Saturday, April 19, 2008

Debt Rattle, April 19 2008: Something’s afoot

Protest March Unemployed Union, Camden New Jersey 1934

Ilargi: Citigroup announced more loses and writedowns, Moody’s and Standard & Poor’s talk about downgrading the bank, and still its stock went up considerably. It truly is a casino out there, isn’t it? Anything goes. And in the end, the house never loses.

Libor rates surge, which may cause hurt for borrowers all over the world, while painfully showing that the 100’s of billions of dollars in capital injections have been missing the mark. Or should I say the supposed mark? A lot of dough has been taken from your wallet, and landed elsewhere, in a black hole that goes by the name of the "financial system". Any chance that was intentional?

And if Libor rates are not enough to convince you of that, look at the increasingly aggressive ways in which an increasing number of banks seek to raise new capital. JPMorgan, in a sort of footnote to its earnings report yesterday (which seemed not too bad at the surface), announced a $6 billion injection, at 7.9% interest.

Wait a minute, how much do they pay at the Fed’s alphabet soup of newly invented discount windows? A lot less, so why not go there? And anyway, what does JPM need another $6 billion for, after the $29 billion Bear gift certificate? The Royal Bank of Scotland needs a whole slew of billions as well, and they’re just the first in line in the UK. teh rest will soon follow.

Looking out over the globe, the Dow may still look to be in reasonable territory, even though it’s way down from the peak, but shares in emerging markets are being absolutely hammered.

Too many things are not adding up in my mind. If I were betting man, I’d consider the possibility that something’s afoot. Something big.

I have a ton of additional things that will appear soon. Please check back in soon.

Ilargi: I’ve been wondering for a while if the Chinese leaders find it such a great thing to have a few hundred million more affluent and more vocal citizens. After allowing more stock investments, which led to a huge boom, the population has now been fleeced of $2.5 trillion. Makes me wonder some more on that same theme. What was the profit for the government? What’s their role in the financial markets?

China Stocks, Once Frothy, Fall by Half In Six Months
The sharp decline in Chinese stocks is approaching a milestone: With a 4% drop Friday, the market has fallen by nearly half since its peak last fall. The decline has wiped out nearly $2.5 trillion of wealth and is testing the government's apparent resolve to let the market find equilibrium on its own.

The plunge has slashed the savings of millions of Chinese investors who jumped into the market as it rose six-fold in two years. It is crimping expansion in the country's nascent financial sector and may put a squeeze in corporate coffers. But so far, it has not slowed the world's fastest-growing major economy.

The benchmark Shanghai Composite Index has lost 49% since topping out, along with other global markets, last October. The slide was triggered by the global economic slowdown combined with the lofty valuations of Chinese stocks. It accelerated recently as investors became convinced the government would not intervene to stop the fall. The index finished Friday at 3094.67, down 4%. While Chinese shares have been among the hardest-hit anywhere, some other emerging markets have also had a tough time, falling 6% so far this year after rising an average of 32% a year over the past five years.

The other big loser is India, which was the other big winner over the past few years. The Mumbai Sensex Index is down 19% so far this year. Arjun Divecha, an emerging-markets specialist who manages about $20 billion for GMO LLC, says that until recently, investors bought pricey stocks in both markets because these economies were seen as the fastest-growing. "But with U.S. and global growth expectations slowing, it's the markets that were bid up the most that are getting hurt the most now," he said.

The Shanghai Composite posted a record close of 6092.06 on Oct. 16. The total value of all of the stocks on China's two exchanges -- in Shanghai and Shenzhen -- peaked on Jan. 11, at about $4.9 trillion. The losses since then are equal to more than 70% of China's 2007 gross domestic product. China can no longer boast that state-owned oil company PetroChina Co. is the world's most valuable listed company.

Most U.S. investors are unlikely to feel much direct impact from China's stock fall, because the shares traded in Shanghai and Shenzhen are off-limits to the vast majority of foreigners. While a few U.S. funds have received permission to invest in these stocks, "it's very speculative, and the quality of companies is not comparable to the Chinese companies listed in Hong Kong," says Richard Gao, portfolio manager of the $1.5 billion Matthews China Fund in San Francisco.

However, some international funds are feeling pain because the plunge in Shanghai-listed shares has been matched by similarly steep declines in shares of Chinese companies listed in Hong Kong, New York and elsewhere. The iShares FTSE/Xinhua China 25 Index Fund, an exchange-traded fund listed on the New York Stock Exchange, is off by 33% from its peak last fall. The Matthews China Fund is off by 32% from its peak.

Both India and China have seen inflation fears worsen in recent weeks, which could force their governments to tap the brakes harder on economic growth. "That would hurt corporate earnings," says Mr. Divecha, the money manager.

Some emerging markets are holding their own. Russia's stock market is off just 5% this year, while Brazil's benchmark index has climbed 1.6%. Analysts say their better performance reflects cheaper stocks and the commodity boom. Russia and Brazil are big commodities exporters, although demand growth may slow along with slower economic growth in China and India.

Ilargi: The Libor rate has been rising since its accuracy was questioned earlier this week. There are suspicions that the banks paint too rosy a picture when reporting borrowing rates.

Libor's Rise May Sock Many Borrowers
A sharp and unexpected rise in a widely used interest rate is threatening to add billions of dollars to the interest bills of homeowners, companies and other borrowers around the world. The London interbank offered rate jumped for the second straight day Friday -- two days after the British Bankers' Association, which oversees the calculation of the interest rate, said it was investigating the borrowing rates that banks had been providing to it.

The BBA started its review amid growing concerns among bankers that their rivals weren't reporting their true high borrowing costs, for fear of signaling to the market they were desperate for cash. John Ewan, a manager of the Libor system at the BBA, said Friday the association continues to believe in the accuracy of the Libor system.

