Wednesday, March 3, 2010

March 3 2010: Swaps and Robbers

Russell Lee Sins of Passion August 1937
"Early morning scene, Tower, Minnesota"

Ilargi: First off, apologies for the publishing hiatus, dear ones. Getting flooded and swamped out will do that to you. I never before spent time in an officially declared catastrophe zone (one notch over emergency, if I’m correctly informed} but I did so over the past few days in French Bretagne, or Brittany for those English readers who are spelling-challenged (there seem to be many of them around here). I’m on a tour, if you hadn’t noticed yet, of TAE readers who had invited me over the past two years. Some, if not all, of them now live to regret their promises.

But so anyway, down to business: swaps. Over the past few days, a number of opinions on them appeared. None too positive, mind you. But what are they worth, both the opinions and the swaps themselves? Let’s look at the short and curly wild boar sort of approach, why don’t we? Since in the end, no matter how complex instruments may be, their fall-out will always be as simple as it is dirty, and it will be those who don’t know CDS from DVD’s who are most affected, not the "brilliant" minds who created the stuff in the first place.

And, to add another chapter to the peak oil versus finance crisis parable, maybe understanding the way CDS have perverted our economies will make people see why peak oil has and had nothing to do with our present economic downfall. Not that I hold out much hope, mind you; I sometimes think I’m talking to a crowd comparable best to the Red State parochial faithful, where in the end and down the line G-d does it all.

However, I still think that once you start to comprehend what the derivatives markets, and I’m singling out CDS for the purpose, have unleashed into our daily lives, aided and abetted by our very own governments and representatives (think about that one last time!), who find much easier "value" in any sort of program that makes them look better today instead of tomorrow, you can leave that whole peak oil notion behind and focus on Wall Street. Unless, of course you think Wall Street bases all of its decisions on peak oil. It doesn't. It’s the fact, instead, that it’s become one giant casino that is responsible for foreclosures, lay-offs, bankruptcies and the even graver consequences we have yet to witness. Our society has gambled itself away, literally, and that is so hard to understand I can't blame anyone for not catching on within the first five minutes. Perhaps once speculators force entire countries to their knees, it will become clearer.

Credit Default Swaps, as they are and stand, have the potential to bring down entire civilizations, and they will too, just to prove their point (and mine). It’s unbelievable to the innocent eye that after the collapse of AIG, the CDS market wasn't ostracized and burned at the stake. Unbelievable, that is, until you realize who's really in power in our societies. If you allow bets, wagers, in your society whose total monetary value adds up to many times the entire world’s GDP. you assure two certain outcomes: First, that these bets will bring down your society at some point and in some way, and: Second, that the people in charge of the bets will take over power until the house comes crashing down. What power does Washington have, with annual US GDP at $14 trillion, while JPMorgan’s derivatives desk has 6 times as much outstanding? When the total derivatives market has numbers like $1 quadrillion attached to it? And then we, the people, hail the winning bets, and bail the losing ones? There’s no way we can win this one.

It’s like we’re all in the hands of the acid hippie who climbs up to the rooftop convinced she can fly. Feeling good, feeling great and then ..... well, not so much.

Yes, banks can bring down societies, simply because they can control them. And that’s what we’ve let them do. And we’ve let them make us think we were far richer than we are, which got them into making us spend much more than we ever had. All this has perverted our economies, and our lives, to a far greater extent than we presently realize. But the bill is coming due, and you're not going to like it.

Here are three views of credit default swaps, by Gretchen Morgenson at the New York Times, Wolfgang Münchau at the Financial Times, and Ann Pettifor at the New Economics Foundation, from which I extracted bullet points. I hope they will give you a better understanding of what’s involved, beyond what I personally have to say.

There’s going to be lot more to talk about on this topic going forward. A good friend of mine suggested that CDS were created for the specific purpose of avoiding regulatory reserve requirements, both for financial institutions and for countries (Greece!). That’s certainly an interesting point, which I’ll get back to.

It’s Time for Swaps to Lose Their Swagger
by Gretchen Morgenson

  • Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that." That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last week [..]

  • Greece employed swaps to mask its true debt picture, with the help of Wall Street bankers, of course. And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments [..]

  • [..] in the case of A.I.G., the speculators got their winnings from the taxpayers.

  • [..] credit default swaps and other complex derivatives that have proved to be instruments of mass destruction still remain entrenched in our financial system

  • Congressional "reform" plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us.

  • Mr. Mayer has been critical of credit default swaps almost since they arrived on the scene. In 1999, for example, he wrote an opinion piece for The Wall Street Journal entitled "The Dangers of Derivatives." "These ‘over the counter’ derivatives — created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing — are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall..."

  • Calling credit derivatives "the most dangerous instrument yet," Mr. Mayer concluded in his article that neither banks nor bank examiners have any idea how to handle them.

Time to outlaw naked credit default swaps
by Wolfgang Münchau

  • I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so-called naked CDSs should be a no-brainer.

  • Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating "a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece". Using CDSs to destabilise a government was "counter-productive", he said. Unfortunately, it is legal.

  • What constitutes default is subject to a complicated legal definition.

  • A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit [..]

  • [..] the case for banning them is about as a strong as that for banning bank robberies.

  • A universally accepted aspect of insurance regulation is that you can only insure what you actually own.

  • CDS are not classified as insurance but as swaps, because they involve an exchange of cash flows.

  • [..] nobody in their right mind would use the swap-like characteristics of an insurance contract as an excuse not to regulate the insurance industry.

  • [..] naked CDSs allow investors to hedge more effectively. This is like saying that a bank robbery brings benefits to the robber.

  • Christine Lagarde, the French finance minister, was recently quoted as saying: "What we are going to take away from this crisis is certainly a second look at the validity, solidity of sovereign [credit default swaps]."

    Münchau: A second look? I wonder what they saw when they looked the first time.

How Greece's Crisis Could Impact America
by Ann Pettifor

  • [..] heavily indebted economy is the canary in a coalmine of sovereign debtors that includes Spain, Portugal, Italy, Ireland, Britain and the United States. As long as the Greek canary keeps singing, people in Europe and the United States need not fear going up in smoke. But Greece's struggling government is threatened by a financial instrument widely used by speculators to discredit government bonds, and undermine the country's weakening creditworthiness.

  • First: regulators could insist that those that sell Credit Default Swaps join the ranks of other insurance companies,

  • Second, regulators could ensure that those buying Credit Default Swaps show proof of an insurable interest:

Ilargi: And of course the TAE donation window remains open, and our sponsors would like you to visit the ads they place on our site.

How Greece's Crisis Could Impact America
by Ann Pettifor

Citizens are rightly angry at the way both the Bush and Obama administrations, aided by Governor Ben Bernanke -- pretty well unconditionally bailed-out the bankers of Wall St., just like governments in Europe and Asia. While politicians and regulators rushed to dampen the flames of financial crisis with taxpayer funds, what happened to those guilty of financial arson? Besides the odd rogue and loner like Bernard Madoff, none has gone to jail for crimes against the people, as far as I know.

As if to rub our collective noses in it, bankers have paraded their contempt for both politicians and taxpayers by using bail-out resources to post massive capital gains and bonuses. It's hard to believe they could be guilty of worse. But believe it you must. For now these self-same bankers are turning on their rescuers -- the governments that bailed them out.

Bankers, hedge and pension-fund managers, including Goldman Sachs, are attacking the very European governments that pay their fees; that provide banks with 'free money' in the form of negative rates of interest that guarantee their liabilities, and that in effect bailed them out unconditionally with taxpayer largesse. It is not a pretty sight.

When the worst of the financial blaze had been put out in 2009, regulators started to murmur about taking away Wall St.'s toxic toys. Violent tantrums were thrown; there may even have been some bullying. Politicians and regulators capitulated. The delinquents fooling around with incendiary financial devices were duly re-financed by the Federal Reserve and other central banks and left free to run amok in the global economy. There they now threaten to put a match to Greece's volatile economy.

So serious a threat do these speculators pose, that the Securities and Exchange Commission is examining "abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products." The clear implication, according to SEC spokesperson John Nester, is that these products can potentially cause "cascading harm" to the financial system. The fact is that if today's speculators bring down the Greek economy, they will likely blow up more debtor nations, and then in a cascading effect, turn on their main benefactors, the now heavily indebted British and United States governments.

Greece's fiscal crisis is no small thing. Americans ignore it at their peril. Her heavily indebted economy is the canary in a coalmine of sovereign debtors that includes Spain, Portugal, Italy, Ireland, Britain and the United States. As long as the Greek canary keeps singing, people in Europe and the United States need not fear going up in smoke. But Greece's struggling government is threatened by a financial instrument widely used by speculators to discredit government bonds, and undermine the country's weakening creditworthiness.

It is the same incendiary device that played a critical role in wrecking the US economy: the credit default swap (CDS). As HuffPost readers well know, this is no swap. It is the most morally questionable form of insurance, because it lets one insure against the borrower defaulting on, say, a bond, without having an insurable interest in that bond. In other words, it is possible to insure against Greece defaulting on her bonds without owning Greek bonds.

That is like taking out insurance on your neighbor's home without owning the house. The incentive to burn down the place and collect the payout, is powerful, which is why regulators ban you and me from the practice. But not Goldman Sachs and other international financial speculators. Instead these footloose bankers, hedge- and pension-fund managers operate beyond regulation and have a perverted incentive to burn down the house that is Greece.

As the financial crisis abated, world leaders (the G20) met in Pittsburgh in September, 2009 to review progress. They ended their Summit by patting themselves on the back for their handling of the crisis:
"Our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital."

"It worked" they concluded, with just a touch of premature smugness. In some ways it sure did. There have been no brakes on global flows of capital. Nobody's toxic financial toys have been confiscated. For bankers, business is better than usual. And so the stage is set for a new, global financial crisis. World leaders could act, at even this late hour, to prevent such a crisis, and protect their citizens. They could place brakes on the mobility of capital, making it harder for speculators to roam wild and wreak havoc.And as the blogger Sudden Debt argues, they could instruct central bank governors and regulators to govern CDSs like conventional insurance.
  • First: regulators could insist that those that sell Credit Default Swaps join the ranks of other insurance companies, where they will be regulated. They would be required, amongst other things, to comply with statutes, have adequate and segregated reserves and actuarial departments.

  • Second, regulators could ensure that those buying Credit Default Swaps show proof of an insurable interest: i.e. that they own the underlying bonds.

With these two strokes of a pen, the meltdown of Greece could be avoided and a global crisis prevented. But do our over-indulgent regulators have the confidence or maturity to take on their own delinquent banksters? You tell me.

Ann Pettifor is a fellow of the new economics foundation and writer of Real World Economic Outlook - the legacy of globalization, debt and deflation, and The Coming First World Debt Crisis.

Time to outlaw naked credit default swaps
by Wolfgang Münchau

I generally do not like to propose bans. But I cannot understand why we are still allowing the trade in credit default swaps without ownership of the underlying securities. Especially in the eurozone, currently subject to a series of speculative attacks, a generalised ban on so-called naked CDSs should be a no-brainer. Naked CDSs are the instrument of choice for those who take large bets against European governments, most recently in Greece. Ben Bernanke, the chairman of the Federal Reserve, said last week that the Fed was investigating "a number of questions relating to Goldman Sachs and other companies in their derivatives arrangements with Greece". Using CDSs to destabilise a government was "counter-productive", he said. Unfortunately, it is legal.

CDSs are over-the-counter contracts negotiated by two parties. They offer the buyer insurance on a bundle of underlying securities. A typical bundle would be €10m worth of Greek government bonds. To insure against default, the buyer of a CDS pays the seller a premium, whose value is denoted in basis points. Last Thursday, a CDS contract on five-year Greek bonds was quoted at 394 basis points. This means that it costs the buyer €394,000 per year, for five years, to insure against default. If Greece defaults, the buyer gets €10m, or some equivalent. What constitutes default is subject to a complicated legal definition.

A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies. Economically, CDSs are insurance for the simple reason that they insure the buyer against the default of an underlying security. A universally accepted aspect of insurance regulation is that you can only insure what you actually own. Insurance is not meant as a gamble, but an instrument to allow the buyer to reduce incalculable risks. Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss.

Technically, CDS are not classified as insurance but as swaps, because they involve an exchange of cash flows. The CDS lobby makes much of those technical characteristics in its defence of the status quo. But this is misleading. Even a traditional insurance contract can be viewed as a swap, as it involves an exchange of cash flows. But nobody in their right mind would use the swap-like characteristics of an insurance contract as an excuse not to regulate the insurance industry. The fact that, unlike insurance, CDSs are tradeable contracts does not change the fundamental economic rationale.

The whole idea of modern financial products is to replicate the payment streams of other, more traditional instruments, while offering better conditions. Selling a CDS is like buying a bond. Buying a CDS is a way of shorting a bond – or of insuring against its default. But that does not change the fact that once you strip away the complex technical machinery, you end up with a product that offers insurance – even though it is a lot more versatile than a standard insurance contract.

Another argument I have heard from a lobbyist is that naked CDSs allow investors to hedge more effectively. This is like saying that a bank robbery brings benefits to the robber. A further stated objection to a ban is that it would be difficult to police. There is no question that a ban of a complex product, such as a CDS, involves technical complexities that commentators like myself probably underestimate. It is conceivable, for example, that the industry might quickly find a legal way round such a ban. Then again, we would not consider legalising bank robberies on the grounds that it is difficult to catch the robber.

So why are we so cautious? From conversations with regulators and law-makers, I suspect they are not always familiar with those products, to put it kindly, and that they may be afraid of regulating something they do not understand. They understand, or think they do, what a hedge fund is. Restricting hedge funds is something they can sell to their electorates. Hedge funds were not at the centre of the crisis, but they are a politically expedient target. Banning products with ugly acronyms that nobody understands seems like unnecessarily hard work.

I do not want to exaggerate the case for a ban. This speculation is neither the underlying cause of the global financial crisis, nor of the eurozone’s underlying economic tensions. But naked CDSs have played an important and direct role in destabilising the financial system. They still do. And banks, whose shareholders and employees have benefited from public rescue programmes, are now using CDSs to speculate against governments.

Where is the political response? The Germans want to bring it to the Group of 20, but they hesitate to do anything unilaterally. Christine Lagarde, the French finance minister, was recently quoted as saying: "What we are going to take away from this crisis is certainly a second look at the validity, solidity of sovereign [credit default swaps]."

A second look? I wonder what they saw when they looked the first time.

It’s Time for Swaps to Lose Their Swagger
by Gretchen Morgenson

"Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that." That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last week when lawmakers asked him about credit default swaps during his Congressional testimony. Concerns are growing about such swaps — securities that offer insurance-like protection and helped tip over the American International Group in 2008 when it couldn’t pay mounting claims on the contracts. Now, there are fears that the use of these swaps may also help propel entire countries — think Greece — to the precipice.

First, Greece employed swaps to mask its true debt picture, with the help of Wall Street bankers, of course. And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments and will face a possible default. Mr. Bernanke is undoubtedly an intelligent man. But his view that it’s "counterproductive" to use credit default swaps to crash an institution or a nation exhibits a certain naïveté about how the titans of finance operate now.

High-octane trading may be counterproductive to taxpayers, for sure. But not to the speculators who win big when such transactions pay off. And in the case of A.I.G., the speculators got their winnings from the taxpayers. The certainty that Mr. Bernanke expressed about the S.E.C.’s inquiry into credit default swaps is quaint as well. If the past is prologue, we might see a case or two emerge from that inquiry five years from now. The fact is that credit default swaps and other complex derivatives that have proved to be instruments of mass destruction still remain entrenched in our financial system three years after our economy was almost brought to its knees.

