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COPING WITH THE CRISIS

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Posted by Digital Blonde (391 days ago)

"Let's be realistic.Thing's are bad but is it really comparable to the Great Depression ?"

No perhaps not another great depression, but we don't really know what the outcome will be yet. I think a couple of days rest will have done everyone in the markets a lot of good after last week. But you try telling the Japanese that what they have been going through for close to two decades now was merely recession. Technically it might have been but I think most people over there particularly the ones who were in their prime during its expansion would be inclined to suggest that what they have gone through for almost 20 years was a little stronger than recession. There are some differences between the Japanese and the Anglo Saxon model, but there are also many similarities with what happened in Japan, what happened in 1929 and what has been occurring for the last year. In all these cases, speculative excess resulted or will result in contraction. The scale of the one that is coming remains to be seen, and I honestly feel most people are a little too sanguine about the knock on effects. I think its going to be bad

What concerns me most is the massive almost unanimous argument by even the most right wing and laissez faire that there needs to be large scale government intervention and nationalisation. I find it very troubling that economists are suggest that during good times shareholders and management should benefit and when times are bad tax payers should pick up the bill because there are no better ideas out there and the fear of an outright collapse of the entire system is enough to ignore ideology.

The argument being put forward is that nationalisation and intervention will result in the same restructuring that needs to occur and would occur should there be a collapse. I appreciate the banking system is unique and wholly dependant on confidence, and its collapse has wide ranging implications on the entire economy but surely this cannot be the only answer??

Shareholders have been punished, and some managers have been fired. If you held Fannie Freddie Bear Lehman or AIG you were wiped out. Everyone else is still in with a chance. The Economist argues that the modern banking system is a free one that de regulation was beneficial to everyone and that when there is a crisis historically there has hostrocially been "large dollops of government intervention" and this makes it OK. I have to disagree, the system has a fundamental flaw if the answer every time a crisis occurs is for governments to intervene. If you ask me, and this goes against my own self interest because I am sure the people I work for would go bust, but I think that answer will warp the system even more than it is already. Perhaps that is good enough, we wont see another serious crisis for the best part of another century and the smaller ones that do arise will be manageable.

Coming out of this though, I am not sure I like the idea that governments are now in the business of credit delivery, profiting from mismatched liabilities borrowing short and lending long. Who is to say that governments behave any more responsibly than managements, what will occur when people lose faith in governments as well.

There are countries where major banks are nationalised or were only up until recently China and India for example are both countries where the big banks were or are nationalised and they seemed to function OK. Though I would have to add that both those countries had socialist systems in place prior to opening up and did not allow free flow of capital and had anaemic growth rates until they embraced market reforms, and I am not convinced that we should be looking to those systems as an an example of how we should be behaving.

Perhaps outright collapse is a non starter as a solution, but is the opposite end of the spectrum where the government takes equity stakes really that much better? Probably to you and I, who hold on to our job or savings for now, I really do hope when something like this comes along again, we have better solutions next time. For a society that has been through this before time and again, we have been myopic in allowing innovation to occur without having any plan in place should the system potentially collapse altogether.

Posted by onemorething (391 days ago)

I will throw in my 2 cents worth. First of all the current credit crisis is caused by the excessive supply of cheap unregulated credit. It is nothing short of a criminal ponzi scheme. This was allowed under the corrupted mix of power (politicians) and money (banks). I am unapologetic about what I will say: political and corporate America is morally corrupt to the core, and quite frankly many Americans were more than happy to go along in the good times.

Now the very same people that brought us the credit crisis are supposed to solve the problem: Hank Paulson, the US Congress and Ben Bernanke. It is the equivalent of letting criminals run the courts. Almost every measure taken by the US authorities so far are nothing short of exacerbating the whole problem. Good money is thrown at bad, more credit is used to fight the problem of too much credit, and more lax accounting is allowed. It is actually only benefitting the rich, and undermines faith in the banks further. Why are banks not allowed to default and convert the bondholders into equity holders? But instead the shareholders and the board are given more cheap credit as a lifeline, until the next multi-billion dollar loss. The problem is not the lack of liquidity, the problem is that the banks are insolvent. From that point of view the British partial nationalisation of the banking sector is a much fairer solution for the taxpayer, while punishing the guilty (the CEO and his cronies).