Libor is one of the world's most important financial indicators. It serves as a benchmark for $900 billion in subprime mortgage loans that adjust -- typically every six months -- according to its movements. Companies globally have nearly $9 trillion in debt with interest payments pegged to Libor, according to data provider Dealogic. If sustained, the past week's rise of Libor could add roughly $18 billion in annual interest costs on that corporate debt, or about $100 to the monthly payment on a $500,000 adjustable-rate mortgage loan.

John Waite, a mortgage broker in Appleton, Wis., said one of his customers, a house painter, faces a reset on his subprime loan next month and will be affected by the recent Libor gyrations. The painter's interest rate was fixed at 7.25% for the first three years of the loan, and next month the borrower will make its first adjustment based on a margin of 6.5 percentage points over six-month Libor. With that rate around 3%, the painter's new monthly payment of interest and principal would be about $1,446, Mr. Waite said, up from the current $1,173. Six-month Libor was around 2.7% Monday. At that rate, the painter's new payment would be $1,408.

The Libor rate, which is supposed to reflect the average borrowing costs of banks, had been falling in recent months as the Fed lowered interest rates. At the same time, though, the gap between the interest rates central banks set and Libor has risen -- an indicator of increased concerns about banks' financial health. That, combined with this weeks' moves, counteracts efforts by the Fed to ease pressures on the economy.

While Fed officials see the rise in Libor spreads as predominantly reflecting pressures on European banks, they also see it as symptomatic of a broad reluctance by banks in the U.S. and elsewhere to lend money they think they may need a few weeks from now. They continue to study options for addressing the pressures. One way might be to expand the Fed's "term auction facility," from the $100 billion it has currently lent to banks. It could also extend the term of loans made through the facility from the current 28 days, perhaps to three months or as long as six months.

The de facto Nationalization of JPMorgan Chase
March 2008 may go down as a major turning point in U.S. financial history. The Federal Reserve crossed a Rubicon of sorts, lending tens of billions of dollars, not to a commercial bank, as has been its historical practice, but for the very first time to an investment bank.

For the record, commercial banks pay the Federal Deposit Insurance Corporation - FDIC - for deposit insurance, whereas investment banks do not, and yet the Fed suddenly made liquidity available to the latter. Commercial banks are legally allowed to use leverage to a maximum ratio of 13 dollars of debt to every dollar of equity, whereas investment banks—ironically subject to less regulatory oversight than commercial banks—can leverage their equity by a factor of 34.

Invoking an obscure, never-before-invoked legislative provision, the Fed made billions of dollars available to JPMorgan Chase to acquire another investment bank, the essentially insolvent Bear Stearns. The Fed-engineered JPMorgan takeover of Bear raises startling questions: What was/is the degree of cooperation between the Fed and JPMorgan? Was this an impromptu alliance, or had it been plotted in advance? Was JPMorgan drafted against its will to absorb Bear Stearns, or did the central bank give JPMorgan a plum that it already coveted? More importantly for the country, what will be the relationship of JPMorgan and the Fed going forward?

Clearly, if Bear was “too big to fail,” then undoubtedly the much larger JPMorgan is too big to fail. JPMorgan was already a key dealer of U.S. government debt before absorbing Bear, and now it has Bear’s erstwhile share of that operation, too. Of even greater significance, even before the takeover, JPMorgan already had multiples of the kind of illiquid financial derivatives that did in Bear Stearns—in fact, more derivatives than any other company in the world—and now it owns Bear’s junk, too.

This implies that the Fed will have to make good o?n those derivatives—even if it eventually means giving JPMorgan real money for worthless “assets”—if that’s what it takes to keep JPMorgan alive. Apparently, investors quickly grasped that implication. The perception that JPMorgan has a new partner—the ultimate sugar daddy, the Fed—helped JPM’s stock to soar 30 percent in the week after the Bear takeover was announced.

The Fed and JPMorgan partnership will remain implicit. There will be no official merger or formal union of the two; o?n the other hand, it may be no exaggeration to say that the Federal Reserve has effected a partial de facto nationalization of JPMorgan. It will be interesting to see what degree of autonomy JPMorgan will retain. There is an old saying that if someone owes the bank a million dollars, the bank owns him, but if someone owes the bank a billion dollars, then he owns the bank. In the present case, JPMorgan appears to be under the Fed’s thumb.

However, because the Fed now requires JPMorgan’s survival, it will do whatever it needs to do to accomplish that. The potential moral hazard created by this dynamic is enormous. JPMorgan may have the Fed over a barrel, too. On March 31, Treasury Secretary Paulson proposed sweeping regulatory reforms that would extend the kind of control that the Fed now has over JPMorgan to all investment banks.

Theoretically, such power is necessary to prevent investment banks from ever putting our country into such a precarious situation again. In practice, though, this would be a huge step toward a national banking monopoly. Considering the various boom-bust cycles caused by the Fed, not to mention the loss of 98 percent of the dollar’s purchasing power under the Fed’s watch, do we really want to place our faith in a bulked-up, super-powered, but clearly fallible Fed?

Wall Street braces for tens of thousands of pink slips
Citigroup Inc, Merrill Lynch & Co and Wachovia Corp this week announced 12,400 job cuts, and the number of pink slips is likely to rise as losses mount and the economy works its way out of its malaise. So far this year, 36,000 job cuts have been announced in the U.S. financial services sector, according to job placement consultancy Challenger, Gray & Christmas, Inc.

The figure does not include Citi's announcement on Friday to cut another 9,000 jobs. Job losses will surge well beyond the current level, given that the latest data does not account for widely expected cuts among the 14,000 employees at Bear Stearns Cos following the investment bank's pending takeover by JPMorgan Chase & Co.