Derivatives are responsible for much of the interconnectedness between banks and other institutions that made the financial collapse accelerate in the way that it did, costing taxpayers hundreds of billions in bailouts. Yet credit default swaps have been largely untouched by financial reform efforts. This is not surprising. Given how much money is generated by the big institutions trading these instruments, these entities are showering money on Washington to protect their profits. The Office of the Comptroller of the Currency reported that revenue generated by United States banks in their credit derivatives trading totaled $1.2 billion in the third quarter of 2009.

Congressional "reform" plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us. According to the Bank for International Settlements, credit default swaps with a face value of $36 trillion were outstanding in the second quarter of 2009, the most recent figures available. Credit default swaps are "a way to increase the leverage in the system, and the people who were doing it knew that they were doing something on the edge of fraudulent," said Martin Mayer, a guest scholar at the Brookings Institution and author of 37 books, many of them on banking. "They were not well-motivated."

Mr. Mayer has been critical of credit default swaps almost since they arrived on the scene. In 1999, for example, he wrote an opinion piece for The Wall Street Journal entitled "The Dangers of Derivatives." "These ‘over the counter’ derivatives — created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing — are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall," he wrote, referring to the market turmoil of 1998. "The derivatives dealers’ demands for liquidity far exceed what the markets can provide on difficult days, and may exceed the abilities of the central banks to maintain orderly conditions."

Calling credit derivatives "the most dangerous instrument yet," Mr. Mayer concluded in his article that neither banks nor bank examiners have any idea how to handle them. "The system is easily gamed, and it sacrifices the great strength of banks as financial intermediaries — their knowledge of their borrowers, and their incentive to police the status of the loan," he wrote. Pointing to a study by the Federal Reserve Bank of New York, he said: "In the presence of moral hazard — the likelihood that sloughing the bad loans into a swap will be profitable — the growth of a market for default risks could lead to bank insolvencies."

How’s that for prescient? His predictions having come true, I asked Mr. Mayer for solutions to the problems that credit default swaps have created. He had several. First, he said, those trading in swaps must be forced to put up more capital to back them so that if a client asks for payment, the issuer actually has the funds on hand to do so. "This is an insurance instrument and it must be regulated on an insurance basis with minimum reserves, instead of making deals that don’t even have maintenance margin on them," he said. "And I think it is an instrument that insured depositories ought not to be allowed to hold or trade."

And yet United States commercial banks, those with insured deposits, held $13 trillion in notional value of credit derivatives at the end of the third quarter last year, according to the Office of the Comptroller of the Currency. The biggest players in this world are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs. All of those firms fall squarely into the category of institutions that are too politically connected to fail. Because of the implicit taxpayer backing that accompanies such lofty status, derivatives become exceedingly dangerous, said Robert Arvanitis, chief executive of Risk Finance Advisors, a corporate advisory firm specializing in insurance.

"If companies were not implicitly backed by the taxpayers, then managements would get very reluctant to go out after that next billion of notional on swaps," he said. "They’d look over their shoulder and say, ‘This is getting dangerous.’" But taxpayers remain decidedly on the hook for future bailouts because Congress has done nothing to eliminate the once-implied but now explicit government guarantees backing large and interconnected companies. And on derivatives trading, lawmakers’ moves have been depressingly incremental.

Mr. Mayer, for one, believes that credit default swaps must be exchange-traded so that their risks would be more evident. He dismisses the contention of big institutions in this arena that many credit default swaps cannot be traded on an exchange because they are tailor-made for particular customers. "These are generic risks and can be traded generically," Mr. Mayer said. "You are not insuring against a very individual risk."

And what of the argument that increased regulatory oversight of credit default swaps will crimp financial innovation? "This insistence that you mustn’t slow the pace of innovation is just childish," Mr. Mayer said. "Innovation has now cost us $7 trillion," he added, referring to the loss in household wealth that has resulted from the crisis. "That’s a pretty high price to pay for innovation." Couldn’t agree more. Too bad Washington doesn’t see it that way.

Bank for International Settlements reports further $360 billion slide in global lending
by Ambrose Evans-Pritchard

Global bank lending contracted by a further $360bn (£235bn) in the third quarter of last year and issuance of debt securities tumbled yet again, almost entirely due to economic and credit strains in Europe. The Bank for International Settlements (BIS) reports that cross-border loans have fallen sharply for the fourth quarter in a row, albeit at a slower pace. A tenth of global credit has evaporated in a year, cutting lending by $3 trillion. The recovery in debt securities ran out of steam in the last three months of 2009. Volume fell by 10pc to $1,778bn. Net issuance dropped by a third to $303bn.
Tim Congdon, from International Monetary Research, said the scale of credit contraction since the bubble burst is deeply worrying. "What it tells us is that the crisis is not yet over. The process that made credit cheaper and more available for companies around the world is still going into reverse," he said. The BIS said banks have come to rely heavily on a form of "carry trade", borrowing cheaply at short-term rates to enjoy higher yields on longer- term bonds – a bet that central banks will keep rates near zero. This creates the sort of maturity mismatch that proved the undoing of many lenders in the credit crisis.

"Financial institutions could be taking on excessive duration risk. Once expectations change and interest rates begin to rise, the unwinding of such speculative positions could reinforce repricing in fixed income markets and result in yield volatility," said the BIS. Europe saw the sharpest fall in new securities, reflecting the split-level nature of global recovery. Net issues in the eurozone fell to $111bn, down by half. Borrowers in the UK redeemed more than they issued, cutting debt by $26bn. Europe accounts for almost all the shrinkage in cross-border lending, with falls of $151bn in the eurozone, and $183bn in the UK. The dramatic shrinkage in Britain reflects the global inter-bank market, heavily concentrated in the City of London.

Banks Out of the Woods? Maybe Not
by Floyd Norris

More than $1 in every $10 that American banks have outstanding in loans is lent to a troubled borrower, a ratio far higher than previously seen in the quarter-century that such numbers have been compiled. The problems are greatest in construction loans for single-family homes, where nearly 40 percent of the loans either are delinquent or have been written off as uncollectible. But they are also high in mortgage loans for single-family homes, where $1 in every $8 of loans is troubled.

The figures were released this week by the Federal Deposit Insurance Corporation, as it announced that the number of banks in trouble had risen sharply, and forecast that the rate of bank failures would increase. The report served as a stark reminder that the banking system remained in perilous health, despite large bailouts of major financial institutions. Many smaller banks are especially exposed to commercial real estate loans, where problems are growing.

The F.D.I.C. also reported that the amount of outstanding loans and leases at all American banks was falling, even after adjusting the numbers for loans that were written off. The total volume of loans and leases outstanding at the end of 2009 was $7.3 trillion. That figure peaked in mid-2008 at just under $8 trillion. There are many reasons for the figure’s decline, and it is hard to know how much was caused by bankers’ seeking to husband resources to deal with future losses, and how much by a simple refusal to lend to any but the safest borrowers.

Some of the decline may have been caused by a reduction of borrowing by businesses and even homeowners who drew down lines of credit when the credit crisis was at its worst and have repaid them, confident that they will be able to borrow again if they need the funds. And some may reflect continued hesitance by American consumers and businesses to increase their borrowing at a time when the economy remains weak. As can be seen in the accompanying chart, banks charged off 2.9 percent of the outstanding loans in late 2009. The F.D.I.C. said that was the highest rate since the agency was formed in 1934. In addition, 5.4 percent of all loans were at least 90 days behind, and another 1.9 percent were more than 30 days overdue.

If there is any reassuring news in the figures, it may be that fewer loans are now going bad. The proportion of loans that are 30 to 89 days behind in payments has fallen since peaking earlier in 2009, while the percentage of loans more than 90 days behind has continued to rise. Commercial real estate loans are widely viewed to be an area of coming problems, in part because such loans are normally made for periods of seven to 10 years, in anticipation that they will then be rolled over into new loans. Many properties are no longer worth anything close to the amount owed, making such rollovers doubtful. Still, many such loans require payments of interest only, or of only minimal amounts of principal, so it is possible for borrowers to stay current until the loans mature.

At the end of 2009, 6.3 percent of such loans were either behind in payments or were being classified by banks as doubtful for repayment. That figure may be held down by a regulatory change. A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only. Just how rapidly that becomes worse may depend on how many banks choose to "pretend and extend," renewing the loan and hoping property values will recover.

Banker sees U.S. failed bank tally hitting 1,000
About 1,000 U.S. banks could fail as a result of the recent banking crisis that saddled financial institutions with large portfolios of bad loans, a leading investment banking executive said on Thursday. James Dunne, senior managing principal of Sandler O'Neill, said 300 to 400 banks could be seized this year, especially as institutions start to deal with deteriorating commercial real estate loans. "This is going to be a very slow recovery," Dunne said in an interview with Reuters.

Regulators have seized 185 banks since January 2008. The Federal Deposit Insurance Corp has said the pace of failures is expected to peak this year. The agency said earlier this week that its "problem" bank list jumped 27 percent during the fourth quarter to 702. Historically, less than 15 percent of the banks on that list end up failing.

Dunne said the FDIC was doing everything it could to attract responsible investors for troubled banks, including private equity groups. Dunne said he disagreed with David Bonderman, co-founder of giant private equity firm TPG TPG.UL, who said earlier on Thursday that the FDIC's rules on private equity investment in troubled banks was scaring off potential investors. Bonderman, speaking at a conference in North Carolina, said the FDIC was "terrified of private equity guys" and that its rules were accelerating the pace of bank failures.

Dunne, whose firm undertakes capital-raisings and advises banks on FDIC-related transactions, said FDIC Chairman Sheila Bair welcomed investment as long as it came with a solid management team for the bank and deep funding. "I've met personally with the FDIC chairman three times in the last several months. She is open, interested and very well informed in looking for any methodology to raise capital," Dunne said. Dunne said the FDIC was also being creative. It was not just looking at private equity groups but also at pension funds as sources of investment for troubled banks, he said.

Dunne said concerns about ownership limits that restricted private equity investments were more related to the Federal Reserve, which requires that institutions holding more than a certain percentage of a bank's voting shares be subject to stiff bank holding company regulations. In August, the FDIC imposed new rules on private equity investment in troubled banks. They were softened from an original proposal that investors said would scare the industry away from failed bank assets.

The rules, which include high capital requirements and long-term investments, are designed to ensure that private equity groups are interested in nursing the banks back to health and not just taking advantage of their assets. The FDIC has been having ongoing discussions with private equity groups since putting the rules in place and has said it is considering whether any further actions are appropriate.

More Than Half of 2005-2007 US Subprime and Alt-A Mortgages Underwater

Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.

Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. A few tidbits from the reports:

As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
  • After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
  • After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
  • Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.

Don't go wobbly on us now, Ben Bernanke
by Ambrose Evans-Pritchard

Barack Obama's home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget." The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It's a catastrophe", said the Schools Superintedent. In Alexander County, the sheriff's patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid.
Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5pc, and imposed a 5pc levy on pension fees. The Economic Policy Institute says states face a shortfall of $156bn in fiscal 2010. Most are banned by law from running deficits, so they must retrench. Washington has provided $68bn in federal aid, but that depletes the Obama stimulus package. This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia's economy may contract by 30pc from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg.

The eurozone's fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc. Britain must slash soon, or face a gilts strike. The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now." Indeed, though cutting too fast would tip the West back into slump and kill tax revenues, solving nothing – a risk that austerity priests rarely acknowledge. Pacing is everything.

Mervyn King, the Bank of England's Governor, seems strangely alone in facing the implications of this for central banks, and in seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad. "I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said. The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract.

Bank loans in the US have fallen at a 14pc rate this year, caused in part by Basel III rules pushing banks to raise capital ratios. The M3 money supply has fallen at a 5.6pc rate since September. The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week. The contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while M3 fell by a further €55bn. Japan's GDP deflator has dropped to a record low of -3pc. These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.

Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press". Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1pc in January. They plummet from here.

So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt? Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand.

City of Angels on brink of abyss
Two and a half years after the official start of the worst economic downturn and fiscal crisis in nearly 80 years, America's economy is supposedly growing again, the stock market is halfway recovered from the lows of 2008 and early 2009, and the unemployment plunge seems to have been halted. Yet, built-in time lags in how revenues are raised and budgets calculated mean that many states and cities around the country are only now starting to feel the worst of the pain. This year has been, quite simply, abysmal for local and state governments, and next year promises to be even worse.

With easy cuts long-ago made, these days basic services are increasingly seen as luxuries, and public sector employees are increasingly vulnerable to wage cuts, benefits rollbacks, and unemployment. While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don't have those options; increasingly cities, counties and states are facing the sorts of austerity measures we've come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.

In Arizona, a cash-pinched legislature put the Capitol building up for sale, proposing to lease it back for state use. In the small Colorado town of Colorado Springs, officials shut off half the street lamps and one-third of the traffic lights, told residents who wanted short grass in public parks to bring their own lawnmowers, and auctioned off a police helicopter on eBay. Around the country, libraries have been shuttered, after-school programmes have been curtailed, mental health services have been decimated.

In Los Angeles, the nation's second largest metropolis, the Democratic mayor, Antonio Villaraigosa, addressed a full session of the city council on 9 February to detail just how grim the city's finances had become. Miguel Santana, the city administrative officer (the CAO is the mayor and council's chief financial adviser) had recently informed the mayor's office that LA was facing a $200m shortfall through the end of this financial year and another half billion dollar-plus shortfall in the years to come if it didn't radically, and rapidly, restructure its budget. Santana didn't mince words. His nearly 300-page report (pdf) opened with this stark warning:

"The city is facing a budget crisis unlike any it has ever experienced … The enormity of our current fiscal crisis forces the City to take swift action now and lay out a financial plan for the future."
Wall Street was growing increasingly worried by the city's financial fragility, and the city's ability to raise revenues through bond sales was at risk. Why the crunch? According to city council president Eric Garcetti's office, for the past four quarters, the city has seen double-digit revenue declines, a scenario not experienced since the darkest days of the Great Depression.

Quite simply, the downturn was so steep it had made government-as-normal impossible to maintain in the City of Angels. As a result, says Garcetti, the city will face a crisis of funding for the next several years as well as an increasingly bitter battle of ideas as to the role of government in modern-day America; for conservatives, he warns it will likely be seen as an opportunity to starve the public sector, to "downsize government so much it can never come back."

Los Angeles' budget, currently around $7bn per year, will, all parties agree, shrink for years to come. And, since much of that $7bn is committed to untouchable items – making sure pensions are paid, keeping the LAPD afloat – the hundreds of millions of dollars in cuts will fall overwhelmingly on employees and on discretionary services. And these are services that disproportionately are used by lower income residents – the very people who have already been hit the hardest by the broader economic meltdown.

The city has already negotiated with public sector unions to ease 2,400 employees (out of a city workforce of about 40,000) into early retirement, is working to immediately reduce the city's payrolls by another one thousand, and is exploring how to make more cuts down the road that could lead to a couple of thousand additional job losses – or, if the mayor and Garcetti's vision of "shared sacrifice" is implemented, to fewer job cuts but across-the-board pay reductions instead. "For me, government matters," says Garcetti. "Workers matter. Services matter." Inevitably, however, the crisis will in some ways shrink the role of city government.

At the same time as the city is negotiating concessions from unions, it is also exploring "private-public partnerships" that would hand the city's zoo, convention centre, parking garages and even parking meters to private operators. And it has already eliminated two city departments – environmental affairs and human services – with more likely to follow, hoping to seamlessly amalgamate their functions into other departments.

Yet in reality, there is very little that is seamless about these budget readjustments. The job losses are adding to LA's already great economic pain – the city has a more than 11% unemployment rate; even with progressives occupying key positions in the city's political leadership, the evisceration of core public services will, over the years to come, impact the quality of life of most Angelenos; and the privatisation of venues such as the zoo and the convention centre will harm the city's long-term ability to raise sufficient revenue to meet its growing needs.

