said Liddy.
"We want to protect our policyholders from announcement through closing," Liddy said during the call. He promised an open and transparent process to any sales. "Our goal is to emerge from this process as a smaller but nimbler company," he said. He said he would look favorably on preemptive offers from companies that have a clear ability to close a deal. He said the company is working on some way of realizing the value in its derivatives business, which has caused most of the losses for AIG in the past three quarters.
After months of crippling losses in its non-insurance derivatives business, American International Group Inc. (AIG) will focus on its core property and casualty insurance and foreign life insurance businesses after paying off an up to $85 billion federal loan meant to keep the company in business. So far, AIG has announced only one deal, a sell-off of its 50% interest in London City Airport to its partner in the venture, Global Infrastructure Partners. It bought the stake as a joint venture with GIP in 2006 for a total price estimated to be around $1.4 billion. The companies did not disclose the terms of the deal.
Through Tuesday, the company had drawn down $61 billion from the federal assistance. In return for the loan, the federal government is in line to get a majority stake in the company. The government stepped in mid-September, as AIG was on the brink of bankruptcy, a situation that many felt would rock the global financial system. Investors had been increasingly concerned about the New York company's ability to raise capital.
Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions.
Fed Loans to Banks, Dealers, AIG Soar to $410 Billion
Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze. Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today.
The total surpassed the previous record after the 2001 terrorist attacks. Borrowing by securities firms totaled $146.6 billion, up from $105.7 billion. Under a new emergency program announced Sept. 19, banks borrowed $152.1 billion as of yesterday to buy commercial paper from money-market mutual funds, more than double a week ago. The report reflects the Fed's expansion of credit and emergency-lending programs to halt a yearlong credit crisis that pushed interest rates on three-month dollar loans today to a nine-month high as short-term corporate borrowing fell by the most ever.
"The financial system is on a lifeline," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. "The Fed will have to maintain this expansion of its balance sheet for quite some time." A provision in the $700 billion financial-rescue legislation being considered by Congress would let the Fed pay interest on bank reserves it holds, making it easier for the central bank to manage short-term interest rates while pumping funds into the banking system.
AIG, the largest U.S. insurer, drew down $61.2 billion on its $85 billion credit line from the Fed, up from $44.6 billion as of Sept. 24, the central bank said. The Fed agreed Sept. 16 to rescue AIG with the loan in return for an 80 percent stake for the U.S. government. As of last week, the Fed combined lending through the Primary Dealer Credit Facility, which serves 18 securities firms, and began in March with new programs special to three of them: Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co.
On Sept. 21, the Fed allowed the U.S. broker-dealer units of Goldman Sachs, Morgan Stanley and Merrill to pledge a broader range of collateral and have their London broker-dealer units borrow. The action coincided with the Fed's agreement to let Goldman Sachs and Morgan Stanley convert to commercial banks, putting the two remaining major investment banks under stricter regulation and giving them access to more-favorable Fed loans. Merrill agreed Sept. 15 to be bought by Bank of America Corp., while the Fed allowed Lehman Brothers Holdings Inc. to fail the same day.
Average daily lending to bond dealers in the seven days through yesterday rose $59.5 billion to $147.7 billion, the Fed said.
The Fed separately has lent $149 billion to commercial banks through the Term Auction Facility, an emergency program begun in December. The program will be expanded to $450 billion, the Fed said this week.
The central bank said on Sept. 14 it will accept equities as collateral from securities firms under the PDCF. Citigroup Inc. and nine other large banks said they would use the program starting that week as they created a $70 billion lending program. Today's report, providing statistics as of Oct. 1, doesn't identify borrowers. The report reflects part of the Treasury Department's plan, begun last month, to sell government securities to expand the Fed's balance sheet. The sales added a daily average of $266.1 billion of Treasuries to the Fed's coffers in the past week.
Fed holdings of U.S. Treasury securities rose $55 million to a daily average of $476.6 billion in the past week. The central bank had about $791 billion of Treasuries at the start of the credit crisis in August 2007. Last month, the Fed said it would extend emergency loans to banks to purchase asset-backed commercial paper from money funds after a record exodus of investors from the mutual funds, long considered to be among the safest investments. Average loans in the past week totaled $122.1 billion a day.
Prime money-market funds held about $230 billion in asset- backed commercial paper that banks could buy with Fed funds, senior Fed staff officials said last month. The subprime-mortgage collapse has led to $588 billion of writedowns and losses at major financial institutions since the start of 2007.
The three-month London Interbank Offered Rate in dollars was 4.21 percent today, a nine-month high. Commercial banks can take out up to 90-day loans from the Fed at 2.25 percent. Primary dealers pay the same rate for overnight loans. The AIG loan accrues interest at three-month Libor plus 8.5 percentage points.
In 2001, the discount rate was a half-point below the Fed's benchmark federal funds rate. In 2003, the Fed reset the discount rate at 1 percentage point above federal funds. The Fed reduced the spread to a half point in August 2007 and to a quarter point in March 2008. Traders expect a half-point cut in the federal funds rate this month, to 1.5 percent.
In March, the Fed agreed to loan $29 billion against a pool of securities to facilitate Bear Stearns Cos.'s sale to JPMorgan Chase & Co., taking the portfolio onto the central bank's balance sheet. The Fed expects the latest quarterly revaluation of the portfolio to be in the Oct. 23 release of the Fed's balance sheet, New York Fed spokesman Andrew Williams said.
The Fed also reported that the M2 money supply rose by $165.5 billion in the week ended Sept. 22. That left M2 growing at an annual rate of 5.8 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.