The cuts will have an oversized impact on New York City, whose fortunes are closely tied to Wall Street. Everything from Manhattan real estate prices to high-end restaurants and private car services could come under severe pressure, as highly paid investment bankers and traders face job losses.

The securities industry accounts for almost 35 percent of all salaries and wages in the city. Many bankers and brokers earn a base salary of $200,000 or more, and get even bigger bonuses. "It is almost inevitable that we are going to see significant layoffs," said Octavio Marenzi of financial consulting firm Celent.

Citigroup's latest job cuts, as it posted a $5.11 billion quarterly loss on Friday after taking billions of dollars of write-downs related to mortgages and turmoil in the credit markets, follow its announcement in January to cut 4,200 jobs.

Citigroup Shareholders' Relief May Not Last as Capital Dwindles
Citigroup Inc.'s investors, cheered by a $5.1 billion first-quarter loss that wasn't as big as they feared, now must watch out for asset sales, a dividend cut and an infusion of outside investment as the bank's capital dwindles.

Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

The bank's shares surged 4.5 percent yesterday after it reported $16 billion of asset writedowns during the quarter, less than some analysts expected. The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions.

"We're in a recession, they have a huge consumer book, and there's huge double-digit-billion provisions that they're going to have to take in the next 18 months to two years," CreditSights Inc. analyst David Hendler said. "They're undercapitalized for their risk." A weakening U.S. economy and rising consumer delinquencies have forced Chief Executive Officer Vikram Pandit and Chief Financial Officer Gary Crittenden to back away from assurances earlier this year that the bank didn't need to raise more capital.

In January, Crittenden said Citigroup "stress-tested" its assumptions under "multiple recessionary scenarios." Asked yesterday if the bank might seek an additional infusion, Crittenden said, "You can never say never." "This is a difficult business environment," Crittenden said on a conference call with analysts and investors. "There are no easy solutions here, no silver bullets."

Bad News Really Is Bad News For Citi
Bad news was good news as earning season opened across Wall Street this week. But not for Citigroup.
Despite having logged $32 billion in mortgage-related writedowns since the credit crisis erupted last fall, and raising $34 billion of new capital from investors and divestitures since then,

Citigroup continues to have massive exposures to the toxic assets that could continue to cause it problems. And it faces the probability of significantly deteriorating consumer credit quality through this year. Credit costs totaled $6 billion in the first quarter, including $3.8 billion in losses. The bank reported weakness in the quality of not just mortgages, but personal loans, credit card and auto loans and higher credit costs from consumer lending outside the U.S.

The first quarter is a repudiation of the notion that a broadly diversified company can weather financial crises better than more focused companies. Citi is suffering across most all of its businesses, with profits down in its U.S. consumer banking and retail brokerage and losses in capital markets and international consumer lending only partly offset by gains in some international consumer banking areas and in transaction services. Yet shares of Citi rallied as investors lumped in Citi's results with those of other financials, despite some key differences.

Fellow U.S. banks JPMorgan Chase and Wells Fargo, in contrast to Citi, posted surprisingly strong profits earlier this week after they managed to blunt declines in mortgage-related businesses with gains in other areas. Citi Chief Financial Officer Gary Crittenden admitted in a conference call Friday that despite the bank's efforts to stay ahead of the situation, "this cycle could be particularly difficult."

Citi doubled its provision for loan losses in the quarter to $5.7 billion, from $2.7 billion in the first quarter last year, and Crittenden said the bank was "comfortable" with current loss reserves. But, he added, "we could face significant head winds as we go through the rest of the year." The first quarter loss of $5.1 billion was wider than already-low expectations, and about equal with its profits in the first quarter last year.

Citi took more than $12 billion in writedowns related to subprime mortgage exposure, collateralized debt obligations, leveraged loans and the like in the quarter, but still has $23 billion worth of CDOs on its books and another $47 billion of assets from structured investment vehicles it was forced to bring back on its balance sheet last year when it couldn't find buyers.

Public's View of Economy Takes Fast Turn Downward
The public's ratings of the national economy continue to sour, with assessments deteriorating faster than at any point in Washington Post-ABC News polling. Views on the Iraq war have also turned more negative, with six in 10 now rejecting the notion that the United States needs to win there to effectively battle terrorism. The economy and the Iraq war are the top two issues on voters' minds, according to the new Post-ABC poll, and worsening opinions of both may dampen GOP hopes for the November elections.

Nine in 10 Americans now give the economy a negative rating, with a majority saying it is in "poor" shape, the most to say so in more than 15 years. And the sense that things are bad has spread swiftly. The percentage who hold a negative view of the economy is up 33 points over the past year, and the percentage who rate the economy "poor" has increased 13 points in the past two months. That is the quickest 60-day decline since The Post and ABC started asking the question, in 1985.

Views of the Iraq war have dipped as well. Now, more than six in 10 say that the conflict is not integral to the success of U.S. anti-terrorism efforts. That is the most people to reject what is one of the Bush administration's central contentions and a core part of presumed GOP presidential nominee John McCain's stand on the issue.

And for the first time since President Bush ordered additional troops to Iraq early last year, the number of Americans saying the United States is not making significant progress toward restoring civil order there has risen. Negative views of the war had eased steadily from late 2006 through early March of this year, but 57 percent in the new poll said efforts in Iraq have stalled, up six points.

Goldman's Glass Brims, Lehman's Cracks
"The last two weeks in March were a different world in financial services." Thus Jeffrey Immelt, General Electric Co.'s chief executive officer, told how his 10 percent forecast for 2008 earnings growth that was "in the bag" in December and still safe in mid-March got halved last week. Translation: life in finance is getting worse, not better. You risk whiplash, however, trying to square the conflicting signals emanating from the world of money recently.