The broader economy may be starting to show some signs of healing, but for those at the bottom of the economy, for those most reliant on government services in Los Angeles and the countless other cities teetering over financial abysses, 2010 looks more like a bona fide Depression year than one made beautiful by the myriad green shoots of recovery.

Seeds of War
by Joel Bowman

A while back, our colleague, Chris Mayer, employed a wonderful analogy to illustrate the passage of time from the roaring twenties through to the dustbowl thirties. The former decade, Chris explained, was captured in essence by F. Scott Fitzgerald’s The Great Gatsby. It was a period ripe with wild speculation, fueled by an explosion in EZ money, and of reckless excesses in general. (If any of this sounds familiar, you can probably already guess the point at which Chris was driving.)

Then, almost as quickly as it had begun, the party ended. Black Tuesday, October 1929, was somewhat akin to calling "closing time" at the Gatsby mansion cocktail party. Markets crashed, the public panicked and central planners did everything in their power to exacerbate the situation they themselves had caused in the first place. The decade that ensued was perhaps best captured, observed Chris, in John Steinbeck’s memorable Grapes of Wrath. The parched plains…"Oakie" drifters…the all-too common hardships of the farm folk… We all remember the scenes as if we had lived through those heartbreaking years ourselves. A bit of a Steinbeck enthusiast himself, your editor has spent a good while mulling over Chris’ astute comparison. The imagery contained in those two momentous works, both Steinbeck’s and Fitzgerald’s, are so vivid that the reader almost feels he can touch the characters, taste the champagne and, eventually, feel the anguish and despair of the stricken Joads.

If you didn’t guess it earlier, the point Chris was making was simply that history tends to repeat itself. The Gatsby years, for instance, might not have been so different from those of the late 1990s – early ’00s; a period of excesses, frivolity and of "irrational exuberance" as Greenspan, the man largely responsible for causing it, noted (though he did so before it had actually materialized, in a typically ill-timed speech delivered back in 1996…before the market more than doubled over the ensuing four years. Oy…). And now, with our own depression unfolding, central governments around the world move to centralize power, to clamp down on free economies and to limit the corrective forces of the marketplace…thereby virtually assuring we will enter another Steinbeck-esque stage, if we haven’t already done so.

As we look around the world today, we wonder if we can’t draw a few more parallels between the early to mid-20th century and the time in which we now find ourselves. And, perhaps hidden within these folds of time, we might discover some clues as to where we are headed in the not-so-distant future. If we’re moving towards a Grapes of Wrath-like scenario, in other words, what comes afterwards?

While Gatsby’s crowd was swinging to the smooth sounds of the roaring twenties in the USA, another man was wallowing away in a dank cell on the other side of the world. Having failed in his attempted November revolution in Munich (1923), the "political prisoner" (as he called himself), set to work dictating his life’s philosophy. The Weimer Republic, still recovering from the nation’s disastrous expeditions abroad during the previous decade, had just suffered through one of the most infamous hyperinflationary spirals in history. It wasn’t until then foreign minister, Gustav Stresemann, issued a new currency, the Rentenmark, that his republic began what is now referred to as the "Golden Era" (1923 and 1929). But even during this period, unemployment grew in step with the republic’s mounting foreign debts and discontent among the working class brewed. If ever a megalomaniacal dictator was to sway the masses, now was the time to make his stand.

Although it was published in two parts during the twenties, the prisoner’s work didn’t garner any real, widespread attention until its author ascended to power in 1933. That man, of course, was Adolf Hitler. His book: Mein Kampf. During the Führer’s reign of terror, his book came to be available in three common editions. First, there was the Volksausgabe or "People’s Edition." This was the most commonly circulated. Then came the Hochzeitsausgabe, or "Wedding Edition" which was given free to marrying couples. And finally, in 1940, the Tornister-Ausgabe was released; a compact, though unabridged edition which was available at post offices, where it could be sent to Nazi family members fighting on the front lines. Tragically for many a sorry soul, the 1940s were to be defined by the work of one of the century’s most infamous authors, Adolf Hitler.

That decade, as everyone knows, was more or less an unmitigated disaster for most of the world. From the islands of Japan to the bloodied desert sands of Northern Africa…the streets of Paris to the burning gates of Stalingrad, the devastation seemed unrelenting. Track marks from Russian T-34s, German Panzers and American M4 Sherman tanks crisscrossed Europe from end to sodden end. And, in the midst of it all, a brave little girl, hidden away in a secret annex with her family in The Netherlands, sat down to pen her own prisoner’s memoir.

Fast-forward to today and we find ourselves in a situation eerily similar to that of the early ’30s. Tensions in Europe are once again heating up over the possible collapse of its relatively nascent monetary union experiment. Nations there have, as they are wont to do, overspent their kitty. This time it is Greece, Italy, Ireland, Portugal and Spain, whose balance sheets are coming apart at the seams, that threaten to drag the financial credibility of the whole continent asunder. Workers in Greece are on strike over austerity measures their government has undertaken to try to manage its budget. Disgruntled protestors numbering in the tens of thousands marched through the streets of Athens this week.

Elsewhere on the continent, air traffic controllers in France are off the job…as are thousands of British Airways workers over in the United Kingdom. Another 70,000 discontents thronged the squares of Madrid…and 50,000 in Barcelona. Workers in Ireland and Portugal are itching to join the queue. And that’s just the kerfuffle in Europe!

Germany’s Export Prowess Weighs on Euro-Zone
Glasbau Hahn could easily be mistaken for one of the auto repair shops or plumbing supply outlets that characterize a former factory district a few miles from Frankfurt’s banking quarter. Yet the family-owned glassmaker, with 140 employees, not counting a Hahn grandchild running around the front office, typifies the small, highly focused companies that may propel Germany back to growth. The paradox is that such companies are also making life difficult for Germany’s European Union partners.

Glasbau Hahn is a miniature multinational company, generating more than 60 percent of its sales abroad and dominating its narrow but lucrative niche: the global market for museum display cases. Even King Tut’s mummy lies in a climate-controlled vitrine made in Glasbau Hahn’s workshop, which sits next to a railyard and across the street from a Fiat showroom. As Glasbau Hahn and thousands of other small German exporters rebound from a dreadful 2009, they give the European Union a much-needed shot of growth. Unfortunately, some of their success comes at the expense of countries like Greece, Spain and Portugal.

The so-called peripheral countries have incurred crushing debts in part because they bought too many Mercedes cars and other imports from Germany and elsewhere, without producing enough of their own export goods. In fact, goods from Greece, Spain and Portugal were often no longer competitive because in the last decade those countries had let wages rise faster than productivity and had become too expensive. At the same time Germany, a country of savers, exported more than it consumed, profiting from its spendthrift neighbors but not reciprocating by buying equal amounts of imports.

"These bubbles that have been growing on the periphery are a mirror image of that surplus that Germany produces," said Erik Berglöf, chief economist at the European Bank for Reconstruction and Development in London. "It’s roughly akin to China and the U.S. It gives rise to many tensions." Germany’s trade surplus is by far the largest in Europe, reaching 135.8 billion euros ($184.9 billion) in 2009, according to Eurostat, the European Union’s statistics office. Germany’s surplus was more than triple that of the Netherlands, which was in second place. The countries with the biggest trade deficits are also the ones with biggest economic problems: Britain, Spain, Greece and Portugal. Only France, which also ranks among the top five trade-deficit countries, has a relatively healthy economy.

Glasbau Hahn helps explain why Germany is so competitive. The company and those similar to it are sometimes called hidden champions. They learned long ago to compensate for slow domestic growth by expanding overseas. And to offset the high cost of labor in Germany, they concentrate on premium products that customers are willing to pay more for. "We’re never the cheapest," said Till Hahn, elder statesman of the family that has owned and managed the company since 1836. But Mr. Hahn, a cheerful 72-year-old dressed in corduroys and an argyle sweater, points out that price is secondary to a museum curator entrusted with a Gutenberg Bible. "In 20 years, no one will ask what the vitrine cost," he said "What matters is the preservation of the object."

Glasbau Hahn applied an engineer’s mentality to a seemingly mundane object. Its vitrines have elaborate dust-protection and climate control systems. The glass panels slide open with the touch of a remote control.
Glasbau Hahn’s display cases are found in top museums, including the British Museum in London, the Rijksmuseum in Amsterdam and the State Hermitage Museum in St. Petersburg, Russia. The company has built cases to hold copies of the Declaration of Independence at the New York Public Library and the mummy of King Tutankhamen in Luxor, Egypt, where a custom-made glass enclosure from Frankfurt preserves the boy monarch in a nitrogen atmosphere.

Glasbau Hahn’s expertise and reputation has helped it beat competitors in Italy and Belgium, just as other German companies have beat their European rivals. The problem that policy makers are wrestling with is how to correct the economic imbalances that German competitiveness creates. It hardly makes sense for Germany to export less. "How do you tell German companies they shouldn’t be winners?" asked Tommaso Padoa-Schioppa, a former member of the European Central Bank’s executive board. One solution might be for Germany to cut taxes to stimulate consumption. But a tax break now would only worsen a budget deficit that is already in violation of euro-zone rules.

Ultimately, the onus is on the weaker countries to address the mismatch between pay and productivity. "This gap has to be closed just as Germany did in the past decade," said Mr. Padoa-Schioppa, who is now chairman for Europe at a consulting firm, the Promontory Financial Group. In fact, German workers were once the ones known for being too expensive and inflexible. But for years, unions have accepted modest wage increases, and they agreed to measures that help companies address fluctuations in demand without resorting to mass firing. For example, Glasbau Hahn — which is not unionized — managed to avoid any layoffs last year by deploying so-called work-time accounts, a widely used tool. Employees bank overtime hours during busy periods. When business is slow, they work less but draw on the accounts to keep receiving the same pay.

Employers also have come to value Germany’s political stability and the skills of its workers, even when they are more costly. In the coming week, Sun Chemical, a maker of specialty inks for food packaging based in Parsippany, N.J., will inaugurate a new plant in Frankfurt employing 120 people. "You can get cheaper labor in other countries," said Rudi Lenz, chief executive of Sun Chemical. "But we need trained and experienced people, and you find them in Germany." Like many other German companies, Glasbau Hahn suffered through a severe slump in exports last year. But this year, orders have taken off again, including a contract to supply display cases for a renovation of the New York Metropolitan Museum of Art’s Islamic galleries. "Last year we had too little work, this year we have too much," Mr. Hahn said.

There are tentative signs that Glasbau Hahn represents a wider upswing in German trade. Though exports plunged 18 percent last year, they increased 3 percent in the fourth quarter from the third quarter, government data released Wednesday indicated. A visit to Mr. Hahn’s memorabilia-filled office, in fact, serves as a reminder that it would be wrong to bet against German companies. They have seen worse. A watercolor on one wall depicts what little was left of Glasbau Hahn’s workshops at the end of World War II. Mr. Hahn retrieves from a cabinet samples of souvenir glass coasters that the company sold to American G.I.’s after the war — anything to keep the business going.

No German rescue plan for debt-ridden Greece
Chancellor Angela Merkel Sunday dismissed talk of a German rescue plan for Greece's ailing economy, as Athens braced for an EU audit that could usher in new austerity cuts to tackle its massive debt crisis. Greek bond prices rallied this week on a report that Europe's top economy was considering coming to the aid of debt-burdened Greece, as Prime Minister George Papandreou prepares to hold talks with Merkel in Berlin on Friday. But the German chancellor denied any such plan was in the works, saying "there is absolutely no question of it".

"We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty," Merkel told ARD public television. Germany has repeatedly denied talk of a bail-out for Greece, further fuelled this week by a meeting between Papandreou and the head of Deutsche Bank. "Right now we can help Greece by stating clearly that it has to fulfil its duties," said Merkel, adding that Greece had to "show great courage" in order to resorb its deficits and restore its "lost credibility".

Greece's Socialist government has pledged to cut the deficit by four percentage points of gross domestic product to 8.7 percent this year, but there are doubts that the recession-hit country will be able to meet this goal.
Merkel warned Athens now had to "set this decision in motion", as she acknowledged that the current crisis was "certainly the most difficult period" since the euro was created in 1999. "I hope the markets will trust in the efforts deployed by Greece," she said. The chancellor also ruled out providing support to Greece in the form of state guarantees to the banking sector, arguing that it would amount to aid.

Greek press reports had said Germany planned to help through the purchase of Greek bonds via its state lender KfW. A new 10-year bond issue had been expected for weeks. Greece is expected this week to announce new measures to limit state spending, which could include bolder benefit cuts and a two-percent hike in sales tax according to reports. The measures are set to coincide with the arrival of the European Union's economic and monetary affairs commissioner Olli Rehn in Athens on Monday.

Papandreou has said he will use the debt crisis to remedy chronic waste in public administration. But if the programme proves insufficient, a meeting of EU finance ministers could demand even harsher corrective action at a meeting on March 16. The head of the group of ministers that oversee the eurozone warned Sunday that Greece must step up its spending cuts and not expect Europe to pick up the bill for its past mismanagement. "Greece must understand that taxpayers in Germany, Belgium or Luxembourg are not prepared to correct Greek fiscal policy mistakes," warned the eurozone chief, Luxembourg Prime Minister Jean-Claude Juncker.

Mired in recession and requiring more than 50 billion euros (68 billion US dollars) in loans this year, Greece needs to bolster falling market ratings that have steeply pushed up its borrowing costs. Greek government overspending reached 12.7 percent of output in 2009 as the global downturn sent public deficits through the roof, putting government bonds under pressure, weakening the euro and pushing the eurozone into crisis. The euro has slipped considerably against the dollar, trading on Friday at around 1.36 US dollars compared to 1.45 US dollars in December, and last week plunged to a one-year low against the yen.

Germany refuses to be bounced into Greek rescue deal by EU
by Ambrose Evans-Pritchard

German Chancellor Angela Merkel has shot down claims by EU politicians of a rescue deal for Greece, denying categorically that Berlin has agreed to underwrite the Greek bond market. "That is definitely not the case. We've got a treaty that does not include any provision for bailing out states. We can best help Greece by making clear that Greece has to do its own homework, just like it is doing at the moment," she told ARD Television. "There have been absolutely no other decisions taken. I would like to say that quite clearly," she said.

The emphatic tone suggests that EU officials and a French-led bloc of states have gone too far in trying to create a sense of inevitabilty behind the rescue package. There is clearly irritation in Berlin that EU integrationists are trying to bounce Germany into an historic commitment, entailing a quantum leap towards EU fiscal federalism and the creation of a debt union. Professor Paul Kirchhof, a leading German jurist, told Der Spiegel that alleged bail-out plans breach of Germany's constitution, and may trigger court challenges.

The German finance ministry denied reports over the weekend that a "rescue action" is already being pencilled into the 2010 budget, but draft documents of some kind have clearly been circulating. The latest Franco-German idea involves use of state banks and pension funds to buy Greek debt, in Germany's case through the KfW bank, for France through the Caisse des Dépôts used to invest civil service pensions. Christine Lagarde, France's finance minister, told Europe 1 that "a number of propositions" were on the table, either from private funds or public funds or the two together. "I have no doubt that Greece will manage to refinance," she said.

However, both the Free Democrats and Bavarian Social Christians in the Merkel coalition have raised doubts over use of KfW for a Greek rescue, viewing any diversion of funds to support foreign policy as an abuse its core role as banker for Mittelstand family firms. The Bundestag's finance committee has also questioned whether it is legal for German state bodies to buy eurozone debt. The mood has been poisoned by Greek rhetoric over Nazi war crimes. Mrs Merkel offered scant hope yesterday. "The euro is certainly in the most difficult phase since it was created. Its important we remember that it is our common currency on the one hand, but also on the other of the need to tackle to the causes of the troubles at their roots which are high Greek deficits and lost credibility."