The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds. During the latest reporting week, M1 rose by $60.9 billion. Over the past 52 weeks, M1 increased 2.6 percent. The Fed no longer publishes figures for M3.
Short-Selling 'Math Geek' Not Naked, Covered in Blame
One of the stock market's latest villains is a 32-year-old self-described "math geek" from a Minneapolis suburb who won't move to Wall Street unless they let him wear flip-flops. Matthew Paschke, who manages the $165 million Grizzly Short Fund at the Leuthold Group, says short sellers like him have become scapegoats for the financial crisis that's wiped out $20 trillion from stocks and brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.
Wall Street chiefs blame those who sell borrowed stock and profit when prices decline for driving shares down as the credit crunch unfolded. After wagers against Morgan Stanley, Merrill Lynch & Co. and Citigroup Inc. surged to records, the Securities and Exchange Commission last month banned short sales of almost 1,000 companies. Paschke says that was the wrong move.
"The whole witch hunt is unfounded and it's frustrating," said Paschke, a father of three, in Leuthold's 46th floor offices overlooking the Mississippi River. "They're changing the rules on the fly, so for those of us that make our livelihood in this business that becomes a very, very difficult proposition."
Moreover, the ban may prolong the downturn by propping up companies that borrowed heavily and took on too much risk, he says. The Grizzly fund has returned 41 percent this year. Through August it almost tripled the average gain for hedge funds specializing in bearish bets. Paschke declined to identify any companies his fund shorts.
James Angel, a finance professor at Georgetown University in Washington who studies short selling, says the 400-year-old practice may have accelerated some companies' declines by undermining investor confidence. "There was a financial panic going on," Angel said. As a result, there was "the behavior of crowds going, `Who's next?' It's only human instinct to ask." At the same time, he said, "When the shorts are circling around, on average they are right."
Bear Stearns was forced into a takeover by JPMorgan Chase & Co. after its shares tumbled 62 percent in March, causing clients to pull their accounts and creditors to demand more cash as collateral. Lehman Chief Executive Officer Richard Fuld told Wall Street executives he thought short sellers "actively colluded" to topple Bear, CNBC reported April 1. Fuld's own firm collapsed five months later.
The ban should continue until the SEC stiffens the rules deterring naked short sellers, according to Robert Brooks, professor of finance at the University of Alabama in Tuscaloosa. Such traders never borrow shares and flood markets with sell orders, driving down prices. Yesterday, the SEC extended its prohibition until lawmakers pass a proposed $700 billion financial bailout package.
"Short selling is out of control," Brooks said. "There should be a huge economic cost to the hedge fund who decides they shouldn't borrow the shares." Short sellers such as David Tice, who runs the $1.08 billion Prudent Bear Fund, and James Chanos, president of the $7 billion hedge fund Kynikos Associates Ltd., say their funds don't engage in naked shorting. Paschke says his firm doesn't either.
Still, regulators around the world are following the lead of the U.S. and U.K. in banning short sales. At least 10 markets including South Korea, Italy and Indonesia have placed restrictions on the practice in the past month.
Paschke was born in Minnesota and married while attending the University of Northern Iowa in Cedar Falls. He says he's "Midwest-rooted." Working at Leuthold, which advises two-thirds of the biggest U.S. money managers, allows Paschke to wear shorts and sandals to the office and spend weekends wakeboarding with his family on Prior Lake near his home, about 20 miles (32 kilometers) southwest of downtown Minneapolis. "The dress code is worth a great deal," he said.
Living more than 1,000 miles from Wall Street also provides perspective on the crisis that has spurred almost $600 billion in writedowns and credit losses tied to subprime mortgages, he said. Shares of four financial institutions that collapsed or were rescued by the government last month had dropped at least 80 percent this year. Lehman, once the fourth-largest U.S. investment bank, failed in history's biggest bankruptcy. American International Group Inc., the No. 1 insurer, was taken over by the Federal Reserve. Fannie Mae and Freddie Mac, the two largest buyers of U.S. home loans, were taken over, too.
The Grizzly fund, which is always 100 percent short and usually bets against 60 to 75 companies, trimmed its holdings in financial companies to about 16 percent of its balance four days before the SEC banned short sales, Paschke said. The proportion has since fallen to 12 percent. On Sept. 2, financial shares accounted for 26 percent of the fund, Leuthold's Web site showed.
In the week leading up to the ban, Morgan Stanley and Goldman Sachs Group Inc., the last two independent securities firms on Wall Street before they converted into deposit-taking banks, had the biggest one-day drops on record. Paschke says it is unlikely short sellers alone caused the declines. He notes that almost two-thirds of the companies on the SEC's banned list have fallen below their closing price on Sept. 18, the day before the restrictions were put into place.
Paschke, who holds a bachelor's degree in finance with a minor in math and earned a master's in business administration from the University of Minnesota, doesn't visit companies and rarely goes on earnings calls to decide which stocks to short. He relies instead on mathematical models he helped develop that use 17 measures. The quantitative-based strategy, Paschke says, keeps him from getting "emotional" about individual companies and holding onto short positions that lose money.
"Money managers tend to get married to a name," he said. "They fall in love with all these things that take their eye off the ball. We strive to avoid that."
On the Seventh Day, They Worked
Sunday is the new Monday. From Wall Street to Washington, the U.S. credit crisis has claimed the leisurely weekend along with Lehman Brothers Holdings Inc. and Washington Mutual Inc.