Last week, we had Lloyd Blankfein, CEO of Goldman Sachs Group Inc., telling his shareholders that "we're closer to the end than the beginning" of the crisis. John Mack, Morgan Stanley's CEO, predicted that the credit-market contraction will probably last only "a couple of quarters" longer. We also heard, though, from Lehman Brothers Holdings Inc. Chief Financial Officer Erin Callan. "March was a very, very tough month," she said last week. "I don't see what the real catalyst for change would be over the next several months. We've got to look out to 2009 for where we're going to change."

And JPMorgan Chase & Co. weighed in with a report this week suggesting that "the financial crisis will affect market structure and pricing for at least a decade," according to strategists Jan Loeys and Margaret Cannella.
For optimists, the glass is overflowing with liquidity, as new pipelines funnel more cash into the money markets and central banks mop up the toxic bonds no investor will buy. Throw money at the credit freeze, and eventually spring will bring a thaw. Keep the gap between short- and long-term lending rates wide by slashing monetary policy rates, to bolster bank profits.

For pessimists, there are still landmines lurking in the long grass. What happens, for example, when thousands of U.S. students are denied loans because at least 50 lenders have backed out of that market, as John Remondi, CFO of SLM Corp., warned U.S. legislators this week? SLM, better known as Sallie Mae, is the largest U.S. education lender.

Meredith Whitney, the recently crowned queen of telling it like it is, said this week that she expects large U.S. banks to report their biggest losses in more than 20 years as consumers fail to repay their credit cards and other personal debts. "Loss rates will exceed the highest levels since 1990 by a significant margin," she wrote in a research report.

The reckless behavior of the banking industry is beginning to have repercussions for non-financial companies. The U.S. corporate earnings season got off to an "awful start," according to a report this week from Goldman Sachs's equity strategy team.

For the CEOs of the global investment banks, the priority now is to avoid frightening the horses, so any statements they make claiming that the worst is over should be taken with a pillar of salt. They know that writedowns are only going to get worse, and that the structured-finance departments that delivered huge earnings in recent years will be about as busy as the Zimbabwe tourist authority for the foreseeable future.

Ilargi: A financial New World Order, complete with a global currency, has been in the works for decades, just go check the Project for the New American Century. Yeah, I know, conspiracy theory yada yada. Still, no time like a crisis to advance the agenda. Come to think of it, it would almost seem to make creating a crisis a good idea.

Bank of England eyes $100 billion mortgage rescue
The Bank of England will next week announce plans to swap 50 billion pounds ($99.8 billion) of government bonds for UK bank mortgages in an effort to break a lending squeeze gripping the home loan market, the BBC said on Friday.

The broadcaster said in a report on its Web site the bonds would have a maturity of one year but would be rolled over for up to three years, meeting banks' demands for longer term debt but ensuring the loans are not accounted for in the national debt. It did not give a source. The Treasury said the report was "speculation". No one at the Bank of England was immediately available to comment.

Pressure has been growing on the British government and the Bank of England to do more to resolve a mortgage debt crisis threatening to slam the brakes on the British economy and which is contributing to a slump in support for Prime Minister Gordon Brown.

Banks' fear that high-risk mortgage debt is lurking on balance sheets has driven the interest rates at which they lend to each other well above the BoE's 5 percent benchmark, in turn raising borrowing costs for households and companies. The new plan is expected to allow banks to temporarily swap mortgage-backed securities for government bonds to help free up their balance sheets and allow them to lend more to consumers.

Banks have warned lending could halve this year and, with an election due by May 2010, Brown's Labour government wants to ensure borrowers are not priced out of the market. It is also desperate to stop another bank getting caught in the crunch after Northern Rock was nationalised this year.

Gordon Brown's US speech calls for new global finance rules
An international early warning system should be established to ensure that future credit squeezes are identified and dealt with before the effects become widespread, says Gordon Brown. In a foreign policy speech in Boston, the Prime Minister urged America to join him in pushing for reform of the major international institutions including the International Monetary Fund and World Bank.

At the end of his three-day trip to the US Mr Brown also said the world faced "terrifying risks" if countries "failed to seize the moment". Mr Brown told an audience at the John F Kennedy Library that globalisation should combine free trade and open economies with policies promoting fairness and justice.

He said: "My proposal is that we set new global rules for a new 21st century global system with: a global trade deal that benefits rich and poor countries alike; a new international financial architecture and economic institutions that end the mismatch between global capital flows and only the national supervision of them - with the IMF an early warning system for the global economy, focused on crisis prevention rather than just crisis resolution."

Mr Brown has used his trip to meet Wall Street bankers to discuss the credit crunch. Yesterday, in Washington he met Ben Bernanke, the chairman of the Federal Reserve. The two talked about what measures can be taken to alleviate the effects of the economic downturn. Next week, the Treasury is expected to announce measures to get the mortgage companies lending again, including taking on some debt in exchange for the lenders' co-operation with market liquidity.

Mr Brown also wants a reformed United Nations that is more effective and relevant to the 21st century that will give greater leadership and can give better assistance to poorer countries. He told the audience, which included Senator Edward Kennedy: "During the year to come I want this debate about change to become a global dialogue about renewal as we embark upon a task perhaps more ambitious than even the Bretton Woods Conference in 1944 [which established international monetary rules]."He added: "American leadership will be indispensable".

Ilargi: First of all, it’s impossible to kick-start Britain’s housing market. Doesn’t work in the US, won’t work in the UK. Second, the market should be allowed to crash, so prices can come down to "real" levels.