Markets are confused over whether the EU is playing a subtle game of "constructive ambiguity" to keep Greece guessing, or whether refusal to offer details masks a deeper split. Otmar Issing, the former chief economist at the European Central Bank, warned last week that a Greek bail-out would be a grave mistake, leading to a breakdown of eurozone discipline and the demise of EMU. Olli Rehn, the EU's economics commissioner, is to visit Athens today to put pressure on Greece for further austerity measures.

An EU expert team discovered a "black hole" of €4.5bn last week, implying that Greece's PASOK government will have to cut deep into the welfare state to cut the budget deficit by 10pc of GDP over three years as agreed. Jean-Claude Juncker, head of the Eurogroup, evoked the threat of EU sanctions over the weekend. "Greece must understand that the taxpayers in Germany, Belgium or Luxembourg are not ready to fix the mistakes of Greece's fiscal policy," he said.

Greek PM to meet Merkel, Obama amid debt crisis
Greece's prime minister announced plans on Friday to meet German Chancellor Angela Merkel next week as signs grow that diplomatic efforts are under way to resolve his country's debt crisis. Prime Minister George Papandreou, who is also due to meet President Barack Obama on March 9 in Washington, told parliament he expected help from Greece's European Union partners, for which German backing would be vital. Obama held a call with Merkel and British Prime Minister Gordon Brown on Friday in which they discussed the Greek debt crisis, among other issues, the White House said.

Papandreou also met Deutsche Bank's Chief Executive Josef Ackermann, although an Athens government spokesman denied Greek press reports the German bank was considering buying 15 billion euros in Greek bonds. Greece wants to restore investors' confidence in its economic statistics and reassure buyers its debt is manageable after revealing that the previous government understated the budget deficit by half. The EU has offered political support but no bailout. "We must do whatever we can now to address the immediate dangers today. Tomorrow it will be too late and the consequences will be much more dire," Papandreou said.

"We ask the EU for its solidarity and they ask us to meet our obligations. We will meet our obligations. ... We will demand European community solidarity and I believe we will get it." Investors appeared to welcome the comments, pushing the gap between yields on Greek bonds and their German equivalent -- a measure of market faith in Greece's finances -- to below 340 basis points. That marked a drop of nearly 20 bps on the day. Greek stocks rose 1.4 percent and traders granted the euro a reprieve after it hit a one-year low against the Japanese yen a day earlier. But many people in the market expect the euro to stay under pressure because of concerns about Greece.

The Greek government said Papandreou would visit Merkel on March 5 and Obama on March 9, but gave few details. It also said little about the talks with Ackermann. Merkel's government has resisted appeals to promise Greece aid and opinion polls show a majority of Germans oppose a bailout. But many economic analysts say Europe's largest economy will step in if it believes the euro's stability is threatened. Media reports have suggested governments in the 16-country euro zone could offer aid worth 20 billion to 25 billion euros, but the EU has not confirmed that. In Washington, White House spokesman Robert Gibbs said the United States believed the EU could and would act appropriately to ensure an effective response to the crisis.

A senior U.S. official said Obama and Papandreou would discuss in White House talks "a number of key issues relating to the U.S.-Greek bilateral relationship, including regional security and economic issues." The official said the meeting had been "timed with the prime minister's planned travel to the United States." Given international concern about Greece's debt crisis, the leaders were all but certain to talk about it. Some of Greece's EU partners fear market volatility caused by Greece will spread to other countries that use the euro and have big deficits to cover, such as Portugal and Spain.

Spanish Economy Minister Elena Salgado told Reuters there was no risk of a double-dip recession in Spain and its economy would grow in every quarter of 2010. "Just two weeks ago, two of the credit rating agencies have confirmed our rating, so investors know that Spain is a country in which they can invest with all guarantees," she said. Investors are anxious about Greece's ability to get out of crisis and must decide whether to buy more Greek debt when it issues a new 10-year bond in the next few weeks. "The prime worry is will Greeks have access to the sovereign debt market at any tolerable rate and that's what we remain concerned about," Chris Pryce, director of sovereign ratings at Fitch, told Reuters Insider television.

Greece said after a parliamentary election in October that its deficit would be 12.7 percent of gross domestic product in 2009, four times the EU limit. It has also drawn up an EU-backed austerity plan, including tough wage and tax measures and pension reforms, to cut the deficit by 4 percentage points this year and bring it below the 27-country bloc's limit of 3 percent of GDP by 2012. Protests and marches by tens of thousands of people crippled transport and public services on Wednesday, but Papandreou blamed the problems on the previous conservative government. "History confirmed our worst fears," he told parliament. "Past policies make it necessary to proceed to brutal changes."

His comments could prepare the ground for a new set of fiscal measures before a mid-March EU deadline to show results in cutting the deficit. EU Monetary and Economic Affairs Commissioner Olli Rehn will visit Athens next week after studying a report from EU inspectors who visited Greece this week with International Monetary Fund and European Central Bank experts. A Finance Ministry official said the inspectors anticipated Greece could cut the deficit by about 2 percentage points, far short of this year's target. That would mean extra measures aimed at savings of about 4.8 billion euros ($6.47 billion). Athens needs to raise about 20 billion euros to cover maturing debt in April and May.

Big German lenders including Deutsche Postbank, Eurohypo and Hypo Real Estate said they would not take on more Greek debt, which could make it harder for Greece to sell bonds to resolve its crisis. Germany's Finance Ministry declined comment on a media report that Berlin might buy Greek bonds through lender KfW Group. KfW also declined comment. In Washington, IMF Managing Director Dominique Strauss-Kahn said the EU nations wanted to resolve Greece's problems on their own but the Fund was ready to help if asked. "They want to clean up the situation themselves. ... I do believe they are able to do that," he said. "We will do what our members ask us" in terms of expertise and support, he added.

Germany, France, Dutch to buy Greek bonds: Member of European Parliament
Germany, France and the Netherlands plan to buy Greek bonds to help Athens cope with a severe debt crisis, a German member of the European Parliament said on Saturday. The comments by MEP Jorgo Chatzimarkakis on Greek television echoed details of an aid plan that were reported by a leading Greek newspaper on Saturday. That report was dismissed by a senior German government official as "nonsense." "The plan is that Germany, France and the Netherlands will buy Greek bonds," Chatzimarkakis, a German of Greek heritage, told Mega TV in an interview aired on Saturday evening.

"Germany is planning to buy immediately 5-7 billion euros (of bonds)," he said, adding that Germany's state-owned development bank KfW and France's state-owned bank Caisse des Depots were part of the deal and would buy Greek bonds. It was unclear how Chatzimarkakis, who is not a high-profile politician in Germany, knew of the plan he described. Earlier, Greek newspaper Ta Nea reported, citing unnamed banking and official sources, that Germany and France -- it did not mention the Netherlands -- planned to help Greece with its debt problems by buying bonds or providing guarantees via the same state banks mentioned by Chatzimarkakis. The report said French President Nicolas Sarkozy had discussed the plan by telephone with Greek Prime Minister George Papandreou.

In return for the aid, the newspaper said the Greek government had agreed to introduce additional austerity measures worth some 4 billion euros ($5.4 billion) to reach its target of cutting the budget deficit by 4 percentage points this year. The Greek finance ministry and the European Commission declined to comment on the report, which came after signs of a diplomatic push to resolve Greece's debt crisis. There was no immediate comment from France's government. But the senior German official, who declined to be named, said there was no such agreement. "No, this report is nonsense," the official said.

Nevertheless, a German parliamentary source told Reuters that the government was quietly preparing emergency budget provisions for possible aid to Greece. The finance ministry denied this. With German public opinion strongly against aiding Greece, Chancellor Angela Merkel's government has been reluctant to offer any concrete monetary assistance, beyond a vague pledge that it will take action "if needed" to protect financial stability in the euro zone.

In private, however, senior German financial officials admit contingency plans have been drawn up in case Berlin needs to intervene in Greece's debt crisis, which has caused turmoil in European markets and hurt confidence in the euro currency. Sources in Germany's ruling coalition told Reuters earlier this month that the coalition was considering having KfW buy Greek bonds. European Union inspectors visited Athens this week to discuss the crisis. EU Economic Affairs Commissioner Olli Rehn plans to visit Athens next week, and Ta Nea said Rehn would announce the aid plan for Greece during his visit. Papandreou said on Friday that he would visit Berlin for talks with Merkel on March 5, while Deutsche Bank Chief Executive Josef Ackermann met Papandreou in Athens on Friday.

Media reports in Germany and France have suggested governments in the 16-country euro zone might offer aid worth a total of 20 to 25 billion euros to Greece. Officials have declined to comment on the size of any aid plan. Greece, which is preparing to tap the euro debt market with its second bond issue this year, has said its funding needs are met until mid-March, and it will need to refinance about 20 billion euros of debt maturing in April and May. Markets worry that Greece may not be able to borrow at affordable rates.

Merkel Seeks to Damp ‘Emotions’ as Greek Crisis Weighs on Euro
German Chancellor Angela Merkel said she hopes talks with Greek Prime Minister George Papandreou will calm down the turmoil over Greece’s budget deficit, signaling her concern that "emotions" may be spinning out of control. While Greece’s debt put the euro on its longest losing streak against the dollar since November 2008, some Greek officials have sought to link the debt load to the Nazi-era occupation of Greece.

"The euro is certainly facing the most difficult phase since its inception," Merkel said in an interview on ARD television today. She is scheduled to meet with Papandreou in Berlin on March 5, seeking "to stay in close contact with him so the emotions don’t run so high," Merkel said in off-the-cuff studio remarks overheard by reporters. The comments are further evidence of Merkel’s concern about the risk Greece poses to the single currency. Merkel, who leads Europe’s biggest economy, warned as early as Jan. 13 of the "great pressures" Greece could exert on the euro and Germany.

German lawmakers say euro-area officials are crafting a plan to grant Greece about 25 billion euros ($34 billion) in aid should the need arise, possibly by using state-owned lenders such as Germany’s KfW Group to buy its debt. Merkel said that decisions on aid " absolutely haven’t been taken" and the European Commission, the European Union’s executive arm, is in charge of the bloc’s response. "We can best help Greece right now by making it clear that Greece has to do its homework," Merkel said on ARD. "The Commission is dealing with that." Greece "must do what’s important for the country but also what’s important for all us," she said.

Greece may take more debt steps as EU visit looms
Greece may soon announce new steps to cut its budget deficit, a government minister said on Sunday, amid signs that Athens might be nearing a deal with European Union governments to ease the Greek debt crisis. Economy Minister Louka Katseli said Prime Minister George Papandreou would review Greece's fiscal plans, after an EU mission to Athens last week decided that the country's austerity measures were not strong enough to reassure financial markets.

"If more measures are to be taken, they will be announced soon," Katseli told state television. "The red line for everyone in this government is that the measures are effective, bringing additional revenues, and that they are socially just." EU Economic Affairs Commissioner Olli Rehn was due to visit Athens Monday for talks with Greek officials about the crisis, which has rocked Europe's debt market and undermined investors' confidence in the common euro currency. The market has been speculating that Rehn's visit, if successful, could move EU governments closer to announcing some form of emergency aid for Greece in exchange for a pledge by Athens to take fresh budget steps.

A German member of the European Parliament, Jorgo Chatzimarkakis, said Saturday that Germany, France and the Netherlands would buy Greek bonds in the deal, using state-run banks such as Germany's KfW and France's Caisse des Depots. It was unclear how Chatzimarkakis, who is not a high-profile politician in Germany, might know of such a plan. His comments echoed a similar report Saturday in major Greek newspaper Ta Nea, which quoted unnamed sources.

German Chancellor Angela Merkel said in a television interview Sunday that she was grateful the Greek government was planning "very courageous" steps to curb its budget deficit. She repeated comments, first made last week, that the euro was in its toughest period since its launch in 1999 -- possibly an effort to prepare German public opinion, which is strongly against aiding Greece, for intervention by Berlin in the crisis.

But Merkel stressed no decision had been taken on financial assistance to Greece, and that Berlin continued to expect Athens to take whatever steps were necessary to resolve its problems. "There have been absolutely no other decisions taken. I would like to say that quite clearly," Merkel said. "Greece has to do what's necessary for Greece. But that is also important for all of us." The Dutch government said there were no plans at present to buy Greek bonds, and that the top priority for the Netherlands was to ensure the stability of the euro.

"We don't want to spend taxpayer money to save the Greeks," said Jan Kees de Jager, appointed as finance minister last Tuesday in a caretaker government that will govern until elections on June 9. The Greek finance ministry and the European Commission declined to comment on the reports of an aid deal. But there were other signs of intensified diplomatic efforts to resolve the crisis. Papandreou said Friday he would visit Berlin for talks with Merkel on March 5, and Deutsche Bank Chief Executive Josef Ackermann met Papandreou in Athens Friday.

French Economy Minister Christine Lagarde said Sunday that her government and others were studying options to tackle the crisis. "I have no doubt that Greece will be able to refinance itself, using means which we are currently exploring, and for which we have a number of propositions. "It would involve private partners or public partners or both," Lagarde said, declining to give further details. German and French media reports have suggested governments in the 16-country euro zone might offer aid worth a total of 20 to 25 billion euros ($27 billion to $34 billion) to Greece. Officials have declined to comment on the size of any aid plan.

Both Greece and EU governments face growing pressure to act from the debt market, which fears Athens might lose its ability to borrow at affordable rates as a funding crunch approaches. Greece has said its funding needs are met until mid-March, and it will need to refinance about 20 billion euros of debt maturing in April and May. It is preparing to tap the euro debt market with its second bond issue this year. Rehn was due to meet Papandreou at 9:15 a.m. EST Monday, Papandreou's office said. Rehn was also expected to meet Katseli at 5 a.m. EST and Greek Labor Minister Andreas Loverdos at 10 a.m. EST.

Any progress toward an aid plan for Athens could boost the euro, as well as bond prices and banking stocks in Greece and other indebted countries on the euro zone's southern periphery. But any rally by the euro might be brief, because investors would also worry that a dangerous precedent was being set for Germany and other rich states in the zone to take on the liabilities of poorer ones.

Markets poised to punish Spain
Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, needed only one sentence to summarise the daunting scale of the challenges facing his country. "Unfortunately," he told a conference last week, "we find ourselves at a historic moment." With characteristic tartness, he was referring to Spain’s urgent need to curb public spending and liberalise a labour market that has left more than 4m people unemployed. Reforms are needed to make the economy more competitive and give the Socialist government’s austerity plan at least a chance of success.

Whatever happens in Athens, and regardless of whether stronger economies such as Germany are finally obliged to rescue the crisis-stricken Greeks, it is all but certain that the markets will soon turn their icy gaze once more on the other vulnerable economies of the eurozone. Spain, at four times the size of Greece in terms of its economy, is by far the largest of the budgetary laggards that will be facing renewed scrutiny, and probably higher financing costs, in the sovereign debt markets. The crucial issue for Spain and its European neighbours is the credibility of its "stability plan", which outlines sharp cuts in government spending, including a near-freeze on hiring civil servants, and aims to reduce the deficit from 11.4 per cent of gross domestic product last year to 3 per cent of GDP in 2013.

Although it will have no short-term impact, Madrid has also proposed increasing the retirement age to 67 from 65 to secure the financial health of the pensions system. José Luis Rodríguez Zapatero, prime minister, faces an uncomfortable spring, for very few economists, analysts or foreign investors are convinced either that the plans are plausible or that the government has the will or ability to implement them. "It is all air," said Luis Garicano, professor of economics and strategy at the London School of Economics, "just ideas that for the most part the government cannot put in place by itself, particularly on pensions or public employees."