"The news cycle is ruining everyone's weekend," Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ in New York, said in an e-mail. In addition to working more at the office, he's tethered to his BlackBerry on Saturdays and Sundays "waiting for the next shoe to drop." Every weekend since Labor Day, the meltdown has forced U.S. Treasury and Federal Reserve officials, members of Congress and Wall Street executives to huddle under pressure to react before Asian markets reopened.
On Saturday, Sept. 6, Treasury Secretary Henry Paulson gathered with the chief executive officers of Fannie Mae and Freddie Mac. On Sunday, Sept. 7, the government seized control of the mortgage-finance companies. The following weekend, New York Fed President Timothy Geithner summoned Wall Street leaders to discuss the possible sale of Lehman Brothers. By Sunday night, Lehman was preparing bankruptcy papers and Merrill Lynch & Co. was selling itself to Bank of America Corp.
The next two weekends, government officials met in Washington to discuss a proposed $700 billion bailout of the financial-services industry. The Senate approved the rescue on Oct. 1 and the House of Representatives is scheduled to vote on it today, setting up another weekend of work to study and implement details if the measure passes, or come up with something else if it fails. "Every weekend, there's been a crisis," said David Kotok, chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey, which manages $1 billion in assets.
Kotok said he had planned to spend his September weekends on a fishing boat. Instead, he's been on his computer and phone, trying to translate details of the latest news to worried clients. "I've been here the last three Sundays, and I'll be here this Sunday," John Silvia, chief economist at Wachovia Corp., said on Sept. 26, referring to the bank's Charlotte, North Carolina, headquarters. "A lot of people are here."
Sundays at Wachovia were more like strategy sessions rather than actual workdays, Silvia said. He and his colleagues followed the news and came up with "what-if" scenarios, he said. The what-if for Wachovia came on the morning of Monday, Sept. 29, when the company agreed in principle to sell its consumer banking business to Citigroup Inc. The deal, triggered by Wachovia's mounting mortgage losses, was brokered by the Federal Deposit Insurance Corp. over the weekend.
Citigroup had more than 200 people "working on this nonstop" for the 72 hours before the deal was announced, Citigroup Chief Executive Officer Vikram Pandit said in a Sept. 29 teleconference. Wells Fargo & Co. said today it had agreed to buy Wachovia for $15.1 billion in stock without federal assistance, ending the Citigroup deal. Wachovia's Silvia said he'll be working again this weekend, studying the continued fallout from the crisis. "It's almost most like the bubonic plague in Europe," Silvia said. "It just goes from one town to the other town and you wipe out the entire population fast."
The Treasury Department sent Paulson and a team of aides to Capitol Hill at noon on Saturday, Sept. 27, spokeswoman Michele Davis said. Some worked with lawmakers until 3 a.m. on the rescue package, she said. That team was replaced the next day with one that also toiled overnight, this time on the Wachovia sale. "Working weekends has become so normal here that we now have a buffet breakfast and lunch each day," Davis said. "Sunday was a spread more common on a day of watching football -- wings, cheese sticks, hot dogs and chili."
In New York on the weekend of Sept. 13, Shai Waisman, a partner at Weil Gotshal & Manges LLP, missed a planned dinner with friends from Texas who were on a layover at John F. Kennedy International Airport. He had to prepare papers for the Lehman bankruptcy, which his firm is handling. That Sunday, a cousin from Israel arrived for a visit and let herself into his apartment. She stayed for seven days, Waisman said, and he never saw her once.
"I've never seen so many New Yorkers with the same ashen, exhausted look at the same obscene hours," Waisman said.
His firm is also handling the Washington Mutual bankruptcy. "I will be working this and every coming weekend for the foreseeable future," Waisman said in an e-mail yesterday.
In Congress, the crisis has forced committees to schedule votes on other matters to late on weekend nights. The House Committee on Rules voted on tax-relief and energy-related bills at 10 p.m. on Sunday, Sept. 28, a "highly unusual" time slot, said Emily Davis, a spokeswoman for Representative Pete Sessions, a Texas Republican who sits on the committee. "The last time I had a day off was a couple weekends ago," Davis said. "The days just run together."
Bair Turns Once-Obscure FDIC Into Power Center in Bank Crisis
When Sheila Bair took over as head of the U.S. Federal Deposit Insurance Corp. in 2006, the agency was probably better known for the "FDIC" logo on the doors of the nation's banks than for anything it did.
Now Bair is at the center of the financial crisis, speeding the takeover of failing banks and pressing the mortgage industry to ease loan terms. And she's vaulted from the leadership of a once-sleepy regulator into the league of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, winning praise from Democrats and Republicans.
"She has more power because of the situation on the ground," said Senator Charles Schumer, a New York Democrat. "No one is going to put handcuffs on her." "She's going to be Treasury secretary someday," said Tim Adams, a former department undersecretary under President George W. Bush who worked with Bair when she was an assistant secretary.
In just the last week, Bair, 54, invoked never-before-used authority to avert a financial-system breakdown by aiding Citigroup Inc.'s purchase of Wachovia Corp.'s banking operations. She seized Washington Mutual Inc. and sold it to JPMorgan Chase & Co. and convinced the Senate to temporarily increase the FDIC's insurance of individual bank deposits -- a move Paulson opposed.
The FDIC chairwoman is working to get Congress to bestow more power on the agency. On Wednesday, as the Senate was reworking the $700 billion financial-market bailout bill to attract more votes, Bair tried to get lawmakers to cede control over how high FDIC insurance limits can rise. Over breakfast in the dining room off her office, she handed Camden Fine, president of the Independent Community Bankers of America, legislative language she wanted him to shop around on Capitol Hill.