That is the only option that is good for the public, the taxpayers. All other options will cost them huge amounts of money for the rest of their lives. But it’s not the best option for the bankers, so it's not the one that will be chosen.

The market will crash regardless, but now a bit later, and with hundreds of billions of pounds tranferred into the bankers’ pockets.

Buiter Says U.K. Banks Need $200 Billion Aid From BOE
Former Bank of England policy maker Willem Buiter said the central bank will need to offer loan swaps to financial institutions of at least 100 billion pounds ($200 billion) to kick-start the U.K. mortgage market. The central bank, the Treasury and Prime Minister Gordon Brown's office may unveil a plan to swap mortgage-backed securities for government bonds as soon as next week, which the British Broadcasting Corp. reported yesterday will total 50 billion pounds.

Banks including HBOS Plc have curbed lending and raised the cost of mortgage loans even after policy makers cut the benchmark lending rate three times since December to help avert a U.K. recession. "In total, they would have to do -- not in one big go -- at least 100 billion for it to really actually make a difference to the liquidity position of banks, but also act as the catalyst for getting that market going again," Buiter said in an interview. He served on the bank's rate-setting panel from 1997 until 2000.

The plan's success "all depends on the scale," Buiter, a London School of Economics professor, said yesterday. "If they do 5 billion it's not going to do much. If they do 55 billion it would help deal with the overhang of illiquid mortgage-backed securities that mortgage lenders have on their balance sheet and prevent them from engaging in any new lending."

The U.S. Federal Reserve last month made up to $200 billion available to banks in return for debt including mortgage-backed securities and in December created a lending vehicle to make credit available to banks as an alternative to borrowing at its discount rate, which may carry a stigma. To date, the Bank of England widened its collateral requirements just for three-month lending. It only accepts top- rated government securities at its weekly auctions.

The BBC said the mortgage rescue plan involves government bonds with a maturity of up to one year. They would be rolled over for up to three years, it said. The plan would be the biggest special initiative by British monetary authorities to supply liquidity to the U.K. banking system and would meet banks' demands for "longer term loans" while escaping being accounted for in the national debt, the BBC said.

And the cupboard was bare
British banks start to pass round the begging bowl

Ever since the emperor bought new clothes, there have been few instances of self-delusion quite as stark as that of cavalier British bankers at the start of 2008. Just as rivals in America and other parts of Europe were writing down billions on their investments in dodgy mortgage loans and frantically raising money, the bosses of Britain’s biggest banks were instead blithely increasing their dividends in a blustery display of financial strength.

Just how hollow it was became apparent on Friday April 18th when it emerged that Royal Bank of Scotland, the country’s second biggest bank, might have to raise money to satisfy bank regulators. The amount will not be trivial, not will be its impact on shareholders. Analysts reckon that Royal Bank may have to raise between £10 billion ($19.9 billion) and £13 billion, about a third of its current market value of £37 billion. It is expected to do so through a share sale which will probably be announced at its annual shareholders’ meeting on April 23rd.

At issue is Royal Bank’s “core capital”—a cushion composed mainly of shareholders’ money that regulators insist banks hold against bad times—which stands at about 4.5% of risk-weighted assets. This is the lowest of any big British bank and well below the 6% that most banks consider a reasonable minimum level.

For Sir Fred Goodwin, the chief executive of Royal Bank, the prospect of having to go cap in hand to shareholders for a bailout would be a deep humiliation and many believe that Sir Fred’s head may well be the price that shareholders demand in exchange for supporting a share issue that may dilute their existing holdings by as much as 50%. If that is the case it would mark the end of a career that was marked by both brilliance and hubris.

Sir Fred made his name at Royal Bank after its hostile takeover of NatWest, another British bank in 2000. Although he was not the main architect of the deal, he was responsible for making it work. He did so skilfully and ruthlessly, in the process earning the moniker “Fred the shred” when he cut some 18,000 jobs.

His reign at Royal Bank was characterised by a curious mix of authoritarianism and prickliness. (He once started to sue a big newspaper for libel after it joked in a column that he had wanted a private road built from his bank’s headquarters to the airport and had been denied membership of a swanky golf course. He denied the suggestions entirely.)

More important is that in recent years Sir Fred has alienated shareholders with a spate of contentious acquisitions abroad that, although vastly expanding the empire he manages, has served mainly to depress his company’s share price. The most recent of these was his bank’s participation last year in the €72 billion ($101 billion) takeover of ABN AMRO, a Dutch bank, by a group that also included Spain’s Santander and Fortis, a Belgian-Dutch bank. This deal, which was paid for mostly in cash, is the main reason that Royal Bank’s balance sheet is so stretched (although writedowns on the value of credit derivatives have not helped).

And, although analysts have speculated for months that the bank would need to raise new capital, he has brusquely brushed aside their concerns. On February 28th when he presented the bank’s annual results, he unequivocally told analysts that he had “no plans for any inorganic capital raisings or anything of the sort.” Rival bankers, however, are advised to keep their Schadenfreude in check. On Friday Citigroup posted a $5.1 billion loss for the first quarter and said it plans to cut 9,000 more jobs.

And in Britain, analysts expect other banks to follow in Royal Bank’s footsteps in beating a path to shareholders’ doors. Analysts at JPMorgan Chase, an investment bank, reckon British banks need to raise about £37 billion. Among the worst affected are HBOS, which they reckon may need to raise as much as £11 billion, and Barclays, which could be short of about £8 billion. Self delusion may be dying hard among Britain’s banks, yet the sooner they face facts, the sooner they can move on.

Ilargi: UK banks are in much worse shape than we’ve seen reported thus far. Northern Rock was just a first little blimp on the radar screen. Britain’s banks run the risk of falling, and very soon, and there’s nothing on that radar to prevent that.