I still believe that partial nationalisation is not going far enough. The deleveraging is feeding on itself and cannot be stopped until the market has found a new equilibrium. Unfortunately that means that close to all banks will be bankrupt. That is a very undesirable outcome from an economic, monetary and societal stability point of view. As professor Nouriel Roubini has proposed all banks should be nationalised and merged or allowed to go bankrupt applying triage (this will be the new buzzword soon!). That means that all shareholders will be wiped out and perhaps some of the bondholders as well.

What we witness now is that banks do not trust each other, and for good reasons. They know how cooked their books are, and that they are all bankrupt. This is now spilling over to corperations, investors and depositors. If the banks do not trust each other, why would I trust them with my money? This trust will not be regained in three months.

The lack of credit in the market outside the banks, i.e. new home loans, and corporate loans, means that the economy will get hit hard. Companies cannot roll over their debt, and will have to cut costs or file for bankruptcy. Both outcomes will result in bigger unemployment and therefore a further deterioration of the economy. This will set off a whole chain of other credit problems from credit card loans to car loans. I believe we may have crossed the tipping point already, and that means we are now in a death spiral. I strongly doubt this can be stopped, unless some really tough painful coordinated action is taken soon. In all honesty even then I am not very convinced we can escape ground zero, but to cheer you up... I am a bit of a pessimist. :-)

So what happens if the financial system implodes? It is really tough to predict, because we are subjected to the irrational unpredictable decisions of our "omniscient" politicians... for one they will want to protect their own wealth, so don't expect any fairness.

Scenario 1: the deleveraging is causing price deflation beyond the scale we have seen in Japan. I expect interest rates to go down to zero in line with Japan. However I expect monetary inflation, and as a matter of fact M1 has already grown by 10% this year. The Fed will print more in order to rescue the banks. This means that more dollars come into circulation. However in an environment where prices decline and where there is high unemployment, these dollars will be hoarded and not be used. At the first signs of these dollars entering the economy again, we will start to see very serious price inflation and the Fed will start hiking interest rates very quickly and very high. We could revisit the double-digit inflation and ditto interest rates from the 70s. This is terrible for corporate profits, so do not expect a serious recovery of share prices.

Scenario 2a: All Western economies will start printing money to bailout everybody and everything: banks, insurers, car companies, home owners, builders, etceteras. Initially this will result in ballooning government debt until there are no new creditors available, followed by printing money to repay these loans. This is the Zimbabwe solution. It won't come that far, because people will take to streets by the time inflation runs in the double-digits. After order is restored we are facing the 1930s Great Depression scenario.

Scenario 2b: There is another bank failure that drags down all other banks worldwide. The US is no longer able to intervene because there are no willing creditors left. The US defaults and a new financial system needs to be engineered. The New US Dollar will replace the old greenback at 10:1 (or 5:1 or 100:1, whatever the number is).

An insurance protection in all scenarios could be gold. Gold is money, and as with all money it is based on faith. The mass has to have faith in gold, otherwise it cannot be pulled off. Under scenario 1 it is also possible that gold will collapse. My feeling is that the current deleveraging will initially drag gold down a lot (like we saw last Friday from 930 to as low as 830), but in the end it will bounce back with a vengeance.

Enough food for thought for now. I have written about some of this stuff before in other threads in this forum. I particularly enjoyed the sparring with Digital Blonde. DB, you have changed your tune a little bit! :-) Not that I was right with everything - haha.

OK, shoot holes in my "essay"!

Posted by axptguy38 (391 days ago)

"I've had enough. I'm off to bed.Let's just be greatful we've got food on our tables. has anyone thought about those in the third world"

The irony is that relatively speaking, the poor in the third world have lost less since they are far less dependent on credit. In reality, as you say, we still have it far better.

"The markets must be allowed to function but I do think that government must play some role in slapping down those who would abuse the system, taking huge packets home then leaving a mess every five or six years."

Investors surely will want tighter controls. However, they will want competent people in charge. The only way to attract the best is paying them the huge packets. It's ironically inevitable.

Many investment bankers can of course be blamed, but this shouldn't be a witch hunt. The vast majority of people who work in investment banking are talented and extremely hard working. Greedy? Perhaps. Certainly the salaries are high, but it is not a get rich quick scheme. It takes a lot of drive and effort. I doubt that there are that many truly scruple-less financiers who really didn't care and just let it happen, knowing their parachutes would deploy and save them personally. Most of them are appalled, and many have lost very large chunks of their net worth. Some would say they deserve it. Perhaps. But I don't believe they are evil or uncaring like the papers sometimes make them out to be.