Fine represents 5,000 community bankers, the sort of "Main Street" constituency that could help convince skeptical House members the bill was essential not just to Wall Street, but to their hometowns. The proposal would temporarily lift the insurance limit on bank deposits to $250,000 from $100,000 and give the FDIC authority to change that limit without congressional approval. Senate Banking Committee Chairman Christopher Dodd said no to giving that kind of discretion to the agency, and the language was left out. Bair will bring it up again, Fine said.
To be sure, she has angered investors. Some Wachovia shareholders blame her for wiping them out when she helped engineer the sale and warn that other banks will suffer for it. "That destroyed the market," said Peter Kovalski, senior portfolio manager at Alpine Woods Capital Investors LLC. "Taking over a healthy, well-capitalized bank, the way they did, now investors are not going to be willing to invest in any bank."
Bair's efforts to prod mortgage lenders to reduce loan principals for borrowers in danger of losing their homes have been met with reluctance from the industry. And some analysts say she hasn't done enough to clear out insolvent banks. "She really hasn't shown her mettle in aggressively seizing banks and helping to sort out solvency issues," said Joseph Mason, an economist at Louisiana State University. Still, Bair -- a lifelong Republican who has made a career in regulation with a decidedly non-Republican bent -- has stood out in an administration that's been criticized for going easy on oversight.
Bair, who has pushed banks to carry less debt and for strong net capital standards, has been "a tougher regulator in a reasonable way than most Bush appointees," said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. And in the last two years, as the crisis has spread to the broader financial system, she's been getting out in front of fellow Republicans, including Bernanke and Paulson.
In September 2006 she told a Fannie Mae conference she was concerned that the proliferation of non-traditional mortgages such as option ARMs was a danger to the banking system. In March 2007, she called for "aggressive" foreclosure relief. Two months later, as Paulson declared the housing market crisis more than half over, Bernanke echoed Bair and called on lenders and the government to intensify efforts to prevent home foreclosures. "She was one of the first to say that you couldn't just do it by interest rates, that you had to reduce the principal and that you couldn't just do it one by one," Frank said in an interview.
When Bair found herself in control of IndyMac in July, she used the bank to make her point. She suspended foreclosures on $15 billion worth of mortgages and sought to work out deals for the 60,000 borrowers who were behind in payments. "My hope is that the program for IndyMac Federal Bank will be a catalyst for others across the country to modify their loans more rapidly and systematically," she told lawmakers at a hearing last month.
The Independence, Kansas, native was an adviser to former Senator Robert Dole throughout the 1980s before taking on roles at the Commodity Futures Trading Commission and the New York Stock Exchange. In 2001, she joined the Treasury Department. She didn't fit in easily with the Bush administration's free-market, anti-regulation ethos, former associates said. She spoke out in support of strong consumer protection and wasn't afraid to preach the virtues of regulation. She left Treasury in 2002 to teach at the University of Massachusetts at Amherst.
"I didn't know how I would replace her," said Adams, who was Treasury chief of staff at the time. Bair doesn't shy away from acknowledging the problems in banking. More of them will fail, she told Bloomberg News in a Sept. 26 interview. "The number will go up," she said. "Banks overall continue to be safe and sound and very well-capitalized." At an event at the National Press Club a few days earlier, she said the most high-profile problems are coming from non- banks.
"There is some virtue to regulation," she said.
SEC’s 2004 Rule Let Banks Pile Up New Debt
“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.
As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.
Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.
Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks. How could Mr. Cox have been so wrong?
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks. They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments.
Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion. “We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”
Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.
Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008. “I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it. After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed. In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities. But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.
The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored. The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”
The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush. A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.
“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”
As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks. The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.
A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries. The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.
“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox). “Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.
In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.
“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?” He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.
Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements. He said in a recent interview that he was never called by anyone from the commission. “I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”
A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”
The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”
Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.
Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.
Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.
In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks. “The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said. The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.
Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it. “In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.
Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”
He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it. “Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”
But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.” “If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”
The roof was bound to fall in on Labour's housing market
"Homeowners rightly expect their investment to be protected by sensible policies's I am determined that, as a country, we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s." Gordon Brown's Budget speech, July 1997
Crash! Another of the Prime Minister's plates has just spun off its stick. British house prices fell for the 11th consecutive month in September. The average home lost 1·7 per cent of its value last month, according to the Nationwide building society, leaving prices 12·4 per cent lower than they were one year ago.
After a decade of wild speculation – the buy-to-let frenzy was little more than a huge bet on ever-rising values – the property market is less stable than a house built on sand. Worse still, many homeowners are being plunged into negative equity, especially first-timers who bought in the past two years.
To say that it's all going horribly wrong understates by the length of Downing Street the extent to which Labour is presiding over chaos. The next phase of Mr Brown's bust will be a fresh spate of defaults, bankruptcies and home repossessions. At this rate, his record will be different from the Conservatives' of the early 1990s only in that, for many victims, the pain will be greater.
Two months after Labour swept to office in 1997, a confident Chancellor told a credulous country: "Volatility is damaging both to the housing market and to the economy's stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it."
Little did we know how such an empty promise would reveal his fundamental misunderstanding of market forces. Almost from day one, they contrived to highlight his impotence. The trouble was, while house prices were rising sharply in the early years of the Blair-Brown regime, very few seemed to care. By 2004, however, even Mr Brown had worked out that there was a potential downside to a property market going up like a hot-air balloon. All that guff about safeguarding stability was in danger of backfiring.