Nomura said it was "not convinced" that the austerity plan could be implemented. Standard & Poor’s, the rating agency, predicted that the budget deficit would stay above 5 per cent of GDP until 2013, well above the eurozone’s widely abused 3 per cent limit. Critics of the austerity plan, which has been sent to Brussels for approval, point to three main obstacles. First, its economic forecasts are over-optimistic. Second, central government has direct control over only about a quarter of expenditure, with the rest disbursed by autonomous regional governments and the social security system. Third, the Socialists lack the necessary will.

When they talk to foreigners, Spanish ministers say they are determined to do whatever it takes to restore order to their public finances. But when they address their supporters at home, they emphasise plans to maintain social spending. The result is confusion and disarray. While José Manuel Campa, deputy finance minister, was sweet-talking bond investors in London with talk of budget discipline, José Blanco, public works minister and a senior Socialist, was back home berating foreign "speculators" and hinting at a foreign media plot against Spain and the euro. And a day after another deputy minister suggested the possibility of a public sector pay freeze to bolster the budget plans, Elena Salgado, finance minister, ruled out any such thing.

Mr Zapatero and his ministers, like their foreign peers, deserve some sympathy for their post-Keynesian hangover. At a meeting in London this month Mr Zapatero recalled that the same organisations and markets that had demanded massive fiscal stimulus to avert an economic depression were now complaining about the resulting fiscal deficits. "What a paradox. What a contradiction," he said. The bad news for Mr Zapatero and other deficit-burdened European prime ministers is that the markets, impersonal yet fickle, do not give a damn about paradoxes or who was to blame yesterday for a problem today.

Spain must, for its own sake and that of the eurozone, implement the measures announced with unwavering determination – and make them even tougher if the recession lasts longer than expected. Ms Salgado and her colleagues say they will do just that. The problem is that not enough people believe them.

RBS paid £1.3 billion bonuses on profit of just £1 billion
Royal Bank of Scotland paid its investment bankers £1.3bn in bonuses for making just £1bn in profit last year, not the record £5.7bn declared last week. The state-backed lender's results show that £4.7bn of the investment bank's worst losses were hived off to the "non-core" division being wound down. Although the bank's split into "core" and "non-core" units has been well explained, the separation generously flattered the investment bank's numbers and allowed management to present it as a record year for the division. Stephen Hester, chief executive, used the performance to justify the £1.3bn bonuses paid to investment bankers, at least 100 of which received more than £1m.
RBS's numbers show that impairments in the "core" investment bank totalled just £640m, helping it produce £5.7bn of the £8.3bn of profits made by the bank's ongoing businesses. By contrast, investment banking impairments dumped in the "non-core" bank totalled £4.7bn. No other UK bank separates out its "toxic" legacy debt. Barclays' investment bank, Barclays Capital, suffered £2.6bn of impairments last year, cutting profits to £2.46bn. However, analysts point out that RBS, now 84pc owned by the state, has taken more conservative marks on its assets than peers, which contributed to the size of the "non-core" writedowns.

Few rivals have removed the "toxic" assets from their investment bank. Credit Suisse has hived assets off but is linking bonus payments to the performance of the portfolio. Last week, Commerzbank, the German lender that was rescued by Berlin, said it was not paying any bonuses at all in its investment bank. In contrast with RBS, Michael Reuther, head of Commerzbank's corporates & markets division, said the lender would still be able to attract and retain talent. RBS's revised profit numbers make no difference to its industry-best 27pc compensation-to-income ratio – the standard comparator for bonus practices. The ratio takes no account of loans that turn sour, only the income generated.

RBS did not dispute the analysis but declined to comment. Insiders pointed out that roughly 7,000 jobs have been cut in the investment bank in the past two years and the management overhauled. They produced record revenues despite a huge restructuring. The "non-core" assets are now handled by an entirely different team. UKFI was fully aware of the arrangement when signing off the bonus on behalf of taxpayers.

Pound under attack as debt worries grow
The pound faces a rough week with uncertainty over the outcome of the general election and concerns over the public finances threatening to trigger a new wave of selling. A dwindling Conservative poll lead is heightening fears of a hung parliament. Fears over Greek debt, which were undermining the euro, have begun to hit sterling, as concerns have grown that worries over sovereign debt could spread. George Papandreou, the Greek prime minister, will hold talks with Angela Merkel, the German chancellor, on Friday. Their meeting comes amid a report that a German-led bailout for Greece will involve KfW, the state-owned development bank, buying or guaranteeing Greek government bonds.

However, several leading private German banks have said they will not buy any more Greek debt and yesterday the German finance ministry refused to comment on the plan. Greece’s woes had hit the euro hard but last week attention shifted to sterling, which was undermined by weak investment data and dovish comments from Mervyn King, the Bank of England governor, and some of his monetary policy committee (MPC) colleagues.

The MPC, which meets this week, is set to leave Bank rate unchanged at 0.5% and stick with the existing £200 billion of quantitative easing, despite hints from some members that more could be done. The "shadow" MPC, which meets under the auspices of the Institute of Economic Affairs, has voted 6-3 to keep Bank rate on hold, with three members urging an immediate half-point rate rise. Several shadow MPC members said the Bank should be ready to announce further easing, with one, Peter Warburton, advocating an extra £25 billion immediately.

"Both hawks and doves agreed that the recent UK output data had been disappointingly weak and that there was a serious risk of a renewed downturn in activity," the shadow MPC’s minutes said. "The disagreement was whether this was primarily a demand-side problem or a supply-side malaise caused by the rise in the government spending ratio and the mass of new regulations that has been introduced." A report to be published this week by Centre Forum, the think tank, will call for quantitative easing to be replaced by direct measures to get credit flowing to businesses and households. "The Bank may have forestalled a total collapse in our financial system but quantitative easing has been less successful at stimulating the real economy," it said.

Cyber-whistleblower stuns Latvia with tax heist
Latvian officials struggled Wednesday to come to grips with an enigmatic group that stole millions of classified tax documents from government computers in a purported effort to expose waste and graft in Europe's weakest economy. The massive data theft from the tax authority's computer system has raised concerns about cybersecurity in the Baltic country. It has also embarrassed politicians and other public officials whose income and wealth — often many times the national average — are being exposed to the public at a time when Latvia is undergoing painful budget cutbacks to rebound from a severe recession.

News of the electronic security breach surfaced last week, when an organization calling itself the People's Army of the Fourth Awakening told Latvian TV it had downloaded millions of classified documents over several months from the revenue service's Web site. One of the group's members, who uses the name "Neo" — apparently in reference to the hero of the popular "Matrix" films — has been making some of the documents available on the Internet. On Wednesday "Neo" published salaries of members of Latvia's police force and, in comments on a Twitter account, said "I call on the police union to analyze the data and determine whether the salary reform is fair and to continue the fight against crime."

Earlier this week "Neo" released data showing that the CEO of Riga's heating company, Aris Zigurs, paid himself a 16,000 lat ($32,000) bonus last year — a hefty sum for a city-owned utility, especially at a time when many municipal workers have had their salaries slashed. Zigurs confirmed to Latvian media the data was accurate. It is unclear where "Neo" and the other organization members — if they exist — are located, though "Neo" has indicated that he or she is currently abroad. Even "Neo's" gender remains a mystery, though local media believe it is a man. "Who is Neo?" asked a Twitter entry on Wednesday. "Behind Neo's mask is something more than flesh, behind this mask is an idea that hopefully no one in power can stop."

While some government officials have questioned "Neo's" motives, many Latvians are supportive. "There is very little trust in Latvia's institutions right now, so anyone who can expose the system is going to be a hero," said Juris Kaza, a political commentator and blogger. Latvia's economy is the weakest in the European Union, with unemployment reaching 23 percent. It is currently carrying out painful social reforms, and many public employees have had their salaries slashed up to 50 percent. Top government officials earn approximately 2,000 lats ($4,000) a month and in some cases more, while teachers have seen their monthly salaries slashed by approximately one-third over the past year to some 300 lats ($600).

Discontent has soared, making it possible for cyber-activists such as "Neo" to win people's admiration. "Judging by the overall reaction, it seems that Latvians are getting some new heroes — a sort of Robin Hood," Maris Kucinskis, the head of parliament's national security council, told Latvian Radio on Tuesday. The nation's security council discussed the breach and expressed concern that only 50 percent of the country's 175 state-run data systems have security oversight. President Valdis Zatlers called for immediate action to install proper security on all systems.

Computer experts concluded that the breach did not constitute a cyber-attack and was the result of poorly developed software and systems management. Police, meanwhile, are searching for "Neo" and other suspects behind the data theft. Police chief Valdis Voins said Latvia has turned to other countries for assistance in the investigation. "One thing is clear now — we're only at the beginning of a long investigation," police spokeswoman Ieva Reksna said.

AIG agrees to $35.5 billion unit sale to Prudential
American International Group Inc agreed to a $35.5 billion sale of its Asian life insurance unit to Britain's Prudential Plc, in a deal that would allow the insurer to repay the U.S. government a substantial amount of its taxpayer bailout debt, sources familiar with the matter said on Sunday. The board of AIG approved the sale of American International Assurance (AIA) to Prudential, Britain's largest insurer, and the two sides are working on announcing a deal, the sources said. An announcement could come as soon as Monday, said the sources, who declined to be named because the deal is not yet public.

Prudential will pay about $25 billion in cash and the rest in equity, the sources said. Prudential is planning a $20 billion rights offering, backstopped by Credit Suisse Group AG, JPMorgan Chase & Co and HSBC Holdings PLC, to finance the deal, one of the sources said. The $10.5 billion equity component of the deal will include convertible and preferred stock, as well as about $5.5 billion in common stock, the source said. AIG, which is nearly 80 percent owned by the federal government after a $182.3 billion bailout, will pay the Federal Reserve Bank of New York about $16 billion from the deal proceeds for its preferred interest in a special purpose vehicle that holds AIA, the source said.

AIG is expected to use the rest of the money to further pay down the Federal Reserve's credit facility, the source said. It would be one of the largest overseas deals to date for a British firm and make Prudential one of the biggest insurers in Asia. Prudential already operates in 13 Asian markets where it has more than 11 million life customers. Asia, which accounted for 44 percent of its profits in 2008, is also seen as the engine of the group's future growth. AIG was advised by Citigroup and Goldman Sachs, while its board was advised by Blackstone Group, the source said. Credit Suisse, Lazard Ltd, JPMorgan and HSBC advised Prudential, the source said.

Hong Kong-based AIA is regarded as AIG's Asian crown jewel, a 90-year-old business that manages more than $60 billion of assets and provides coverage to about 20 million customers, or close to a third of AIG's total customer base. AIG had been planning an initial public offering for AIA in Hong Kong, in what was expected to be fetch more than $10 billion. Prudential, which has coveted the asset for a while, had been in talks with AIG on and off since at least the January of last year, the source said.

In the end, the amount of cash being offered under the Prudential deal proved to be very attractive to both AIG and the government, the source said. AIG is also in advanced talks to sell another large foreign life insurance unit, American Life Insurance Co, to MetLife Inc in a roughly $15 billion deal. Those talks hinge on a tax issue that the two sides are trying to resolve. So far, AIG has announced more than two dozen deals to sell assets for over $11.9 billion.

China risking property bubble with prices rising 20% a month
Property prices in Britain may be back on a downward trajectory, but there is one market where they are still white hot – China. The Asian superpower is in the midst of such a vast property boom, with prices leaping 20pc a month in some regions, that developments are taking on fairy-tale dimensions. Literally. The sight of a "real" alpine village rising from the grimy industrial suburbs of Huairou outside Beijing provokes an increasingly common reaction when discussing China's property market: "You've got to be kidding me, right?"

With its alpine clock tower soaring 200ft into the murk emitted by nearby chimneys, the "Spring Legend" development offers a Disney-style version of a lifestyle that the residents of Huairou and Beijing can realistically aspire to. "The air is so fresh it penetrates your heart," waxes the sales brochure, a claim that requires a suspension of belief equally demanded by Spring Legend's ersatz palm trees, faux red English phone boxes and plant pots brimming with plastic alpine flowers.

Making sense of such developments, along with the forests of empty new office blocks in Beijing and the tripling of land prices in some Chinese cities over the last 12 months, is now leading some heavyweight investors to cry "bubble". "Dubai times one thousand – or worse", was the verdict of Jim Chanos, the short-selling hedge fund manager who was among the first to predict the demise of Enron and says that the Chinese asset bubble will pop "sooner rather than later". George Soros has also given warning of "overheating", whilst two weeks ago Marc Faber, who runs an eponymous $300m (£196m) fund in Hong Kong went further, predicting "that the Chinese economy will decelerate very substantially in 2010 and could even crash".

Given that property and its ancillary industries account for up to 17pc of Chinese GDP and 25pc of investment in China it is clear that a crash in China's property market would have disastrous consequences – in China and beyond. On the face of it, the numbers do appear to be running hot. Chinese house prices spiked by 24pc in 2009 and sales of residential space rose by more than 80pc in some major cities like Beijing. In the most extreme example of property speculation on the southern Chinese island of Hainan, prices rose by 20pc in January alone as cash-flushed investors raced to capitalise on government plans to create an international tourist resort there.

The last Hainan property bubble burst spectacularly in the 1990s, from which it took a decade to recover, a warning that some pundits say China must heed. Professor Cao Jianhai at the Chinese Academy of Social Sciences, a government think tank, believes the crash could come within the year and when it does, it will badly expose China's banks who have lent huge amounts of money to businesses who have invested not in core-activities, but in taking quick property profits. "It's like injecting pork with water, falsely plumping up the market. A huge proportion of the current buying is speculative and totally unsustainable," said Professor Cao who is known as one of the "three swordsmen" of the Chinese property market because of his influence as an official economist.

"When prices stop rising as they soon will, the market condition will change very quickly. Landlords will all rush to sell out to realise their cash with disastrous consequences," he told The Daily Telegraph. However, not everyone agrees with the bears. Look beyond the extremes of Hainan and some parts of Beijing and Shanghai, and there are in fact persuasive reasons to think that Chinese property prices are more sustainable than they first appear.

With China expecting its urban population to increase by 400m over the next 25 years, underlying demand will remain strong, argues Rosealea Yao, property specialist at the Beijing-based Dragonomics consultancy.
For this reason, comparisons with the Japanese property bubble with the 1980s, where businesses made more money from property than their core activities, are also wide of the mark, since China, unlike Japan at that time, is still rapidly urbanizing. China's one-child policy also means that couples buying for the first time are frequently supported by two sets of grandparents, often with undeclared stores of wealth that are not reflected in official household income surveys.

"Current prices levels are quite sustainable in our view, and we do not see an imminent collapse in the market," Ms Yao said. "Prices will stay relatively healthy for some time to come." And even if a crunch does come, its impact will be limited by China's prudent mortgage rules that require buyers to put down a minimum of 20pc deposit, protecting banks that in any case have not securitised their mortgage books, as US and British banks did to such disastrous effect. Those keeping the faith, including many Chinese buyers, also have a fundamental belief that China's government has too much at stake, economically and politically, to allow the market to seriously falter.

"The government can't cool the market too hard because they rely on it too much," concludes Ms Yao, "They simply cannot afford to allow it to collapse and they do have the policy tools and resources to prevent it from doing so." Back in the show home at Spring Legend business certainly appears to be brisk. A fresh-faced sales agent points to the little red "sold" signs affixed to 22 of the 29 blocks in the nearly completed first phase of the development. "We opened for sales a year ago and the first residents will be moving in May," he says, asking not "if" but "how many" units we might be interested in buying.

Even before the new owners receive their keys they can count a handsome paper profit, with a three-bedroomed apartment that cost £87,000 a year ago now selling for £106,000 – a gain of more than 20pc. Certainly among the buyers in Spring Legend, there was confidence that prices would keep on rising, despite some grumbles about the developer deliberately withholding completed houses to take advantage of rising prices – a common trick in the Chinese property market.