"The Great Depression was caused by measures of governments that were totally wrong. But they did not know any better in those days. These days there is a far better understanding of economics.

Two major causes of the Great Depression were a restriction of credit and money flows, as well as market protectionism, effectively strangling commerce.
Exactly what free markets do not need."

Indeed. The kind of confidence boosting measures seen in the past weeks just didn't happen during the depression. Economics is not an exact science, but as Lehman Wong says the current understanding is vastly superior to what we had in those days.

"The point is, if we were such masters of the economy we would not be in this situation - so it would be hubris not to protect oneself from a possible meltdown and assume that our leaders will come up with something that heads off the worst."

If there is a true meltdown, the only thing to do is stock up on canned goods and head for the hills. Especially if you live in a big city. I don't see it. Certainly the economy won't be too hot for several years, but I don't see that scenario. I'm a glass half-full kind of guy. ;)

Posted by Ed (389 days ago)

This was in my mail this morning...

When The Music Stops

Now that the party is over, a crisis of confidence will lead to a crisis of credibility for many of the world's high-flying bankers.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” Chuck Prince, chief executive of Citi, the world’s biggest bank, said in July 2007, three months before he was sacked.

There have been plenty of occasions in the past 25 years when the music has paused and bankers, brokers, traders and fund managers have sat down for a rest. This happened in the 1987 crash amid insider dealing scandals, and again in the recession in the early 1990s and the emerging market crises at the end of that decade.

Then there was the telecom and dotcom boom and bust at the turn of the century, when Wall Street analysts pretended to give impartial advice to investors, while corporate financiers lined their pockets with fee income given for advising on deals that were economically pointless but pushed a company’s share price higher. For at least a decade, there has been a focus on shareholder value which aligns corporate pay with stock price performance.

In fiction, these financial masters of the universe have been lampooned by Tom Wolfe in The Bonfire of the Vanities, demonised by Bret Easton Ellis in American Psycho, and epitomised by Gordon Gekko in Oliver Stone’s Wall Street. These masters of the universe have rarely been admired or praised, except by proud parents, aspiring new entrants or a colluding or gullible financial press. Instead, they have been parodied or despised as pretentious yuppies, scheming snake-oil salesmen, automated number fixers, forked-tongue con-artists, heartless destroyers of local communities and national economies, or simply braying or smug but always self-obsessed tossers.

Yet, each time they survive. Bad apples are apparently discarded, new business models are paraded, fresh visions are revealed and new heroes emerge. Their wealth and power intimidates. It invites envy and an uncomfortable feeling that maybe they are what they say they are or at least imply: alpha men and women, winners, a warrior Aryan race reaping financial rewards as they make the world a more efficient and therefore better place.

But this time it’s different. The lights have been switched on, sobering them up, making them wonder if they’ve made fools of themselves. And then they notice the partner they’ve been shimmying in front of or, worse, gyrating against, is actually a bit of a trog. But worse, far worse: they have an audience.

Everyone’s watching: from the people who serve them in or have been priced out of their cities, to the countries they’ve lectured to about discipline and hard choices, while pleading for no restrictions on their own 24-hour partying.

How can you believe it when they next come round selling a structured product, giving investment advice based on probability-based risk models that have certainly failed, touting stock picks or asset allocations backed by often arbitrarily chosen discount factors or finger-in-the-wind macro forecasts, claiming credit for betting red rather than black, writing explanatory guides about esoteric financial instruments or evangelical tracts on the path to management success.

This loss of confidence within the financial system must surely mean a loss of credibility for many of its practitioners.

There are the articulate salesmen – experts at bluffing through half-digested briefs, who spin persuasive stories, earning status within the bank and six- or seven-figure sums from its shareholders by closing deals that shift unwanted positions from his trader’s books to a softened-up punter, while pretending to be honest advisers.

Then there are the preening, vain investment bankers who search for the corporate killing as globe-trotting mercenaries, earning vast fees for advising on mergers and acquisitions based on company synergies when it suits, or diversification benefits when it doesn’t.

There are the analysts who are under pressure to produce papers, interpretations and forecasts – weekly, daily or even hourly. How thought out, reflective or even objective are these reports? It’s easier to decide your conclusion first, then work backwards. On a holler-box driven trading floor in a Bloomberg world, a message, a view is all important – at least until the next one a few seconds later.