Having unleashed a torrent of cheap debt and a culture of reckless borrowing, something had to be done. There was an opportunity for the then chancellor to appear in control. He looked for a whiz-bang idea and came up with the National Housing and Planning Advice Unit (NHPAU). Crackerjack, eh?
As if we did not have enough quangos and advisory bodies clogging the body politic and draining the taxpayer, the purpose of Mr Brown's exciting new venture would be "to provide independent advice on affordability matters to the Government". A reasonable man would have spotted the catch: here was another state-funded think tank whose only goal was to offer the Government evidential fig-leaves to cover conclusions that it had already reached.
But so inured had most of the electorate become to Labour's proliferation of politicised consultancies that it was hard to see the dead wood for the sleaze. Anyway, with house prices defying gravity, a reasonable man was hard to find. Those who warned that a crash was inevitable were dismissed as the commentariat's version of nutty doomsayers with cardboard placards proclaiming "The End is Nigh". The world, it seemed, was full of experts, eager to explain why this time it would be different.
By early 2006, average house prices had reached about £200,000. At the same time, average salaries were roughly £25,000.
It was clear to anyone who could count beyond five without using fingers that this chronic imbalance – a ratio of eight to one – was unsustainable. It would need only a small increase in the cost of money or unemployment for the roof to fall in. Never mind, most ministers, with their visceral hatred for voters who live beyond Labour's urban heartlands, couldn't wait to have a crack at the "housing crisis".
And we knew what that meant: crashing through pledges to protect the green belt in favour of new estates of "affordable" units.
Skipping over the fact that the Government had encouraged an explosion in immigration, which exacerbated spiralling property prices, Downing Street seemed delighted to learn from its house-trained advisory unit, NHPAU, that a building blitz was required.
Last June, just 15 months ago, NHPAU made an astonishing prediction: United Kingdom house prices could rise to the equivalent of 10 times average salaries by 2026. It's impossible to know where wage levels will be in 18 years, but even if they grew at only 1 per cent a year, that would put the average salary at about £30,000 and therefore, according to NHPAU, the average house price at £300,000.
Did such an outcome ever seem likely to you? Of course not. And the reason is that it's an economic absurdity. With advisers like these, who needs pin-stickers? Only three months after NHPAU's dire warning, its crystal ball was smashed by the credit crunch. Northern Rock, the mortgage lender that behaved more irresponsibly than most, crumbled.
Since when, a poisonous cocktail of rising taxes, higher fuel and food bills, and a collapse in the availability of mortgages has been addressing the problem that Mr Brown was so keen to solve. The gap between house prices and income is shrivelling. Unfortunately for the Prime Minister, confidence is so low that even those who can secure funding are reluctant to buy.
During the summer, the number of homes on the market for every buyer rose to 15, more than double the ratio in June 2007. Conditions have since deteriorated, leaving many estate agents facing the chop.
In some areas, the market has ground to a halt. This sclerosis will continue until sellers capitulate and slash prices further. It's a return to affordability, but not as we know it. At the nadir of the 1990s slump, house prices fell 10·7 per cent in one year. The current "correction" has already zipped past that and there is worse to come. "We are only in the initial stages of what is likely to be a severe economic downturn," says Capital Economics, a forecasting group.
Along with "no return to boom and bust" and "British jobs for British workers", let us add to Mr Brown's list of boomerang boasts an outrageous one-liner from his first Budget: "I will not allow house prices to get out of control." That one has just whacked him on the back of the head. The property market went completely out of control on the way up, and is about to do the same on the way down. As it shatters on re-entry to economic reality, the debris will bury Labour's hopes for a fourth term. The house that Tony and Gordon built will be crushed by falling prices.
Schwarzenegger to U.S.: State may need $7-billion loan
California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks. The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.
The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.
Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.
California finance experts say they know of no time in recent history when the state has sought an emergency loan of this magnitude from the federal government. The only other such rescue was in 1975, they said, when the federal government lent New York City money to avoid bankruptcy.
"Absent a clear resolution to this financial crisis," Schwarzenegger wrote in a letter Thursday evening e-mailed to Paulson, "California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing."
The letter, obtained by The Times, came on the eve of a vote by the House of Representatives on a $700-billion rescue package, but it was too soon to know how the package would affect the nation's paralyzed credit markets. The Senate approved the so-called rescue bill Wednesday night.
A top Schwarzenegger aide followed up the letter with a call to the Treasury secretary Thursday night. Treasury Department officials could not be reached for comment. It's customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after Christmas and income tax receipts arrive in the spring. "California is so large that our short cash-flow needs exceed the entire budget of some states," Schwarzenegger wrote.
The cash needs to be in the state's bank account by Oct. 28 to be available to fund a scheduled $3-billion payment to more than 1,000 school districts. Said Matt David, Schwarzenegger's communications director: "California faces the potential of a perfect storm created by the financial crisis' effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget. The governor is taking steps to prepare for this scenario to ensure that the state can make critical payments."
But those payments won't be forthcoming if the state can't do routine borrowing. For now, "the window is shut, and if it stays shut, we are in deep trouble," said an administration official, who asked not to be identified, citing the sensitive talks with Washington.
Quick passage of the rescue bill by the House of Representatives today and a signature by President Bush could inject more money into the international financial system and allow California to borrow at a reasonable interest rate, the official said. But there are no guarantees that the economic recovery plan before Congress will succeed, said California Treasurer Bill Lockyer, who has been working with Schwarzenegger to keep the state solvent.