"The market will not collapse at all," said one owner, a 50-year-old woman out inspecting her property, "Beijing is such a large city and the government has promised to make it an international one. It will only expand. Prices are still lower than in other major cities, like Moscow for example." Such confidence is widespread in China, and perhaps one more reason for the smart money to bet that the short-sellers like Jim Chanos are premature in their predictions. When it comes to China's property market, it may be some years before the relevant parties – buyers, investors, developers and indeed the Chinese government itself – discovers who exactly has been kidding whom.

Survey shows China manufacturing growth slowed
Growth in China's manufacturing slowed in February amid efforts to curb overcapacity in some industries and cool inflation by tightening control over bank lending, two surveys showed Monday. The state-affiliated China Federation of Logistics and Purchasing said its purchasing managers index, or PMI, slipped to 52 in February from January's 55.8 on a 100-point scale. Numbers above 50 show manufacturing activity expanding. There were clear signs of weakening in many components of the index, the federation said in a statement.

"Given changing trends in domestic and overseas demand, China's economic recovery faces definite uncertainties. We should pay close attention to the weakening in overseas orders," it cited federation analyst Li Zhangqun as saying. A separate index issued by HSBC Corp. fell to 55.8 in February from 57.6 in January and 56.1 in December. Despite the decline, HSBC's assessment was more upbeat than that of the federation. The survey found strong new business growth and export sales at their highest level since March 2005, thanks to improved conditions among China's trading partners.

"Growth momentum for China's manufacturing sector remains strong, pointing to a further acceleration in industrial activities in the coming quarters," Qu Hongbin, chief economist for China at HSBC said in a comment on the survey. China's economic growth accelerated to 10.9 percent over a year earlier in the final quarter of 2009, driven by 4 trillion yuan ($586 billion) in stimulus measures. Subsidies and tax cuts boosted sales of home appliances and autos, fueling a rebound in industrial output. Now, the government has begun to tighten the lavish bank lending that supported the expansion but also has worsened overcapacity in many industries and is raising concerns over excess inflation. Banks have been ordered to set aside more reserves to control credit growth, and economists expect an interest rate increase this year.

"Overcapacity in manufacturing, wage pressure and more restrained government spending may have affected sentiment among purchasing managers," Jing Ulrich, JP Morgan's chairwoman of China equities, said in a report. The China Federation of Logistics and Purchasing's index for overseas orders was at 50.3 in February, barely in positive territory. Seasonal factors may also have contributed to the lower figure for last month. Industrial activity tends to slow during the Lunar New Year holidays, which this year fell in mid-February.

Soros Criticizes Obama's Bailouts
Billionaire investor George Soros, who helped U.S. President Barack Obama raise money for his presidential campaign in 2008, said Sunday he wasn't happy with Mr. Obama's handling of the financial crisis. Mr. Soros said the government should have taken over U.S. banks instead of bailing them out, a move he suggested would have been more popular with Americans. "The solution that he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution," Mr. Soros said in an interview with CNN. "He should have compulsorily replaced the capital that was lost."

After taking office at the start of 2009, Mr. Obama stuck to plans implemented by his predecessor George W. Bush to rescue banks by buying toxic assets from them and injecting capital into struggling lenders. As the financial sector recovered, the Obama administration put banks through stress tests to determine how much new capital they would need to withstand a severe recession, but steered clear of nationalizing them. Mr. Soros said China took a better approach to dealing with the financial crisis by forcing its banks to increase their minimum capital requirements. He suggested that Beijing has in recent years been more successful in its handling of economic policy than the U.S.

He said the "market fundamentalist" belief prevailing in the U.S. that markets correct their own excesses was wrong, and criticized former Federal Reserve Chairman Alan Greenspan for taking that line. Mr. Soros — who as chairman of Soros Fund Management, said he manages about $27 billion in assets — cited his own investment decisions as an example. "When I see a bubble, I buy that bubble, because that's how I make money," he said. Mr. Soros doubled his bet on gold at the end of 2009 as prices for the metal rose, a filing showed this month, a few weeks after Mr. Soros called gold the new asset bubble.

Mr. Soros said the U.S. and China needed to work closely to manage the global economy, calling recent signs of bilateral tension worrying. The two countries disagreed over how to tackle global warming during a meeting in Copenhagen recently, and have faced off over trade and currency issues. Mr. Obama met with Tibet's exiled spiritual leader the Dalai Lama of Tibet in the White House this month, despite official protests from China. "Unless we stop it in the next few months, I think that we could yet fall back into a situation that prevailed in the 1930s, where each country is for itself," Mr. Soros said. He said trade protectionism was his top concern, in terms of the global economy's outlook.

Turning to Europe, Mr. Soros said worries about Greece's debt had exposed a flaw in the euro's construction, namely that the 16 euro zone countries, which share a single currency, had a common central bank but not a common Treasury. "Either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it may not survive," said Mr. Soros. Soros Fund Management is one of several heavyweight hedge funds that are betting that the Greek-debt woes will push the euro lower. In what he suggested was an encouraging step in the U.S. , Mr. Soros said Mr. Obama appeared to be taking a tougher political stance on issues, especially health care, after the Democrats lost a key Senate seat in January.

Republican Scott Brown won the Massachusetts special election to replace the late Sen. Edward Kennedy, in an upset win that cost the Senate Democrats their 60-vote supermajority and threw into question their ability to pass a sweeping health-care overhaul. Mr. Obama unveiled a $950 billion health-care overhaul plan earlier this month, laying the groundwork for his party to try to push legislation through Congress without Republican support "I think he got the message in Massachusetts," Mr. Soros said.

Plastic rubbish blights Atlantic Ocean
Scientists have discovered an area of the North Atlantic Ocean where plastic debris accumulates. The region is said to compare with the well-documented "great Pacific garbage patch". Kara Lavender Law of the Sea Education Association told the BBC that the issue of plastics had been "largely ignored" in the Atlantic. She announced the findings of a two-decade-long study at the Ocean Sciences Meeting in Portland, Oregon, US. The work is the conclusion of the longest and most extensive record of plastic marine debris in any ocean basin.

Scientists and students from the SEA collected plastic and marine debris in fine mesh nets that were towed behind a research vessel. The nets dragged along were half-in and half-out of the water, picking up debris and small marine organisms from the sea surface. The researchers carried out 6,100 tows in areas of the Caribbean and the North Atlantic - off the coast of the US. More than half of these expeditions revealed floating pieces of plastic on the water surface. These were pieces of low-density plastic that are used to make many consumer products, including plastic bags.

Dr Lavender Law said that the pieces of plastic she and her team picked up in the nets were generally very small - up to 1cm across. "We found a region fairly far north in the Atlantic Ocean where this debris appears to be concentrated and remains over long periods of time," she explained. "More than 80% of the plastic pieces we collected in the tows were found between 22 and 38 degrees north. So we have a latitude for [where this] rubbish seems to accumulate," she said.

The maximum "plastic density" was 200,000 pieces of debris per square kilometre. "That's a maximum that is comparable with the Great Pacific Garbage Patch," said Dr Lavender Law.
But she pointed out that there was not yet a clear estimate of the size of the patches in either the Pacific or the Atlantic. "You can think of it in a similar way [to the Pacific Garbage Patch], but I think the word 'patch' can be misleading. This is widely dispersed and it's small pieces of plastic," she said. The impacts on the marine environment of the plastics were still unknown, added the researcher. "But we know that many marine organisms are consuming these plastics and we know this has a bad effect on seabirds in particular," she told BBC News.

Nikolai Maximenko from University of Hawaii, who was not involved in the study, said that it was very important to continue the research to find out the impacts of plastic on the marine ecosystem. He told BBC News: "We don't know how much is consumed by living organisms; we don't have enough data. "I think this is a big target for the next decade - a global network to observe plastics in the ocean."


VK said...

Oh my!

A tenth of global credit has evaporated in a year, cutting lending by $3 trillion. The recovery in debt securities ran out of steam in the last three months of 2009. Volume fell by 10pc to $1,778bn. Net issuance dropped by a third to $303bn.

*whistlin' past the graveyard*

Tom said...

Hi Ilargi,

Glad to hear that you are OK.

Since you appeared to have moved on from your indication of a few days back of "not discussing peak oil and finance", are your faithful readers again at liberty to comment on this matter?

For an alt perspective on the relationship between arcane devices such as CDS and Hubbert's Peak (i.e., contrary to your own) suggest that you read my thoughts on this matter (links below).

Obviously, because I read all your posts - does not mean that you should pay my scribbling the time of day. But one can always hope...

Truly yours in open minded discourse,

Tom Therramus

1. Peak Oil and Investment Risk

2. Did Oil Price Volatility Cause the Financial Crisis

3. Oil caused recession, not Wall Street

WgS said...

If only we could swap the question "What is profitable?" for the question "What is valuable?" we might rob the oceans of their toxic debris...

Ilargi said...


I don't want to have the same conversation over and over, and judging from what I see going through your TOD article, that's what it'll be.

Did peak oil repeal Glass-Steagall? Did it create default swaps? I think the answer is overly obvious.

Look, I did energy for years, it's not as if I'm blindsided. The same goes for Stoneleigh, And we both come to the same conclusion: peak oil ain't done the deed. Are we both that stupid? Say what you will about me, but there's very few people out there who have anything on her, be it in energy or finance.

Tom, I suggest you go to WIkipedia and read the entries on both Ponzi Schemes and Credit Default Swaps. I suggest that's a good exercise for anyone who read this, by the way. And after you've done that, maybe we can talk.

But the volatility in oil prices did not cause what we're immersed in right now, that much is clear.


DIYer said...

I sometimes think I’m talking to a crowd comparable best to the Red State parochial faithful, where in the end and down the line G-d does it all.

Well you know Ilargi, all you have to do is make a couple of accurate predictions and folks will think you're clairvoyant. I mean, there I was with all my retirement accounts tied up in oil & gas thinking they would ascend into the stratosphere and carry me there. You and Stoneleigh said "no they won't" ... and here I am.

Greenpa said...

"[..] nobody in their right mind would use the swap-like "

My own sad experience there- the phrase "nobody in their right mind!" is comforting, when arguing. Unfortunately it has the power of prophecy, and is not protective, at all.

Years ago, I bought a very ugly but mechanically sound truck to use as a utility vehicle on the farm. Ugly- because then we could just leave it in the field and not worry, since "nobody in their right mind would ever steal it!"

Sure enough. Some people who were not in their right mind stole it.

I'm afraid, at this point, the same dynamic applies within the financial spheres.

Ilargi said...

"I mean, there I was with all my retirement accounts tied up in oil & gas thinking they would ascend into the stratosphere and carry me there. You and Stoneleigh said "no they won't" ... and here I am."

Yeah, well, I'm still leaving open the option of starting my own religion.

jal said...

“... CDS were created for the specific purpose of avoiding regulatory reserve requirements, both for financial institutions and for countries (Greece!).”

I would add, “To avoid paying taxes, to avoid supporting the socialist system”
[quote]Financial intermediation - when it works properly - is by definition a function of matching buyers and sellers of money. That is, by definition it is a parasitic function that draws its "income" off the transactional stream of commerce.[/quote]

The biggest host are the capitalists.
Preying directly on the middle class was a failed attempt.

$$$Dollar$$$ said...

I just don't get this market. Things are actually dipping back down again on even the manipulated indicators and this market just refuses to obey reality and continues its rocket shoot higher. Even Dylan Ratigan was mouthing something about DOW 12000 or something like that.

Blindweb said...

It's the debt stupid:

The debt is intricately related to the lack of recognition of the consequences of peak oil. Derivatives are used to hide and profit from the debt. To say peak oil didn't cause the financial crisis is a complete lack of understanding of the nature of cause and effect. Outside the laboratory cause and effect can't be traced a->b. There are different hierarchies of cause. Peak oil is a once in a millennium sized event. It trumps everything else. To say it didn't cause the financial crisis is ignorant. Try saying: peak oil was the greater cause but derivative were a problem also... (It trumps everything except for the lack of understanding of the limits of using the words cause and effect. When you arbitrarily decide how far back in time you are going to start your analysis you are always going to run into trouble every time. That traces back to the origins of Western Civilization and Judeo-Christianity, and I think may be as big of contributor to the fall of the west as oil)

jal said...

Re.: debt or peak oil as cause of the crash

Irrelevant! The horse has left the barn!

History will be written by the survivors.

This History will not repeat itself.

Yesterday is gone! Prepare for tomorrow!

Ilargi said...


"When you arbitrarily decide how far back in time you are going to start your analysis you are always going to run into trouble every time."

That is the problem with your idea, not mine. Yes, in the end all is energy. My birth, my death, all my words in between. And that, therefore, doesn't answer a single thing. Or it does all things.

What remains is your lack of understanding of finance in general and derivatives in particular.

What makes people like you think they're all that smart escapes me. Lack of alternatives? Fear?

Or think of it this way: the CDS issue makes clear, once more, that our economies are Ponzi based. Do you understand why, and to what extent, that is true?

And if you do, please tell me what the effect of peak oil has been on Bernie Madoff.


Phyll said...

IMO the wolves at Goldman knew about Peak Oil and perhaps encouraged or at least did not dissuade the pumping-up of debt. If you’re going to place bets in favor of corporate and sovereign collapse, why not blow the bubble as big as you can. After all, they’re in the business of creating profit for themselves and are not overly worried about the general course of human events or the stupidity of nations.

And when the unwinding begins why not threaten martial law and have your bets covered by the sovereigns you’re betting against. If they were around for tulip mania, they would have packaged tulip-backed securities and taken out CDS’ against them, knowing the whole thing would eventually collapse. Peak Oil was and is a guarantee that a lot of debt and GDP will soon vanish. The mortgage mania popped before hitting the Peak Oil finisher. Peak Oil, if you're fully aware of its implications guarantees your bets.

And why feel guilty about profiting off of others misfortunes, it was going to happen anyway. Right? Now, where can I find a nice war to finance.

Bigelow said...

@Ilargi “Perhaps once speculators force entire countries to their knees, it will become clearer.”

How much clearer are we looking for?

Mr. Martian Armstrong suggests we should not tar all of Wall Street with the same brush. But “five banks have over 95 percent of the market for over-the-counter derivatives.”
15 Years Ago, the Combined Assets of the 6 Biggest Banks Totaled 17% of GDP... By 2006, 55% ... Now, 63%

Ms. Catherine A. Fitts demonstrated 9 years ago where casino culture controlling interests lay:
“My numbers showed` that Dave the drug man had bought up not only Sam's companies, but ---if you throw in other organized crime cash flows----a controlling position in about most everything on the New York Stock Exchange.”
Narcodollars for Beginners

And here is yet another criminal variation:

“A developing country borrows money.
• It cannot pay it back.
• A vulture fund buys the debt at a heavy discount to reflect the possibility that it may never get the money.
• The rich governments then say they are writing off much of the developing country's debts.
• The vulture fund is still there and says it will not write anything off and will sue to get the money.
Recently, two funds won the right to recover $30m from Liberia, which is over 5% of the government's annual revenue.”
Vulture funds: UK MPs propose law to end debt relief profiteering Greg Palast, BBC

el gallinazo said...

Ilargi said...

"And if you do, please tell me what the effect of peak oil has been on Bernie Madoff. "

He had to pay more to tank up is Beemer?

It seems that we are getting an influx of TOD evangelistas here who feel threatened that anything, including the global Ponzi scheme, could overshadow Peak Oil, even temporarily. Peak Oil has become, in a sense, the Source, the God, from which all things are derived.

Which is not to negate the reality of PO. Anyone in his "right mind" meaning with an IQ over 70 knows it to be true. (Actually, that is not the case. Technically, the "smartest" guy I know, a Russian born math genius professor emeritus of material science is a PO denier :-) He is politically a Neocon, however. So much for reason.

I can sympathize with them. I spent 5 years in school learning Russian and now I need to learn Spanish. If only I could get Latin America to convert to Russian, my life would be easier. It's a bitch having to learn something new after the age of 10.