And finally there are the fund managers who go through the motions of investment processes to win asset allocation mandates from US pension fund consultants, when it’s always so much more ad hoc, where hunches are disguised by vapid power point bullet points or slipped by credulous colleagues with a chin-stroking display of conviction. Their self-importance is too often elevated by flattery, attention and entertainment from brokers and their sidekick analysts, wheeled out to provide gravitas as a counter-balance to the salesman’s good-old-boy levity.

If history repeats, as it often does, these well-groomed bankers and analysts with over-trained presentation voices will reappear. In fact they are still with us, explaining what went wrong and what should be done now. But how can you believe them? It’s like listening to drunk drivers responsible for a motorway pile-up giving advice about road safety while blaming the pub landlord for serving them.

It’s hard to be impressed. The bespoke suits of still aspirant bankers, the polo shirt and chino casuals of adolescent hedge fund managers or the crumpled affectation of billionaire old-timers now look like vulgar bling.

Nor can their cheerleaders be ignored. Financial journalists who struggle with a calculator but parrot phrases and words fed by bankers; admonished investors who had been too slow, hence too unsophisticated, to buy products (such as CDOs) they themselves couldn’t hope to understand; or the academic type, proselytising for magazines and newspapers with a free-market agenda, issuing sage, world-weary advice predicated on theoretical models to businessmen, bankers, governments, multinational agencies. Yet, they often possess so little practical experience that tying up a shoe lace is the extent of their manual labour and finding a cheap copy of Freidrich von Hayek’s The Road to Serfdom on the internet is the limit of their entrepreneurial flair.

Of course, the problem has been the raising of financial jobs to a status they never deserved. “A high-flying banker” should be an oxymoron, when his world is made up of so much smoke and so many mirrors. Yet, spurious qualifications have sprouted to provide an appearance of professionalism. In reality they teach little beyond a superficial understanding of difficult concepts, and instead a holiday guide-book knowledge of an arcane language that other travellers can also pretend to comprehend.

In the past, the stockmarket crises have been blamed on rogue traders, unethical mavericks, parvenu broking or investment firms, or, desperately, computers. Even more desperate, and certainly egregious, it’s been “foreigners” – that is “corrupt spendthrift Asia, corrupt ill-disciplined Latin America or corrupt gangster-ridden Russia”.

But western financiers are now struggling to find “not us” scapegoats. There is the insidious undercurrent that it was the poor black and Hispanic house-buyers who started it all, despite the lofty pundit talk about the Fed’s loose monetary policy, global financial imbalances and layers of derivative securities that hid rather than spread risk.

The problem is that now the music stopped and the lights have come on, the grown-ups are also seen standing amid the detritus of the party. Regulators, central bankers, government officials and the normally shy multinational elite of bureaucrats who police and control the financial world have been caught in an embarrassing glare. Rather than bouncing undesirable intruders or throwing out drunks, they had been giving a welcoming wink and supplying the liquor. Yet now they’re calling for order. Perhaps they’ll get away with it.

http://www.financeasia.com/article.aspx?CIaNID=86655

Posted by Ed (389 days ago)

When the first bail out plan was approved in the States I was watching for a big drop in the Libor rate as I think that is the key barometer measuring banks' expectations for the success of the bail out. Libor rate increased after the bail out was approved.

Here we have round two. A revised package is announced, stock markets rally, the Libor rate has dropped 7 basis points. Would this be considered a significant drop?

If not then I would think that this is a very disturbing signal...

Thoughts?

Oct. 13 (Bloomberg) -- Money-market rates in London fell after policy makers offered banks unlimited dollar funding and European governments pledged to take ``all necessary steps'' to shore up confidence among lenders.

The London interbank offered rate, or Libor, for three-month dollar loans dropped 7 basis points to 4.75 percent today, tied for the largest drop since March 17, the British Bankers' Association said. The one-month dollar rate declined to 4.56 percent, while the one-week euro rate fell to 4.34 percent, the BBA said. There was no overnight dollar price today because of the Columbus Day holiday in the U.S.

The Federal Reserve said today central banks around the world will offer as much dollar funding as required. Leaders of the 15 nations using the common currency agreed yesterday to guarantee new debt from financial institutions and use taxpayers' money to keep lenders afloat. The three-month rate banks charge for euro loans dropped by the most since Dec. 28.

``Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses that have prevailed in commercial paper and inter-bank markets,'' a team including Dominic Wilson, senior global economist at Goldman Sachs Group Inc. in New York, wrote in an investor report today. ``This is because bank solvency risk should decline as the government offers protection.''

Markets Frozen

Credit markets remained frozen last week even as policy makers jointly cut interest rates for the first time since 2001 and continued to inject cash into the banking system. The Group of Seven nations pledged measures at the weekend to stem a market panic that sent the MSCI World Index of stocks plunging 20 percent last week. Stocks rallied today, with the index jumping the most since Sept. 19.

The Fed, ECB, Bank of England and Swiss National Bank will hold one-week, one-month and three-month dollar auctions at a fixed interest rate, the Washington-based Fed said on its Web site today. Central banks ``can provide U.S. dollar funding in quantities sufficient to meet their demand'' into 2009, it said.

Three firms are finalists to be the U.S. Treasury's ``master custodian'' for Secretary Henry Paulson's program to aide financial institutions, Treasury Assistant Secretary Neel Kashkari said. Paulson's program to buy equity in these companies will be optional and aimed at ``healthy'' firms, Kashkari, who oversees the $700 billion Troubled Asset Relief Program, said in Washington today. The selected firm will be announced within 24 hours and will serve as the program's prime contractor, he said.

Loan Guarantees

The three-month dollar rate is still 325 basis points more than the Fed's target of 1.5 percent. The difference was a record 332 basis points on Oct. 10. The rate was 82 basis points more than the Fed's target on Sept. 15, the day Lehman Brothers Holdings Inc. collapsed.

``Policy officials have won this fight, but not the war,'' said Lena Komileva, head of G7 Market Economics at Tullett Prebon Plc in London. ``Risks remain and it's crucial that governments move ahead with recapitalization and the introduction of bank debt guarantees soon. It is early days still, but the freeze is starting to thaw.''

France, Germany, Spain and Austria today committed 1.1 trillion euros ($1.5 trillion) to guarantee bank loans and take stakes in banks equal to 3 percent of their economies, racing to prevent the collapse of the financial system.

Germany has pledged 400 billion euros in loan guarantees and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks. France will guarantee 320 billion euros of bank debt and set up a fund that could spend up to 40 billion euros. Spain's government will guarantee up to 100 billion euros of bank debt and buy shares in banks in need of capital.

`Restore Faith'

``Extraordinary measures are necessary under such extraordinary market conditions,'' the German Finance Ministry said in an e-mailed statement. ``The central task is to restore faith between market participants.''

In Hong Kong, where the government has refrained from guaranteeing bank debt, interbank lending rates stayed at the highest in a year. The three-month rate climbed 3 basis points to 4.44 percent. Singapore's three-month dollar loan rate increased for a fifth day, rising more than 5 basis points to 4.79 percent. That's the highest since Dec. 27.

The dollar Libor-OIS spread, a gauge of demand for cash, narrowed 4 basis points to 360 basis points. It was at 105 basis points on Sept. 15. The spread was 24 basis points on Jan. 24.

Guessing Libor

Libor, set by 16 banks in a survey conducted by the BBA each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for terms between one day and a year.

While the estimates that go into Libor used to be based on actual transactions between banks, they have become little more than guesswork since credit markets froze, three people with knowledge of how interbank rates are set said last week.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 7 basis points to 457 basis points, down from the most since Bloomberg began tracking the data in 1984.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRZTg5IzBnI0&refer=home

Posted by Digital Blonde (389 days ago)

Define corruption.

To be frank I am a little dubious of your notion, you seem to qualify it now, but that qualification to be frank doesnt seem to make an awful lot of sense to me, how is investment banking more corrupt then any other industry? they all have lobbies and all of them cosy up to politicians in all countries. It really makes no difference what industry you are in. So long as there are rents to be had, the industry will engage in rent seeking behaviour, that is the basis of capitalism and unless you work for a charity or engage in welfare it is no more corrupt an industry than the one you work in, the only difference is the average salary is far higher than most other business.

I doubt for a second if someone offered you the same job for the same money you would spend even a second thinking debating its morality.