Royal Bank of Scotland will spur others to go cap in hand
Britain's banks have been in denial. As one shareholder put it: "All of them agree that the industry as a whole needs to be better capitalised but none believes the observation applies to them individually." It's not hard to work out why. The first mover always risks moving alone, and to be the only one to go cap in hand to shareholders would stigmatise management.

The City is littered with the corpses of careers killed off by rights issues. Matthew Taylor of Barclays, Jonathan Bloomer of the Prudential and Bob Mendelsohn of Royal & Sun Alliance, to name just three. Royal Bank of Scotland may need capital more urgently than most, but its decision to tap shareholders makes it easier for rivals to follow suit.

Analysts believe Barclays and HBOS, at the very least, will have to give it serious thought. Credit Suisse reckons Barclays could do with £6bn of capital and HBOS £4.5bn, compared with the £12bn it says RBS needs. Political pressure for the banks to strengthen their finances, as a "quid pro quo" for the £50bn-£100bn of liquidity support the Government is planning, might tip the scales. Both HBOS and Barclays have been in contact with regulators about their capital positions.

With sub-prime provisions worsening and bad debts on UK mortgages certain to rise as house prices stumble and mortgage costs soar, the banks have been told they need to be in as strong a position as possible. Analysts have given up trying to predict the level of new sub-prime provisions, but they claim UK banks have been more optimistic than US peers in their assumptions to date. Britain's banks are all expected to reveal further, significant writedowns that erode the capital base in the coming weeks.

With less capital, the financial position of the bank weakens - jeopardising growth prospects at the very least and raising the prospect of regulatory intervention in the worst case scenario. As the tables show, Barclays and HBOS have the weakest capital positions after RBS. Barclays, in particular, is exposed to worsening sub-prime conditions that threaten its capital. For them, the issue may be whether to sell assets or to go to shareholders. As is thought to be the case with RBS, a rights issue would be accompanied by a dividend cut, making it a far less attractive option.

But the scale of the funds Credit Suisse estimates the two lenders require would suggest they have little choice. Alliance & Leicester and Bradford & Bingley are considered next at risk. Although B&B has a strong capital position, analysts expect its mortgage bad debts to mount rapidly as it is a specialist in buy-to-let and self-certification, areas of the market considered higher risk.

Being smaller lenders, both are also likely to find it more difficult to raise new funds at affordable levels as the credit crunch slowly plays out. UBS analyst Alastair Ryan said: "For the foreseeable future, these companies are likely to see volumes declining. As we anticipate bad debts rising, this leaves profits on the wane." With profits falling, he believes they will be obliged to cut the dividend - by 37pc at A&L and 19pc at B&B.

Such capital restoration measures would normally put management under pressure, but Mr Ryan believes the exceptional and sudden deterioration in the credit markets provides an excuse for British executives. "We don't believe cutting the dividend would be taken as an indictment of management by shareholders," he said. "It would be demonstrable that market conditions were the driver of the cuts, and management teams could expect to remain in place.

Ilargi: People keep thinking that one year of downturn will be it, and they honestly believe that. But everybody, ask yourself: what would possibly lift the US and UK economies out of their slumps?

Me. I can’t think of anything. I think we;’ll never in our lifetimes return to what we’ve had in the past few decades. To quote George Soros: "it’s the end of an era". Really, it’s over, as far as I can tell, and it won't come back for many years, if ever.

Financial crisis forces Britons into austerity
Families are having to cut back on groceries, eating out and holidays as the credit crisis starts to have a profound effect on household spending, research by The Daily Telegraph has shown. With the cost of living going up by £1,800 a year for the average home, the first evidence has emerged of how families are changing their spending habits to cope with the economic squeeze.

Middle-class customers are turning to budget supermarkets, discount stores, low-price hotels and car rental firms, all of which have had booming sales in recent months. While high street sales have fallen, Primark, the discount clothes retailer, has seen trade increase by 4 per cent. Aldi, the budget supermarket, has reported a 25 per cent increase in sales, with rising numbers of middle-class customers.

Travelodge, the low-cost hotel chain, has increased sales by a quarter, while the number of people making inquiries about British holidays has risen by almost a half. Restaurants have reported falling trade, with food stores saying that customers are opting for ready meals to make up for not going out. The British Retail Consortium reported a 1.6 per cent fall in sales this week compared with a year ago, as clothing, furniture and electronics stores suffered most.

Mintel, the market research company, released figures showing that 57 per cent of consumers have trimmed their spending because they were unsure of their finances. Twenty per cent have delayed a family holiday, 16 per cent have put off home improvements and 11 per cent have failed to top up their savings. Disposable income has been affected by a range of increased costs. Gas, electricity, water, food and drink bills, council taxes and mortgage payments have all increased by more than the rate of inflation.

Together, they cost £21,495 annually - £1,800 more than a year ago, said uSwitch, the price comparison website. Figures released this week suggested that food shopping alone now costs the average family £600 more. Retail experts said families were economising. Nick Gladding, an analyst at Verdict research, said: "It is clear that people are cutting back on discretionary spending.

"Electricals, furniture and DIY items are all showing signs of the slow-down. There is going to be a cloud hanging over the consumer economy all year. "And there are signs that middle-class shoppers are trading down, with discount stores doing very well out of people's belt tightening.

When Men Had Balls That Clanked
230 years ago men with the names of Jefferson, Hamilton, Madison and more pledged their "lives, wealth and sacred honor" to give us a nation. Over the last few months I have heard every possible excuse in the world as to why "we're doomed" from this or that from an economic (or physical) threat, and why nobody thinks that getting off their butts will make a difference.