For me the winning argument for Ponzi finance over PO, vis-a-vis GD v. 2.0, is GD v. 1.0. The USA didn't hit peak oil for 43 years after its start. What's so hard to understand?

Private said...

For anyone who is interested in how Derivatives and Swaps work, where they came from etc. I highly recommend reading "Traders, Guns, and Money" by Satyajit Das. Das was involved in trading dervatives going back to the 1970's and he has a very interesting, sometimes tounge-in-cheek look at it all. It's very entertaining and full of good info. I tend to agree with his opinion, that most of the SIV's, CDS's and other structured investment vehicles that continued to be created (or evolve) were as a result of shrinking profit margains as the competition caught up. He makes the argument that subprime, Alt-A loan programs were created to keep the profit margains high on these investment vehicles.

It's a fun read but also very imformative.

Coy Ote said...

"And if you do, please tell me what the effect of peak oil has been on Bernie Madoff."

Not a damn thing! He was a monumental crook, the kind that, if there are enough of them, can bring down an empire.
As a matter of fact, maybe they will... the jury is still out.

I came to TAE as a neophyte, believing peak oil caused this crash, but folks like Ilargi, StoneLady, El G and other astute people on this board have opened my eyes to some things. (to be fair, also the Z-Hedge, Karl, etc.)

The corrupt financial world, I have discovered through others, was overdue by it's own virtual schemes and corruption for a huge "re-adjustment" crash.

As to any kind of long-term recovery from this situation (which is still in it's infancy by the way IMO), yes, I think energy will have a bearing on that, a deleterious one to be sure. There may well never be a recovery!

But no, P.O. did not cause it. And Jal, I agree with you--so what? Now we have to deal with this predicament in the best way we can. And all ideas seem to include downsize, localize, simplify!

Coy Ote said...

"...It's a bitch having to learn something new after the age of 10..."

Or... is that 10 x 6 ;-)

el gallinazo said...

Interesting. Now Phyll uses the threat of PO in the future as the motivating factor for the oligarchs to float their great global Ponzi. So it was PO after all - but the psychological threat of it. I think that they would have run this Ponzi scheme regardless. It is the growth and collapse of the Elliott 5th wave and has been going on for centuries. Maybe the tulip crash was caused by the threat of peak wind to run their sailing ships and mills.

Anyway, I'm done with that. As I say to the Jehovah Witnesses, please leave your literature across the street at the house of the loud, obnoxious drunk.

What I a interested in is what is going to stop the Fed from growing its (nominal) balance sheet with toxic waste and monetization? When the Fed's balance sheet stops to grow, TSHTF almost immediately. Not that it can't happen anyway. So when, how, and why? As Prince Hamlet would say, "To grow or not to grow. That is the question." I wish more light was shown on that here.

Blindweb said...


I, unlike most, restrict my comments to things I know more of than the rest of the commentators. I've actually read and enjoyed your blog for quite some time. I really don't care if I'm smarter than you or not. Although I think it says something about someone who continuously has to pose the question...

Yes we are all energy. Excellent straw man. I think it should have been implicitly understood that when forming a hierarchy of cause one should stick to things relevant to our future well being.

Yes, the economy is a ponzi scheme. The economy was a ponzi scheme long before derivatives, making your thesis null and void. The whole thing was coming down no matter what. Now why was that? Maybe because the global population fueled by fossilized-sunlight-crack felt endless expansion was inevitable. Nixon went off the gold standard in 1971. Fiat currency has been around for centuries. Derivatives are just the latest in a long line of paper. And I actually wonder whether under the assumption, made by previous generations, of endless civilization growth, possibly off the planet, and technological advancement whether these would be schemes at all. Oh look, back to peak oil again, the limiting factor.

My point being your analysis of derivatives is negligibly relevant to the real problem facing the world, and actually distracting. It's coming down one was or another. I know, how about when we ban CDS we ban shorting selling too! Let's let countries and companies hide all their flaws. That'll work out well. (Yes I understand finance. I'm not some peak-oil scientist tool) I'm going outside to work on my garden.

And for the record I don't like the TheOilDrum much either. It's the same junk. Every time I go there, there's some overly esoteric diatribe that's akin to rearranging the chairs on the titanic.

Top Cat said...

a blended rant on Soros & CDS's

I regard George Soros as an 'Enlightened Tapeworm"

He has been fully aware from their conception about CDS's and has used this knowledge to personally profit from it.

To suggest otherwise is way beyond naivete. The man is a Player.

The 'enlightened' part of Soros is that he understands the nature of parasitism.

(Parasitism is yet another in a long line of "isms" infecting the body politik)

Some parasites blindly engorge themselves until they kill the host, others have a feed back trigger that stops them just short of killing the host while a third manifestation of parasitism realizes that a maximum optimal return on blood sucking can be had if the host is left in pretty good shape so it can produce the maximum reliable volume of blood/golden eggs over the Long Run.

Soros is in the last category.

Not being born to Royal blood, he never the less seems to have adopted "Noblesse oblige" (a term generally used to imply that with wealth, power and prestige come responsibilities.)

In the titanic battle to the death on Planet Earth between Savers and Gamblers, he still ranks as a Gambler, albeit one with somewhat of a conscience.

Those who control the generally understood meaning of words and context control the dialogue.

Gamblers love to euphemize their public persona as anything but a 'something for nothing' mentality, which is cheap and tawdry and, well, parasitic.

Gamblers mythologize themselves as performing a useful job, as say 'investors' allocating resources to worthy enterprises and withholding resources from bad enterprises. Sounds good on paper. Mary Poppins would approve.

But the reality is that CDS's being bets on bets on bets, bare no relationship to Reality whatsoever, and no relationship to a useful or socially redeeming creation or occupation.

CDS's are Black Magic. Voodoo birthed like the financial equivalent of Rosemary's Baby by Organized Criminal Syndicates of gambling addicts mesmerized by the phantom of Infinite Wealth. Faust would approve.

CDS's are like someone talking about the theory of music theory's concept of possibly creating aesthetically pleasing music and without ever actually working hard to learn how to master an instrument to thus realize playing actual music. Is that clear? Their purpose is to obfuscate the Ponzi.

CDS's are true Monsters from the deep, having their origin in the absolutely worst parts of the human imagination.

They are more than capable of destroying the entire planet's wealth and financial infrastructure, and they are doing precisely that, with or without PO.

el gallinazo said...

Look at the volume of the S&P500 today. You can have a million holders of a stock, but if 999,999 are eating lunch and one of them sells, he sets the market. We have two robots setting the market. One has a jersey logo of Jules Verne's giant squid and the other the bald pate and mustache of JP Morgan. And they both have their batteries on charge by being plugged into the Fed. They are playing a game of catch with S&P500 futures while everyone else watches.

Tero said...
This comment has been removed by the author.
Bryan McNett said...

>Did peak oil repeal Glass-
>Steagall? Did it create default
>swaps? I think the answer is
>overly obvious.

Also this: The Great Depression, The Panic of 1907, and the many panics of the 1800s - all happened despite *rising* fossil fuel production.

Throughout The Great Depression, both the price and production of oil continued to rise.

Max said...

In a deflationary scenario I would expect cuts in oil investment, but BP plan big investment (no guarantee of a return, or of producing lots of oil). BP are lucky, they have lots of cash to hand. Cash is king when debt is scarce.

'BP plans to pump £1bn a year into North Sea'

BP annual profit 2008-2009 $14bn

£1bn = $1.44bn

Bryan McNett said...

physics tells us that there exists no causality, and that with the exception of the second law of thermodynamics, time does not even go forward.

peak oil happened in 2005 and its consequences will be life-changing for anyone born after 1960. this will take decades to play out.

the ongoing economic collapse has far more serious proximate consequences for everyone alive.

what's important right now is to:

1. unplug yourself from the propaganda machine. unplug from all major political parties, financial institutions, and major media outlets.

2. prepare for the future to be worse: get rid of old debts and avoid new ones. get on the non-discretionary side of the economy.

the ultimate cause of the collapse makes for interesting chat, but the boat is sinking now. there'll be plenty of time to discuss ultimate causes once you're in the lifeboat.

Sandra said...

OBAMA and Bernanke are featured in a movie-- about greedy hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold nearly into bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and revealed some of their secrets. DVD is everywhere but cheaper at

Reluctant Poseidon Hamster said...

Ilargi: "French Bretagne, or Brittany for those English readers who are spelling-challenged..."

Conquer a land and you can spell it as you like.

Lovely people, btw. Hope the sun now shines brightly on you all there.

Greenpa said...

Bigelow- "Recently, two funds won the right to recover $30m from Liberia, which is over 5% of the government's annual revenue.”

Which makes me seriously wonder: Does Liberia have an army? access to training and arms? What the heck is their incentive to not just send out a demolitions squad and blow the people running the funds to hell??

I don't get it. Hell, they wouldn't even have to pay hitmen.

Bigelow said...

“To meet the Obama administration’s targets for cutting greenhouse gas emissions, some researchers say, Americans may have to experience a sobering reality: gas at $7 a gallon.”
Fuel Taxes Must Rise, Harvard Researchers Say

shargash said...

Derivatives were certainly the major factor in the meltdown of 2008. But I view them largely as amplifiers of a dysfunctional economy. We didn't need derivatives to have a ponzi economy -- Fanny/Freddie, easy credit, stagnant wages, bankruptcy "reform", a captured and corrupt political system, and more, played a role. The problem is primarily a credit bubble, with derivatives causing the bubble to get vastly larger, and vastly more damaging, than otherwise possible. But I don't think they caused the credit bubble per se.

IMO, the credit bubble was caused by a confluence of (1) rising cost of living, (2) stagnant real wages, (3) relentless consumerist propaganda, and (4) easy credit to the consumer. We substituted credit growth for income growth to allow an unsustainable rise in living standards. The origins of the credit bubble go back to the late 70s or early 80s.

The relentless consumerist propaganda goes back much further, of course, at least to Edward Bernays. I don't think gets nearly enough attention as a cause of the current problems, just as it wasn't given enough attention as one of the causes of the Great Depression. Why would an ordinary person run up $50,000 in credit card debt? My parents & grandparents would no more have done that than they would have rammed hot pokers in their eyes.

Coming out of the stagflation of the 70s, there was a more-or-less deliberate attempt to crush wages by shipping jobs overseas. At the same time easy credit was extended to supplement wages; you can't grow a consumerist economy if you just crush wages.

In a sick sense, the globalized credit bubble was brilliant. It reduced the two major drains on corporate profits (labor and commodity costs) by opening third world markets, while AT THE SAME TIME allowing the very people whose wages were being crushed to buy ever increasing amounts of useless crap. Sheer genius.

Where I think oil plays in this is as the driver of the stagflation of the 70s. If America had not peaked and still had abundant cheap energy, would there have been stagflation? Would there have been the drive towards globalization? Would there have been a "morning in America" and a subsequent credit bubble? Possibly. But I still think oil was a big factor.

Gravity said...

"The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week."

This is not the same thing I was fumbling with a few days back, but what exactly happens when this is below 1? Would this signify that fractional reserve mechanisms are no longer causing any increase in the money supply? How would this relate to inflation? Inquiring minds want to misspel excessively.

Debora said...

Peak oil trumps everything for sure. What gets me is are the people that think the market will come back. Love the title of this Swaps and Robbers..............Debora Edholm

Ilargi said...

" Gravity said...
"The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week."

This is not the same thing I was fumbling with a few days back, but what exactly happens when this is below 1?"

Right around here, we call this the debt deflation trap.

We always have too. Nothing new on that front.

You can run, but you can't hide, that sort of thing. It'll all get much worse.


Paleocon said...

When dragons grow too mighty
To slay with pen or sword
I grow weary of the battle
And the storm I walk toward

Funny how when I take an introspective turn I wander back 25 or 30 years to the music of my youth.

"Financialization" of the economy is the dragon we face...and it has grown larger than the gov't or industry. Its Achilles heel, though, is that it depends on the lifeblood of commerce to feed it, so the only way to starve it is to first choke the economy.

Unfortunately, the gov't is a parasitic symbiote with finance. It may well have to die as well.

Tom said...

Apols that I have not been able to respond.

Day job + family + ADHD

There seems to be a lot to respond too - so here goes.

One recurring theme in the comments is:

Explain how Peak Oil (PO) invented CDSs etc.

IMO phrasing it like this mixes up the ontogeny of financial devices such as CDSs with what they eventually differentiated into.

Derivatives may have been initially used to offset risk etc by airlines, farmers and the like, but over time other more malign uses were discovered.

Another comment theme is that "the run-up to PO of the last decade is too short to explain the evolution of financial crisis"....forgive my paraphrasing.

Two things here.

First, in my articles linked to above you'll find data/charts showing that the onset of oil price instability appears to have started sometime in the mid-1990s. Interestingly, this timing coincides with what Steve from Virginia at the TOD refers to as "Peak Oil Availability". Steve noted that oil price in inflation-adjusted dollars reached its minimum in about 1998-1999. After this time, he speculated that as demand grew, supply was not able to keep up, and the effect was felt in price, rather than in increased production.

Second,in these articles you'll also find data and discussion of what was learned by the financial markets from domestic US PO in the early 1970s and the Black Monday Crash of the mid-1980s.

Yet another theme in the comments is the issue of the Dutch Tulip Crisis and GD 1.0 etc not being explained by PO. A number of other astute commenters have already discussed on TAE that it is treacherous logic to presume that financial crises share common mechanisms.

I tried to get into this in response to VK on Sunday, but unfortunately the discussion was closed.

In response to my Oil Drum Essay Dave Ramsey (not sure if Dude of radio fame) posed me a related question. What makes you so sure that "This time it's different"....

Dave added the interesting suggestion that maybe I should look at price instablities in commodities prior to other crashes. Finding reliable data on Tulip prices in the mid 17th century is tough. However, I was able to track down reliable data on commodities including South and North Dakota Barley prices prior to and after the 1929 stock market crash. What I found is that barley price remained stable in the decade prior to the stock market crash of 1929, though did show strikingly higher levels of variance during the 2000s, including pulsed waves that appeared to correlate to spikes in the volatility oil price.

Bottom line - the barley price story is preliminary - but the data so far is not inconsistent with the hypothesis that.... "this time it may be different".

Post continues below.......

Tom said...

Continued from earlier comment by Tom.....

My discussion with Dave Ramsey is published as an appendix to the TOD essay for anyone curious to read it in more detail.

The final comment theme is perhaps the most impt of all...."Why try and understand - either way we're screwed."

I can't help it, but longterm, I am optimistic about our species. I believe that our aggressive drive to solve problems will eventually come to our aid.

Naive probably, but I am not so foolish as to think there is not going to be extreme pain. This is a euphemistic way of putting it, but sometimes the whole truth hurts too much. IMO the key initial step in the process of unleashing our ingenuity is to recognize what we're up against.

Democracies are obtuse and slow. We see this with the refusal of manyvoters to concern themselves with the real potential of a climate catastrophe by 2040. A common view is that Global Warming is a problem that the kids and grandkids may have to deal with.

Democracies only seem able to respond to proximate crises - the problem of the frog in the warming pot.

Now here's the thing. Volatility in the price of oil is an immediate problem, manifestly with us here and now. My analyses have led me to conclude that this volatility is the result of PO and it has been propagating instability into the financial markets for at least the last decade...ergo PO is a prime suspect in the current unpleasantness.

Maybe to a hammer everything looks like a nail. Nonetheless, it is my plan to keeping pounding away on what I believe to be the nature of the existential threat that at this very moment is at hand.

Tom Therramus

Ilargi said...


On the theme PO vs derivatives your hands are empty, you have nothing. What else is there to explain? You;re wavering somewhere between oil price instability and optimism about the species, but never one provable indication that there is a correlation between oil and finance. Not even one. Volatility in prices in itself means zilch. I can do that one with chick peas.