Bankers get paid for the most or it is supposed to be, about revenue and profit generation, You are supposed to eat what you kill. The bonus system is actually archaic at banks, in fact it is warped, because most people don't end up eating what they kill, they try to eat what others have killed, or pretend as if they were responsible for the hunt when it comes to bonus time, and perception rather than reality defines a bonus in every department where the individual is not responsible for their own P+L. The fairness and logic of that kind of system is a different debate altogether though.

Its not for you to say who is over paid and who is not, There are people who would do your job for probably half the price you charge and probably think you are being overpaid. How much people are paid and whether they get paid too much or to little is relative, and ultimately the barometer is usually profits.

Frankly speaking I think your moral outrage is more than a little hypocritical and self serving, you seem to value a free society where you can speak your mind and given on more than one occasion in the past you have commented on the direction of particular markets and trades you have engaged in. You seem to suggest that its OK for you to profit from markets, but when people or industries make their living from them and probably a good one at that. To you that is not acceptable, and there is some kind of crime being perpetrated. So capitalism for you is fine but its not for anyone else that makes more money than you do. Those that do are corrupt and the industry they work in should be ashamed of itself.

You will excuse me if I am a little skeptical that your notion is either pragmatic and not self indulgent. I allocate capital for a living, I get paid well when the choices I make work and I get punished if I make bad decisions. That is the essence of banking, that is what we do. Our business is prone to mania and paranoia, because of what we do for a living, channelling credit from those that have it to lend to those that need it to invest, for the last 30 years, there has been the largest global peace time expansion in the history of mankind. Billions have been lifted from poverty entire countries have been transformed and millions of people no longer starve.

Did we take our pound of flesh all the way along? you bet your bottom dollar we did, Am I surprised that someone somewhere made an awful lot of money for not doing very much given everything that happened? Not in the slightest. Was sh*t eventually going to hit the fan with all the change that has occurred and all the wealth that has been created for so many people, not just the bankers? Of course it was, it was always going to do that. Generational changes do not come without a price. We have all benefited from the excess, from the innovation, not just the financial services industry and now we are all going to pay.

Should we be ashamed because we made a lot of money knowing that at some point the party was going to be over? not for a second mate, and don't pretend the ordinary person in the street is some kind of victim and didn't profit when the party was on. Everybody played there part here and no one kicked up a fuss when the money was rolling in for everyone, and now people want to label an entire industry as criminals or snake oil salesmen, when it was probably less than 1000 people globally that caused this mess that we are in.

Like I said define corruption, I am at best dubious of whether you understand what it actually means and even if we agree that you do, I would wager that you are probably not in the least guilty of a little greed yourself.

Posted by widemoose (389 days ago)

I agree with digital blonde that this so called moral outrage directed solely on bankers is misdirected. "Mainstreet vs. Wall Street." If you invested in stocks and sold for a profit, or bought a house and sold for a profit, or received a low-cost mortgage, or received a raise/promotion in the past, you've benefited from the unprecedented growth from the recent credit expansion--which was facilitated by bankers. If you missed out, bummer, but that doesn't give you higher moral authority to bash those people who spotted the opportunities because they saw the DEMAND and looked to profit from it. Isn't that the basis of capitalism? Of course that can get out of control, which is why we are supposed to have proper government regulations. Bankers could not have created and sold their risky products if there was no demand. It's like prostitutes. If there are no "johns", there will be no prostitutes. You can't just blame the prostitutes. Okay, let's take that one level up. Some of the most brilliant medical doctors have switched to plastic surgery. Because that's where the money and demand is. Not cancer research or treatment. Are these medical doctors morally corrupt because they are part of a system that exploits people with insecurities about their looks to make money? The point is that we are ALL guilty. We enjoy cheaper products (look the other way knowing these products are created in sweatshops or human rights violating countries) and more choices (threatening companies that you'll take your business elsewhere if they don't offer you a lower/higher rate), among others. Maybe there are a few who can genuinely say they lived their lives without any greed or negotiation, but for most of us, we are guilty, whether it is through direct or indirect participation, or through ignorance.

Just to be clear, I'm not saying onemorething is entirely wrong. There are some people (including bankers) who are morally corrupt. I just don't think you should label an entire group as being morally corrupt, as if it had no other participants. By the way, I know a lot of bankers and they are hard working nice people who are among the first to donate to charities and support social causes. Not saying all bankers are like that.

Going back to the markets, I'm not sure that this rally will last because once the fourth quarter earnings start to trickle in...if you missed out on the rally, it is highly likely that there will be another buying opportunity around the corner. I would not go in now. Others?