Asking the federal government for a loan "is one option on the table," said Tom Dresslar, a spokesman for Lockyer. The treasurer, he added, is working with outside financial advisors on a possible emergency plan to sell short-term debt notes to the U.S. government. Lockyer believes that such a plan is both feasible and legal, Dresslar said. "I don't think we have ever gone to the feds," said Fred Silva, senior fiscal policy advisor with California Forward, a state budget think tank.
Silva said the closest California came may have been in the days after the 1994 Northridge earthquake, when at the request of the state, Washington sped up payment of federal funds that the state was owed. State officials now fear they face a potential cash crisis worse than California confronted in 2003, in the final days of Schwarzenegger's predecessor, Gov. Gray Davis.
At that time, the precipitous decline of state revenue in the middle of a budget year forced officials to pay a syndicate of banks a premium of hundreds of millions of dollars for what amounted to an expensive "payday loan." Even that option, administration officials say, would not be available during the current credit drought. They say if Congress does not approve a bailout plan -- and maybe even if it does -- there will be no lenders available to provide the state with the money it needs, regardless of the premium the state is willing to pay.
"We need to go as wide as possible to try to find buyers at reasonable rates," said Robert Fayer, an attorney advising the state on its planned $7-billion bond sale. "Whether it could ultimately be the federal government, I have no idea. It is a fairly radical concept."
Why the Next United States President Won't Mean a Thing to Afrika Unless
At the same time that it laid waste to Angola, the U.S. ensured a similar fate for adjoining Mozambique, which also emerged from Portuguese colonialism in 1975. Here, the U.S., again through South Africa, backed the Mozambican National Resistance (RENAMO) "an artificial armed engine of destruction," created by the intelligence service of the racist Ian Smith regime of Rhodesia (now independent Zimbabwe).
Even more vicious than UNITA, RENAMO committed massive atrocities against civilians and destroyed much of Mozambique's infrastructure in a 16-year long civil war with the left-wing government of the Front for the Liberation of Mozambique (FRELIMO). One million people were killed and five million displaced by the time the war ended in 1992.
In 1988, Roy Stacey, U.S. Deputy Assistant Secretary of State, who was part of a group trying to end Washington's backing for RENAMO, stated that the insurgents were carrying out "one of the most brutal holocausts against ordinary human beings since World War II."
Somalia which today is wracked by civil war and has no central government was the top recipient (per capita) of U.S. military and economic aid in Africa during the 1980s. Siad Barre, the country's dictator at the time, was a key strategic ally of Washington in the Cold War and got $600 million in U.S. aid. Following Barre's rampage of killing and plunder, Somalia literally fell apart. Barre's forces murdered 5,000 unarmed civilians in 1988-89 and in 1990 he was overthrown.
Similarly, Sudan today is embroiled in an 25-year old civil war that has killed four million people. The U.S. is actively supporting the rebel Sudanese People's Liberation Army (SPLA) against the government. However, it has long been clear that Washington wants to keep the rebels strong enough to prevent defeat but does not want them to become capable of toppling the government. "Peace" a U.S. official explained, "does not necessarily suit American interests. An unstable Sudan amounts to a stable Egypt."
Washington has fomented not only military conflict and genocide in Africa but also an economic holocaust through its agents the World Bank and the IMF. The Structural Adjustment Programs (SAPs) imposed by these institutions on 36 African countries since 1980 have devastated the continent, decimating national economies and health and education systems.
SAPs offer loans on condition that governments drastically reduce public spending (especially on health, education and food subsidies) in favour of repayment of debt owed to Western banks, increase exports of raw materials to the West, encourage foreign investment and privatize state enterprises; the last two steps mean selling whatever national assets a poor country may have to Western multinational corporations.
Under SAPs, Sub-Saharan Africa's external debt has actually increased by more than 500% since 1980, to $300 billion today. In 1997, the United Nations Development Programme (UNDP) stated that in the absence of debt payments, severely indebted African countries could have saved the lives of 21 million people and given 90 million girls and women access to basic education by the year 2000. The All-African Conference of Churches has called the debt "a new form of slavery, as vicious as the slave trade."
After twenty years of SAPs, 313 million Africans lived in absolute poverty in 2001 (out of a total population of 682 million), a 63% increase over the 200 million figure for 1994. Life expectancy has dropped by 15% since 1980 and today is 47 years, the lowest in the world.
Forty per cent of Africans suffer from malnutrition and more than half are without safe drinking water. Health care spending in the 42 poorest African countries fell by 50% during the 1980s. As a result, health care systems have collapsed across the continent creating near catastrophic conditions. More than 200 million Africans have no access to health services as hundreds of clinics, hospitals and medical facilities have been closed.
This has left diseases to rage unchecked, leading most alarmingly to an AIDS pandemic. More than 17 million Africans have died of HIV/AIDS which has created 12 million orphans. Between 1986 and 1996, per capita education spending in Africa fell by 0.7% a year on average. Forty per cent of African children are out of school and the adult literacy rate in Sub- Saharan Africa is 60%, well below the developing country average of 73%.
More than 140 million young Africans are illiterate. Given the annihilating social impact of SAPs all over Africa, it is not surprising that Emily Sikazwe, director of the Zambian anti-poverty group "Women for Change," asked: "What would they [the World Bank and the IMF] say if we took them to the World Court in The Hague and accused them of genocide?"
Ghana : Structural adjustment here was preceded by CIA intervention. In 1966, a CIA-backed military coup overthrew Kwame Nkrumah, Ghana's President. Hailed as "Africa's brightest star," Nkrumah called for an anti-imperialist, pan-African organization and non-alignment in the Cold War.