Anastasia said...

@ Phyll
MO the wolves at Goldman knew about Peak Oil

For sure. Lehman Brothers were talking about peak oil back as early as 2004. They had forecast the peak event to occur in 2008.

Ruben said...

Ahimsa is going to be very distressed when she learns chick peas caused the financial crisis.

Nelson said...

Here's our local news - not to steal Ilargi's thunder - but what happens in Cascadia makes for a nice microcosm:

"Oregon may invest pension money in troubled-bank rescues"

"In a deal being pitched as a home-run investment opportunity for the state pension fund, Oregon's public pensioners may be about to buy stakes in several of the 700 troubled banks around the country that are wallowing in bad loans.
The deal's unusual structure and hefty fees raise concerns,..."

The Greater Fool incarnate.

I. M. Nobody said...

@ Ruben

Sir, I think you may have maligned the lady. She has forthrightly declared herself in favor of murdering the evil little beasties and devouring their carcasses. Do you not think that she will now do so with reinforced certainty that she is doing God's work?

Blessed are they that would undertake the sisyphian struggle to rid the world of such cunning and destructive vegetables. :)

scandia said...

It is budget day in Canada to-day.
I'm sure the budget will be brilliant. Our best have been designing it in camera for 3 months!
It will please me immensely if the finance minister comes clean as to state of affairs, if he choses transparency so Cdns have clean data to work with.
Just maybe we've been a first world country without representation in Parliament for some other reason :)

Tom said...


Your original question to me was:

"Did peak oil repeal Glass-Steagall? Did it create default swaps? I think the answer is overly obvious."

My response was that it is shaky reasoning to posit that because something starts as X it can not become Y as time proceeds. Common sense teaches us this.

Some of the most profound examples of this process can be found in evolutionary biology - where an adaption is modified over time to assume a new and unexpected role. The process of how CDSs mutated from a tool of risk management to fraud may be akin to the mechanism that Stephen Jay Gould refers to as "exaption".

In your latest response you shift to suggesting that:

"On the theme PO vs derivatives your hands are empty, you have nothing. What else is there to explain?"

I think what you're getting at is that my analysis is correlative and therefore suspect. As a general rule it is tough to argue against this position. In mitigation, I keep emphasizing in discussion of my analysis that mixing correlation and causation can be dangerous.

The above being said, IMO the initial prodding and slicing and dicing the data in the manner that I and others are attempting to do is important. It lays the ground work for new ideas and more mechanistically based tests of hypothesis.

Also, I typically feel more comfortable backing up my reasoning and interpretations with data - even if that data is descriptive.

Best wishes,


Ahimsa said...

Another example of the crimes against humanity committed by the US Empire. Remember the white phosphorus and depleted uranium the US military used in Fallujah? Don't think that what was done in Fallujah will not be done within US borders!

"Fallujah Doctors Report Rise in Birth Defects"

Ahimsa said...

Hey, guys, what's going on with garbanzos?

I love hummus!


jal said...

How do you define ZERO SUM.
It so easy to understand.

Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome its transaction costs.

That’s why, the value of your new car goes down as soon as you drive it off the lot. The transaction costs are reflected in the price.

Market corrections, every 4-7 years, are when the transaction costs are reflected in the value of the assets.

From Ticker forum

“Finance in all it's forms, whether banking or insurance - produces nothing either.  Every dollar of such "activity" comes about only as a parasitic drain on production.  It cannot be otherwise.  Further, speculative activity in all of its forms produces losers in exact proportion to winners - if Goldman makes $100 million speculating on oil prices, someone else loses the same $100 million.  The net benefit to our nation's economy?  Zero - we merely moved money from one hand to another.

What is presently happening is not a market correction. Its the collapse of the financial and economic ponzi game.

scandia said...

Joe Bageant has a morning chuckle for us , " Moon Over Gringo Gulch!"

I. M. Nobody said...

@ Ahimsa

Almost nothing is known about the plans and intentions of the garbonzos. We are keeping a very close watch on them, but understanding vegetable mindsets is, well difficult. That said, it is rather suspicious that something calling itself a bean shows such a strong affinity for salad greens. Something not right about that. The same goes for the so called kidney bean. Surely, some kind of plot against humanity is being hatched. :)

I. M. Nobody said...

Given the thematic scheme for this round of whack-a-mole seems to be the search for exogenous causes for the implosive actions of the FIREmen, I humbly offer a link to the latest effusion by Pentagonal thorn Franklin "Chuck" Spinney.

Eisenhower's Nightmare Arrives
And a paper to which he refers in his article.

If I were the Lords Blankenstein or DiMAMmon, such trends would sure weigh on my self-interested mind.

Personally though, I still agree with Ilargi the Illustrious. It's gotta be the chick peas. :)

PS: Thanks to scandia for publicizing Bageant's latest post. I might not have checked his site today without that. IMHO, he is easily the sharpest tack in the carpet and an inspiration to all us mutts.

Bigelow said...

Thirteen more foreclosure notices in the small town paper this week; down a little from last week.

Of all the news lately, ex-FED Chair Paul Volcker saying the best thing to come from decades of financial innovation were the instant cash machines sticks with me.

Somehow he failed to mention the derivative contracts or bundled mortgages that have savaged individuals and countries alike.

And of course no names, no blame. Criminal finance is like the weather to most people. What are they going to do about it anyway?

gpp said...

CDS are not a problem.
Swaps are not a problem.

The bailouts are the poblem.
The government in its inadequate response to the crisis is the problem.

Without bailouts counterparties default and the CDS you bought will pay you nothing.

The playerz become insolvent and the game stops.

It would have been a whole lot cheaper to nationalize insolvent institutions and wipe out the shareholders and punish the creditors.

Unfortunatley that is not what happened and so the Games Must Go On.

I. M. Nobody said...

MOXNEWS weighs in on the Consumer Protection Agency conundrum with a link to this high-talent skit from Funny or Die.

Gravity said...
This comment has been removed by the author.
jal said...

"The playerz become insolvent and the game stops."

Wrong ... the players never lose money.

It was grannies money that they were using.
Cannot have that fact be known otherwise hell would have seemed like heaven.

Bigelow said...

“These people are all coming from the Business Roundtable…

The top 1% of the population has captured 75% of all economic activity in the past 5 years. They now control 70% of financial assets which is an all time record…

The economic elite have come to the decision that the U.S. middle class is obsolete…

Over 60% of the United States is living paycheck to paycheck right now…

They’ve launched a war on us…

They see us as an obstacle to further concentration of wealth and power globally…

Trillions of our dollars have been stolen, trillions of national wealth and somehow in the U.S. media this is not a story. They want to talk about Tiger Woods cheating on his wife…

People need to understand this. It’s all out in the open. It’s not like this is done in secrecy…

90% of our elected officials have the Business Roundtable to thank because those companies primarily funded their campaigns…

Free market Capitalism is done. It’s finished. This is straight up criminal activity.”
@13 minutes 15 seconds Keiser Report #22 David DeGraw, author of “The Economic Elite versus the People of the United States of America

carpe diem said...


Gravity said...

Only the dead have seen the end of the swaps.

Ilargi said...

Brilliant, and made me cry, which in turn makes me a man. No woman no cry turns to no cry no man.

Jon Stewart and the Boss


Stoneleigh said...

Hello Folks,

I wanted to let you know that I'll be doing a talk in Guelph (Golden Horseshoe/Toronto/Hamilton area) at 1:30pm on March 13th. If you would like directions, please contact Scandia at

Stoneleigh said...

I second Ilargi's recommendation of that Jon Stewart video clip. I loved it.

Bryan McNett said...

>The economic elite have come to
>the decision that the U.S. middle
>class is obsolete…

The U.S. middle class didn't speak when 1,000,000 Iraqis, 4,000,000 Vietnamese, and 15,000,000 Native Americans were made obsolete.

"When they came for the gypsies, I did not speak, for I am not
a gypsy. When they came for the Jews, I did not speak, because I
wasn't a Jew. When they came for the Catholics, I did not speak, for I am not a Catholic. And when they came for me, there was no one left to speak."

Bigelow said...

So does anyone suppose Music save save Humanity?

Bigelow said...

@Bryan McNett

>The economic elite have come to
>the decision that the U.S. middle
>class is obsolete…

“The U.S. middle class didn't speak when 1,000,000 Iraqis, 4,000,000 Vietnamese, and 15,000,000 Native Americans were made obsolete.

"When they came for the gypsies, I did not speak, for I am not
a gypsy. When they came for the Jews, I did not speak, because I
wasn't a Jew…””

I think your quote is spot on. And circa that period, Hitler, having observed the American propaganda machine in its infancy during the First World War, was a great admirer of its power. U.S. citizens were no match for the persuasiveness of it either, then or now.

David Delaney said...

I wonder what TAE's view is of the excerpts of the speech given on March 3 at the AGM of the RBC by RBC's president and CEO, Gordon Nixon. Seems like a bit of misdirection and self serving half truth to me. See text published by the Financial Post today at

I. M. Nobody said...

If you've already seen Jon Stewart's tribute, you might also find an extra tear while watching Ron Kovic's tribute to The Boss.

Stoneleigh said...

Tom T,

...the onset of oil price instability appears to have started sometime in the mid-1990s.

On can date our current expansion from a number of places, depending on what degree of trend you are considering. IMO the mania dates back to at least 1982, and the top was in 2000. The subsequent 2003-2007 rise was in nominal terms only. Prices move with changes in the money supply and the perception of scarcity, among other influences.

Yet another theme in the comments is the issue of the Dutch Tulip Crisis and GD 1.0 etc not being explained by PO. A number of other astute commenters have already discussed on TAE that it is treacherous logic to presume that financial crises share common mechanisms.

Part of what we are trying to point out here at TAE is that these crises do share a common mechanism - that of the pyramid scheme. People periodically rediscover leverage (usually after the lessons of the previous episode have been forgotten). Predictably tragic consequences follow, and the scale of the hangover is proportionate to the scale of the party that preceded it. We have just had the biggest party in history.

"This time it's different"....

This, along with "It's a new paradigm!", is a huge red flag for me. Excessive leverage never turns out differently.

If you're looking into financial crises and commodity prices, you could look at Kondratieff's work on long cycles.

I. M. Nobody said...

@ carpe diem

Secret negotiations were held in the hope of giving peas a chance. Unfortunately, water chestnut could not be persuaded to call off its amphibious invasion. Peas may someday have a chance, but there are reports of a split in the peas camp. :)

Tero said...
This comment has been removed by the author.
scandia said...

RE the Cdn budget I was pleased to learn we will have 7% GDP for the next 5 years thereby eliminating the deficit, our biggest and growing in Cdn history.
So no worries...:)

Tom said...

Hi Stoneleigh,

Tks for weighing in...

"IMO the mania dates back to at least 1982, and the top was in 2000."

My reference was to a figure in one of my essays that identify a cluster of spikes in oil price instability that first emerged in the mid 1990s and include the oil shock of 2008.

I perhaps should have been more specific about this reference. Looking back over the last 50 years one can see other clusters of these spikes that correspond roughly to US Peak Oil of the early 70s, the Iranian hostage crisis of the late 70s, the collapse of OPEC in the mid 80s, and the Gulf war.

"Part of what we are trying to point out here at TAE is that these crises do share a common mechanism - that of the pyramid scheme."

As mentioned before I admire both you and Ilargi immensely. I think we're on the same side. This being said the aspects of the puzzle that I spend a lot of time pondering, 1) How the "pyramid scheme" was underwritten (Oil IMO) 2) How instabilities associated with the oil depletion cycle are presently impacting the "pyramid scheme, and 3) The human response to all this.

With respect to the "human response" my curiosity has led me to ask questions about the potential of something that might have been called fraud if it had occurred on a smaller scale.

"This time it's different".... "This, along with "It's a new paradigm!", is a huge red flag for me."

In a sense I agree with you - its probably a matter of the phase length and amplitude of this particular event. The fossil fuel "bubble" of the last 250 years or so is just larger than what we've historically seen. So in my mind this time the large scale of the event confers novel characteristics.

"If you're looking into financial crises and commodity prices, you could look at Kondratieff's work on long cycles."

Thanks for the tip.

Best wishes,


ogardener said...

@ scandia said...

RE the Cdn budget I was pleased to learn we will have 7% GDP for the next 5 years thereby eliminating the deficit, our biggest and growing in Cdn history.
So no worries...:)

A natural resource play no doubt. They won't cut all the trees down will they?

Glendale Train

Rumor said...

It vexes me how difficult it is to find information on derivatives holdings, and particularly CDSs, by the big Canadian banks. I'm left with assumptions, and I don't like that as much.

jal said...

Remember what I said before ...

China lends money to the US. by buying t-bills. China wants more than promises and higher interest. China demands a contract. US puts up the assets of F&F. US cannot pay. Defaults. Assets are transfer to the China.
Management is replaced if it does not manage the assets as per the will of the new owner.

US debt is reduced. Rinse and wash. US deficit is manageable. Everyone is happy.

China has conquered USA without firing a shot. USA now becomes serfs of China instead of USA using the serfs from China.
Debt slavery continues in the USA but the income goes to new masters.

Now read the following about Fannie and Freddie.

Fannie, Freddie May Ask Banks to Eat $21 Billion of Sour Loans

“We are trying to be good stewards of taxpayer dollars and as part of that, it’s important that those dollars not go to loans that should not have been sold to us in the first place,” said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac."

The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.”
Everyone is entitled to put on their wish full thinking cap at less once a month.

Ed_Gorey said...

Big News: Fannie/Freddie Bondholders are told they might be holding an empty bag!

from the Washington Post:

"Rep. Barney Frank questions safety of Fannie Mae, Freddie Mac investments"

"An influential voice on Capitol Hill has unexpectedly called into question the safety of investing in Fannie Mae and Freddie Mac, raising the specter that investors who have lent money to the two firms or bought their mortgage-backed securities could one day suffer losses."

$$$Dollar$$$ said...

jal this is exactly what is going to happen. All of the China scaremongering by Denninger is going to come to nought because this IS the future for America. I once read on his forum where someone said that it was the debtor who was best off during the depression. Uh, pull the other one. Europe landed itself into WW2 and suffered catastrophic damage. Debt = slavery or (at least) serfdom. A lot of the national income is going to be going to the Chinese. And no, contrary to what Denninger may think or propose, default is NOT going to be an option.

Gravity said...

@ Tom,
I'll attempt to reallign your propositions once more, please try to bear with my inequities just a bit longer.

0. Information was in place prior to the crisis enabling anticipation that peak-oil induced volatility would increase investment risk to levels unacceptable to the financial industry.
1. Volatility in the price of oil will increase after peak.
2. This increase in volatility of the price of oil will propagate volatility into the price of other goods and services.
3. Increasing volatility in price of oil and prices of things in general will result in increases in investment risk, but since this effect was already misanticipated as a provisional profit mechanism in 0, any relevant measurements pertaining to this effect are causally effected by said anticipation.
4. - see 0.

There remains a significant logical gap concerning information asymmetry between prop. 2 and 3
when attributing large-scale preemptive risk aversion to foreknowledge of price volatilities, which would require a critical mass of capital to anticipate and correctly quantify the specific effects on their investments caused by variance transient propagation, thus allowing for preemptive restructuring to minimise exposure to said risk.

Though the inferred informational transfer mechanism between anticipated volatilities and the assessment of these specific risks is not clear, any such foreknowledge might progressively amplify anticipated effects in a harmonic resonance wave of some sort, and would render relevant measurements since the information was in place and sufficiently disseminated as causally effected and distorted by the inherent profitabilities of prop. 4/0, thus invalidating them as correlative proof of prop. 1/2 to some extent.

Thank you for your time.

Ilargi said...

New post up.

The Long Hot Summer