In terms of currencies. This is a tough one because I've been burned badly. How are you holding your currency?

Gold. Still not convinced. I feel like it has had it's run. Gold is tied to inflation (which I'm not sure we'll have), oil price (which looks to be going down by most assessment), and the US$ (which I'm not sure I want to bet against given the other alternatives). Also, few alarming things I heard about gold. There are more paper (right to gold) outstanding than the physical gold--hence the highly unlikeliness of going back to the gold standard, gold has no return value--must be sold and exchanged for currency to be used, and its industrial usage is diminishing--there is much more supply than demand in that sense. There is a lot of gold jewelry already in circulation. Also, when the markets are rallying, people tend to sell gold to get into equities and the like. So it seems like you can't win with gold anymore because in a recession/depression everything is sold, and in a period of growth, gold is sold. Wish I had gotten in when it was at $300. I think I missed the golden opportunity, just like I missed out on the dotcom boom and the housing boom--from being too rational!

What are your investment plans?

Posted by onemorething (389 days ago)

DB> I am all capitalist and free market and free speech, so we at least can agree on that (although I enjoy disagreeing in general). I guess that makes me a Von Mises type libertarian.

I want to stick to the point, which is a bit difficult, because I know that everything I say needs a lot more clarification than the inherently restrictive nature of a forum posting permits me. I have plenty of examples of why investment banking is morally corrupt (from the top down). For starters the immense self-serving greed that is placed ahead of any other shareholder or social interest you can possibly imagine. Any mean is justified to achieve this from lieing, back-stabbing to brutal power abuse. Seriously, just look at all the bank CEOs that have departed over the last twelve months. The repeated denial and lieing about the true state of the company's balance sheet, the state of the economy and the need to raise capital. While maintaining huge pay packages and big dividend pay-outs. A bank does not go bust in a matter of a few months. Its demise slowly spreads like a cancer, but curing it will jeopardise all the perks of being a CEO, so it won't be treated. It is truly disgusting. Then there is the symbiotic relationship between Wall Street and Washington, which really took off under Bill Clinton by the way, which has led to corporate interests ruling the US of A.

Now that the cancer has spread so much that the banks can no longer hide it from the public, the taxpayer has become the new medicineman, or actually just the new medicine. The roots of the corporate interests have to be kept alive inside the political establishment. And for the unpatriotic non-believers, don't question the cure or the whole world will come to an end tomorrow (think $700 billion "bailout" fund).

This has nothing to do with capitalism or free markets. The Washington politicians have gained a monopoly on power, and abuse it by granting influence to corporate America in exchange for money. All of this goes unchecked. Hank Paulson's bailout plan goes unchecked. The Fed goes unchecked with their alphabet soup liquidity measures. And Bush and Cheney have gone unchecked a long time ago since the introduction of the "War on Terror" and the Patriot Act. Corporate America goes unchecked, because we never got to vote for them in the first place.

That is what I call morally corrupt. If you look up morally corrupt in an encyclopedia you probably find a photo of Richard Grasso, the NYSE CEO with regulatory powers that cashed in 100s of millions as legally approved by his pals on the pay board.

There are very few hedge fund managers that truly add value to the financial system and therefore the world. Just playing a lottery every day with one thousand white marbles and one black marble does not make you smart: White marble you get 7 digit bonus. Black marble your investors lose all.

Call it shrewd, brilliant, unlucky or lucky... I call it morally corrupt.

axptguy38> I have seen much more intelligent postings from you. You have to get a lot more cynical, mature and sharpen your act. Do you really understand where all the money has come from? Does M3 mean anything to you? Ever heard of Level 3 assets? Who was the previous employer of Hank Paulson? Who owns the Fed? How does the Fed operate market operations? How does M1 increase or decrease?

Posted by Ed (388 days ago)

Could the worst be yet to come re: mortgage defaults?

Credit crisis needs a Churchill

A bulldog spirit is required, says Hong Kong hedge fund manager Paul Sheehan, who puts forward a proposal for addressing the credit crisis.

Paul Sheehan is CEO of Hong Kong hedge fund Thaddeus Capital. He arrived in the alternatives world with a unique background, having in the past worked as a bank examiner at the Federal Reserve in the US, followed by stints as a bank equity analyst at the ill-fated firms Bear Stearns and Lehman Brothers.