In October 1965, Nkrumah published his famous work, "Neo-Colonialism-The Last Stage of Imperialism" in which he accused the CIA of being behind many crises in the Third World. The U.S. government reacted by sending Nkrumah a note of protest and cancelling $35 million in aid to Ghana. Four months later, Nkrumah was overthrown in the CIA-engineered coup.
IMF involvement in Ghana followed the coup and SAPs were activated in 1983. Seen as a "star pupil" by the World Bank and the IMF, Ghana privatized more than 130 state enterprises including the mining sector (its main source of revenue), removed tariff barriers and exchange regulations and ended subsidies for health and education.
As a result 20% of Ghanaians are unemployed and the cost of food and services has gone beyond the reach of the poor. GDP per capita was lower in 1998 ($390) than it was in 1975 ($411); 78.4% of Ghanaians live on $1 a day and 40% live below the poverty line; 75% have no access to health services and 68% none to sanitation.
The introduction of user fees for health care in 1985 combined with falling wages and increasing poverty has reduced outpatient attendance at hospitals by a third. As one observer put it, "Patients pay for everything; for surgery, drugs, blood, scalpel, even the cotton wool." User fees in education have raised the primary school dropout rate to 40%.
Ghana is the second largest gold producer in Africa (after South Africa) and gold mining is the country's main source of income.
SAPs have compelled Ghana to sell the gold mining sector to Western multinational corporations which now own up to 85% of the large-scale mining industry. More than half of the 200 active gold concessions belong at least in part to Canadian companies. The corporations can repatriate up to 95% of their profits into foreign accounts and pay no income tax or duties. This means that Western companies virtually monopolize Ghana's gold which contributes little to its economy.
Just as "An unstable Sudan amounts to a stable Egypt" so an unstable, war-wracked and poverty-stricken Africa amounts to a stable and prosperous West. This is U.S. imperial strategy towards Africa and it has destroyed the continent. The strategy aims at extracting the maximum amount of wealth from Africa for the West at the lowest cost through the perpetration of a holocaust created by eleven wars and structural adjustment programs imposed on 36 countries.
The wars have killed more than four million Africans and the SAPs have led to an estimated 21 million deaths; both have resulted in the transfer of hundreds of billions of dollars to the West. Most African exports to the West are raw materials and the wars have helped keep their price low since the armies need to sell these for whatever money they can get in order to buy weapons; a considerable portion of the weapons are also bought from the West.
SAPs have transferred $229 billion in debt payments from Sub-Saharan Africa to the West since 1980. This is four times the region's 1980 debt. Like the wars, SAPs also help keep raw material prices low by enforcing the expansion of such exports to the West. The value of primary African exports has dropped by about half since 1980.
Four hundred and fifty years of the slave trade and 150 years of Western colonialism in Africa helped build the U.S. and European economies; Washington's ravaging of Africa today continues this horrifying legacy and starkly reveals the grotesqueness of the West.
The New American Century; Cut short by 92 years
The era of Superpower America is coming to an end. The financial crisis was the last straw.
Whatever good faith was left after the invasion of Iraq and the shrugging off of international treaties, is now gone. The United States has polluted the global economic system with worthless mortgage-backed securities and, by doing so, has pushed 6 billion people closer to a long and painful recession. That's not something that's easy to forgive.
The anger at the US seems to be surfacing everywhere at once. It was particularly noticeable at the recent opening of the UN General Assembly. Typically, this is a tedious event full of empty political blabbering and pretentious ceremonies.
But not this time. With the world sliding towards a US-created recession; foreign leaders have started lashing out at the United States more vehemently. The speeches have been blunt and acrimonious; no one is "pulling their punches" any more. Venezuela's Hugo Chavez summed up the mood of the meetings like this:
"I think that, sooner rather than later, this empire will fall - to the benefit of the whole world, enabling a balance in the world to be created: polycentric and multi-polar. That will guarantee peace in the world. To the creation of this multi-polar world we are making our small contribution."
What Chavez objects to is Bush's "unipolar" model of global governance whereby all the world's crucial decisions--on everything from global warming to nuclear proliferation--are made by Washington. No one likes being told what to do, just as no one likes the US constantly meddling in their affairs. That's why none of the UN attendees seemed particularly bothered by the fact that the US financial markets are in freefall. It's called schadenfreude, taking pleasure in someone elses misfortune, and it was on full display at the United Nations last week.
Many of the dignitaries seem to believe that America's sudden economic downturn presents an opportunity for change. And that's what everyone wants; real change. No one wants another 8 years like the last. That's why the central theme in Chavez's speech was repeated over and over again by other leaders. They reject the present system and want a bigger role in shaping the future.
That doesn't mean that the world hates America. It just means that everyone wants a breather from the torture, the abductions, the bombing of civilians, and now, the financial contagion that has spread throughout the global system. The US's lack of regulation and monetary policies have driven up inflation, triggered food riots, and sent oil prices skyrocketing. Enough is enough. The United States is like the dinner guest who doesn't know when it's time to go home. Perhaps, a touch of recession will help to rebalance Washington's approach and make its leaders more responsive to the needs of the rest of the world.
Journalist John Gray summed it up like this in his article in The Observer, "A Shattering Moment in America's fall from Power":
"The control of events is no longer in American hands.....Having created the conditions that produced history's biggest bubble, America's political leaders appear unable to grasp the magnitude of the dangers the country now faces. Mired in their rancorous culture wars and squabbling among themselves, they seem oblivious to the fact that American global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where America is only one of several great powers, facing an uncertain future it can no longer shape."