I've even had a couple of dozen people I've sent tickers or other calls to direct action (letter writing, petition signing, etc) turn around and tell me they're afraid of ending up on some "list" if they make noise. People are afraid of going to Washington DC or even sending a petition or picking up the phone to call their Congressman because they'll end up on some sort of "list"?[..]

Look at the financial "earnings" this quarter. Regional banks nearly all hit their numbers from profits on the Visa IPO - which was not part of the estimates, because it wasn't known when those estimates were published. That's the mother and father of all "one time" gains but boy, you wouldn't see that featured prominently in the press release, would you? Nope!

Or how about the "Level 3" asset moves? The last two quarters have seen absolutely enormous gains in "Level 3" assets - which came from "Level 2" assets, not new production. Crooked? You decide - is it crooked accounting when a bank or other institution simply doesn't like the price its being quoted, so it stops asking and makes up a number?

Or how about all these "REO" houses that banks are sending to auction with a reserve, the reserve is not hit and they get 'em back. How are those homes "valued"? Are they counting the "value" as the high bid that they refused to accept? Hell no. Is that crooked? You decide, but keep in mind while you're thinking about it that 97% of all homes sent out to auction in California are coming back unsold!

Our government says it is (we are) $9 trillion in debt but ignores the forward liability of Social Security and Medicare, which totals, at present, $53 trillion dollars in the mother and father of all "SIV"s. Oh, and David Walker, Comptroller General of the GAO, the nation's "chief accountant" resigned in February of this year, after screaming for years about the accounting that our nation practices and what it will lead to. He was ignored. Crooked? You decide.

We have $4/gas in some parts of our nation, diesel is over $4 virtually everywhere, and this is likely to continue to escalate. Why? Because our accounting is crooked - not only corporately but nationally.

We have sat back while Morton Grove effectively banned firearms and the City of Chicago banned handguns. Never mind that the 2nd Amendment was given to us by those very same "balls that clank" men 230 years ago not so you can shoot some thug who is trying to invade your home, but precisely so that if the government goes so far out of the boundaries of reasonable conduct that no human should have to tolerate it, you can shoot them. If you disagree with this interpretation of The Second Amendment, by the way, I suggest that you spend a few hours reading The Federalist.

The intent of the Second Amendment really is rather clear if you bother to read the material. And don't start with "the army has more guns than I do, therefore it doesn't matter." Of course the military and police have more guns than you do! They're also better trained. So what? The purpose of the Second Amendment isn't to allow you to "go postal" against the government, it is so that you and all 299,999,999 if your neighbors in this great nation can do so all at once if it ever becomes necessary.

It is this very fact that the people can exercise the ultimate check and balance on government that will keep it from ever needing to occur. Government should be afraid of the people, not the other way around, because this is how government is forced to act within the boundaries of reason, proper conduct, and the law. But you, each and every one of you, have allowed this rampant lawlessness to go on. You're the frog put in a pot with the water slowly being heated, boiling in the pot, and you refuse to act because you're afraid.

How New Global Banking Rules Could Deepen the U.S. Crisis
In 1999, in the aftermath of a financial crisis that spread from East Asia to Brazil, Russia, and beyond, the central bankers and finance ministers of 10 of the world's wealthiest nations sent their deputies to the tidy Swiss city of Basel. Their mission: to begin devising a set of improved banking regulations for their governments to adopt, with the hope of reducing the harm from future financial crises.

The world's leading financial regulators labored together to strike a balance between ensuring banks' safety and giving them room to take risks and make money, finally in 2004 producing a recommended rulebook called Basel II. (Yes, there was a Basel I. More on that later.)

Now, as another financial crisis unfolds, it would seem that nations are adopting BaselII at just the right time. Europe and Japan have put it into practice over the past year, and the U.S. is set to phase in a modified version starting next year. The start date for American banks to begin submitting their plans for compliance to U.S. regulators was Apr. 1.
But despite all the sober and deep thought that went into them, many regulators, academics, and financial analysts are increasingly concerned that the new regulations will end up making today's financial crisis worse rather than better.

BaselII is intended to keep banks safe by requiring them to match the size of their capital cushion to the riskiness of their loans and securities. The higher the odds of default, the less they can lend, all else equal.

Here's the problem. Today, many banks already face so many risks that implementing Basel II as written will put them in a capital squeeze. They will either have to reduce risk by cutting back on lending, or sell more shares to give themselves a bigger capital buffer, or both. If the banks do lend less, it could cause an even steeper economic decline, which would lead to more defaults and cause banks to ratchet back even more, and so on in a downward spiral.

In other words, the bureaucratic machinery of Basel II could become a classic case of the law of unintended consequences. "It takes a crisis and makes it worse. I call that a liquidity black hole," says Avinash Persaud, chairman of Intelligence Capital, a London-based financial advisory firm. Adds William I. Isaac, a former chairman of the Federal Deposit Insurance Corp. (FDIC), who is chairman of Secura Group, a Vienna (Va.) bank consultancy: "I'm very concerned about Basel II. I think it will be a serious mistake. It's bad public policy."

Yet the bureaucratic process of creating and implementing the new rules has so much momentum that it will be hard to deflect. Regulators have invested time, money, and their reputations and don't want to be seen as going backward by easing regulation, since it is obvious that overly lax regulation got the financial system into this mess in the first place.

Flowers Losing Smell
Link to disappearing bees suggested

Spring's bloom may not smell so sweet anymore, as pollutants from power plants and automobiles destroy flowers' aromas, a new study suggests. The finding could help explain why some pollinators, particularly bees, are declining in certain parts of the world.

Researchers at the University of Virginia created a mathematical model of how the scents of flowers travel with the wind. The scent molecules produced by the flowers readily bond with pollutants such as ozone, which destroys the aromas they produce. So instead of wafting for long distances with the wind, the flowery scents are chemically altered. Essentially, the flowers no longer smell like flowers.

"The scent molecules produced by flowers in a less polluted environment, such as in the 1800s, could travel for roughly 1,000 to 1,200 meters [3,300 to 4,000 feet]; but in today's polluted environment downwind of major cities, they may travel only 200 to 300 meters [650 to 980 feet]," said study team member Jose D. Fuentes.

With flowers no longer advertising their presence over as large an area, pollinators are forced to search farther and longer to pick up the hint of their scent. They may also have to rely more on their sight than what they smell.

Bees depend on flower nectar for food, and if they have a hard time finding the flowers, they can't sustain their populations. Other studies, along with the experiences of farmers, have indicated that bee populations are dropping in places such as California and the Netherlands. Fuentes and his team think air pollution may be the reason.

The research, funded by the National Science Foundation, is detailed online in the journal Atmospheric Environment.


scandia said...

Ilargi, I saw Mark Carney of TV last week and had that same troubling feeling you are having. He revealed nothing , kept any real information or concerns to himself, used incomprehensible jargon to respond to the interviewer. All I came away with is he intends to keep his manadate which was presented as keeping inflation within 2%.He struck me as a man keeping a secret. And he certainly was not forthcoming in a way intended to inform the average citizen.He gave the interview because as Chairman of the Bank of Canada he has to. He was not enjoying the " opportunity" to communicate with Cdns.
We are not part of his mandate, I've concluded. I do wonder who his master is? Do you know?

Anonymous said...

Good selection and comments, Ilargi!

I think you'd like this kind of solution to the current financial crisis (it'd be the fastest and clrearest):

"Euthanize Wall Street to save the economy"

by NBBooks;sid=2008/4/14/234335/523



Anonymous said...


Finance Minister Jim Flaherty announced Thursday that Carney, a 42-year-old adviser *from his department, will replace retiring Bank of Canada governor David Dodge as of Feb. 1, 2008. Dodge indicated in April that he would not seek a second term. *(my bold)

Don't have to go far to go figure the fix is in, eh?

Anonymous said...

"Government should be afraid of the people, not the other way around, because this is how government is forced to act within the boundaries of reason, proper conduct, and the law."

Gotta love Denninger. Given human nature, it's foolish to allow power to centralize. I've had many discussions with vets in my classes about what they might do if martial law were declared by a central authority--are their loyalties to Washington or their communities? 100% of them so far have said "communities." All the vets I've talked with have something I don't see in non-vets: an overwhelming respect for what their radar tells them is right or wrong.

I don't want government that "fears" me; I want government that "respects" me--and respect can only be earned. If their's any good in what's coming, it's that we, as people, might become respectable again.

Ilargi said...

Scandia, CR

Carney is a Goldman man, like Paulson and so many others.

I've never really seen a credible history of the Bank of Canada, but since Canada was British property till not so long ago, and is still headed by Elizabeth, it's not hard to figure that the Bank of England was the model.

The US Fed may have been installed in 1913, in England the right to issue money was handed over to William Paterson, a Scottish banker (and his friends in the City), in 1694, in return for a large loan to the broke and destitute William III, who had spent all he had, and then some, fighting Louis XIV, the Sun King.

scandia said...

Maybe a study of the history of Goldman Sachs might give us some significant insights as to the size and whereabouts that black hole being filled up with taxpayers dollars. I am recalling a Bush statement after Harper's first visit to the US as PM. Bush described Harper as a man who " gets it".I wrote back then to ask the PM what there is to get but didn't get a response. What there is to get is a secret held by the leaders of the G7 countries. I do hope we can abort their plans for us.

peakto said...

Let's see...scandia and cr,

Harper attended the Bilderberg group meeting in 2006, and Flaherty in 2007.

Nuf said..."get it"..."the fix is in"

Anonymous said...

For the record, I don't think there is any conspiracy, just a bunch of people who went to Oxbridge or Harvard together and serve the interests their own, semi-hereditary, ruling class rather than the uncouth masses.

As an analogy, suppose there is a minor earthquake,and in the aftermath a man walking around town notices dollar bills blowing in the breeze, and points it out to his buddies. They follow the trail of cash and find a fissue has opened up right through the middle of a local bank and exposed the vault. They start stuffing cash into plastic bags. They realise there is far more than they can carry, so a few excited guys call up their buddies, and pretty soon all their old college friends are down there shovelling greenbacks into suitcases.
Is this conspiracy? No. Just theft by "flashmob".

I do think we are looking at the biggest scam in the history of the world, in progress. The backstopping of the multi-trillion dollar Ponzi scheme that is now unravelling.

I would expect to see trillions of US taxpayer money poured into Fannie Mae and the FHC so that banking insiders can offload their mortgage-backed securities at a good price. They got caught with the shit when the music stopped, now they are going to restart the music long enough to leave the taxpayer with the tab.

After they have exchanged their crap for cash, they can sit back and watch the economy slide and asset values crash (since little of the bailout money ever made it to the consumer). And buy up cheap assets in a deflationary environment a few years later (though I do expect hideous increases in the cost of living as the dollar falls on the increased debt burden).

Whether or not this "works" is beside the point. They looted on the way up, now they are looting on the way down to save their skins.

scandia said...

tenthousandmilemargin, Your analysis makes sense to me. thinking of the Carlyle Group that went bust and then reformed, raised new capital for just the purpose you mention, to buy up depressed assets as in make another fortune from the collapse.

Anonymous said...

Re: When men had balls that clanked

Would it be overly cynical to suggest a very large motivating factor behind the American Revolution was the desire of one group of rich white men to stop paying taxes to another group of rich white men? Possibly the largest, most successful tax dodge in the history of the world!