The US is about to join the family of nations and learn how to get along with its neighbors whether it wants to or not. There's simply no other choice; the dollar is falling, the deficits are soaring, and the financial markets are in a shambles. America will either learn to cooperate or become isolated in a world that is rapidly integrating. It's "get along or go it alone"; a message that Washington needs to learn quickly so it can adapt to the new power-paradigm.
Yes; plenty of money will still flow into covert operations and CIA-sponsored dirty tricks just to keep alive the hope that Superpowerdom will be restored. That is to be expected. The well-heeled rogues in the British royal family still dream of rebuilding the Empire, too. But realists know that it's just a harmless fantasy.
Nothing will come of it. Empires have a short shelf-life and they're impossible to stitch-back together. They usually end on a corpse strewn battlefield or in a towering financial bonfire which leaves nothing behind but a pile of ashes and shards of broken glass. We can only hope that the yawning economic chasm ahead of us all, will involve less hardship than we anticipate. But when a nation sows dragon's teeth, it shouldn't expect a harvest of sweet plums.
Journalist Steve Watson reports on Infowars:
"A Council on Foreign Relations member and former policy planner under prominent Bilderberger Henry Kissinger has penned a piece in the Financial Times of London calling for a “new global monetary authority” that would have the power to monitor all national financial authorities and all large global financial companies.
“Even if the US’s massive financial rescue operation succeeds, it should be followed by something even more far-reaching – the establishment of a Global Monetary Authority to oversee markets that have become borderless." writes Jeffrey Garten also a former managing director of Lehman Brothers. (Infowar.com)
The dream of "one world" government does not die easily, but it is dead all the same. The center of the present global financial system is the Federal Reserve. Its offspring includes the Council on Foreign Relations, the IMF, The World Bank, the G-7 banking cartel and thousands of predatory NGOs which have expanded the grip of the Washington banking cabal and the dollarized system across the planet. But neoliberalism is collapsing and what we are seeing now is the erratic spasms of a terminal heart patient entering the final stages of cardiac arrest. There is no drug or medical procedure that will restore the victim to good health.
No one is looking to the US or its "supply side" hirelings to chart a course for their country's economic future. Those day's are over. The US will have to pull itself from the rubble and start over without the massive infusions of low interest capital from China, Japan and the Gulf States. The money spigots have been turned off. It's thin gruel and hard times ahead. That's the price one pays for swindling the world with worthless mortgage-backed snake oil and other "illiquid" garbage.
Russian President Vladimir Putin summed up recent events in the financial markets like this:
“Everything that is happening in the economic and financial sphere has started in the United States. This is a real crisis that all of us are facing, and what is really sad is that we see an inability to take appropriate decisions. This is no longer irresponsibility on the part of some individuals, but irresponsibility of the whole system, which as you know had pretensions to (global) leadership.”
Back at the United Nations, Germany's Finance Minister Peer Steinbuck echoed similar sentiments when he said:
“The United States is solely to be blamed for the financial crisis. They are the cause for the crisis and it is not Europe and it is not the Federal Republic of Germany. The Anglo-Saxon drive for double-digit profits and massive bonuses for bankers and company executives that were responsible for the financial crisis.”
He added,"The long term consequences of the crisis are not clear. but one thing seems likely to me; the USA will lose its superpower status in the global financial system. The world financial system is becoming multipolar."
Steinbuck was merely reiterating the feelings of Chancellor Angela Merkel who used more diplomatic language in her critique: “The current crisis shows us you can do some things on the national level, but the overwhelming majority must be agreed to on the international level. We must push for clearer regulations so that a crisis like the current one cannot be repeated.”
Merkel knows that Europe was blindsided by America's deregulated system which allows fraudsters and scam-artists to rule the roost. Even now--in the middle of the biggest financial scandal in history--not one CEO or CFO from a major investment bank has been indicted or dragged off to prison. US markets are a lawless "free for all" where no one is held accountable no matter how large the crime or how many people are hurt.
But there's a price to be paid for fleecing investors, and the US will pay that price. Already, the purchase of US Treasurys has slowed to a crawl. In the coming months, America's life-support system will be disconnected altogether and the oxygen tent removed. Kissinger's protege is not worried about that; but working class American's should be. There's a train wreck just ahead and many people will suffer needlessly.
This is how Spiegel Online puts it:
"The banking crisis is upending American dominance of the financial markets and world politics. The industrialized countries are sliding into recession, the era of turbo-capitalism is coming to an end and US military might is ebbing....This is no longer the muscular and arrogant United States the world knows, the superpower that sets the rules for everyone else and that considers its way of thinking and doing business to be the only road to success.
A new America is on display, a country that no longer trusts its old values and its elites even less: the politicians, who failed to see the problems on the horizon, and the economic leaders, who tried to sell a fictitious world of prosperity to Americans....Also on display is the end of arrogance. The Americans are now paying the price for their pride." (Spiegel Online, "America loses its Dominant Economic Role")
Both presidential candidates have vowed to continue the unilateralist Bush Doctrine. Obama is just as eager as McCain to violate sovereign borders, invade countries that pose no imminent national security threat to the US, and carry out the many flagrant violations of international law as long as they serve the interests of western mandarins. But it's not up to the politicians anymore. Change is coming; the unipolar moment has passed. As the financial crisis deepens, America's ability to wage war will steadily erode as capital and resources dry up. Its only a matter of time before the war machine sputters to a halt and the troops return home. When the killing stops, a truly new world order will begin.