Here he presents his manifesto for resolution of the credit crisis.

Letter to America: Action this day

Winston Churchill, upon assuming office as British Prime Minister at the beginning of World War II, would prod a slow-moving government corpus with demands for “Action This Day”, the order that was attached to his most urgent missives.

Observing the collective market reaction to the policies of the US government in its attempts to resolve the current credit crisis, it would seem that a box of Churchill’s stickers, to be dispensed liberally, is in order.

The G7 and the IMF are anxiously petitioning America for further aggressive action to stem the progress of the credit crisis which began in the US, and is now affecting the entire world.

As we in Asia are not only impacted by the crisis, but know a thing or two about banking crises ourselves, perhaps it is an appropriate time to return the favours of 1997-98 and advise the US on appropriate steps to take.

First, let us review the underlying problem, and the root causes of the crisis:

Credit crisis: Root causes

American consumers are broadly over-leveraged relative to income. This borrowing has been used to finance consumption, and is one of the reasons for the preternaturally-resilient American economy over the past ten years. The US economy is now dependent on consumer spending well above the normal trend as a percentage of GDP.

The major increase in borrowing has been via secured lending with residential property as collateral. This has been encouraged by government promotion of home ownership, regulatory capital calculations which assume only nominal loss on all first-lien mortgage lending, and ratings agency somnolence. It has also been embraced by borrowers themselves, accustomed by steadily-rising property prices to being able to refinance their way out of any problems servicing debt, and thus looking to maximise their gains by taking on as much property as they could possibly finance.

With little recent history of loss and the acquiescence of bank regulators, underwriting standards slipped greatly. At the peak of the property bubble it was possible for borrowers not only to make no down-payment when buying a new home, but actually to take money out immediately from the first mortgage, over and above the cost of the house. This new loan might not only have a low “teaser” interest rate, but also negative-amortisation features which would cause the principal balance to actually rise each month for the first several years. By the time interest rates reset and the loans began amortising, both borrowers and lenders assumed that the collateral would be worth much more.

The chain of mortgage losses

As these badly originated mortgages season, they are defaulting at a high rate. In addition, negative-amortisation and/or low-teaser-rate loans will be resetting in large numbers through 2010, and are much more likely at that point to also begin defaulting. The initial collateral values backing these loans either were never accurate, or have since fallen substantially. Thus, mortgage-holders will incur substantial loss, even before accounting for the large costs of foreclosure and resale.

Sales or overhang of foreclosed property will further depress property prices. This effect by itself will lead to additional mortgage defaults, as consumers price the option of default very efficiently. Falling property prices and foreclosures will lead to less consumer spending, resulting in a potentially very severe recessionary cycle, as rising unemployment and depressed property prices are likely to lead to a second wave of delinquencies and defaults in late 2009-2010.

So far, the anticipated effects of these losses have been mainly felt via mark-to-market of securities and derivatives based on mortgages, which are held by trading entities or in the available-for-sale or trading books of commercial banks, where they must be marked-to-market, or in the absence of real prices, to model which is meant to approximate market. We have not yet seen - for the most part - the effects of losses on the raw underlying loans, which are generally held in accrual books and not marked-to-market. The capital support and pricing read-through from WaMu and Wachovia indicate that these losses are substantial, and they will be widespread as almost every US bank has exposure to mortgages.

Most institutions are therefore either holding mortgage-related assets at accrual price, or marking to model at unrealistically-high prices. How do we know they are too high? Banks and broker/dealers have an immense incentive to get these assets off their books, and if they could sell at the current (written-down) book values they would surely do so to eliminate investor and counterparty concerns.

There certainly exist investors who would buy these assets at some price and who have cash. As no one is selling, we can conclude that the prices are in general higher than true market. Anecdotal evidence, such as a view of the bids for Lehman assets in bankruptcy, supports this view.

Therefore, we can conclude that most financial institutions have undisclosed uncertain (and not easily calculable with public data) losses – hence the uncertainly of investors and counterparties. All we know is that the published balance sheets are wrong.

Why Tarp is not a solution

The Tarp (Troubled Asset Relief Program) will of course help to some extent, but it is inefficient and does not target the underlying problems of the economy and credit markets.

First, it is oriented, at least in its original conception, towards purchase of mortgage securities and mortgage derivatives. This will not help the underlying mortgage borrowers, and it is their failures which will contribute to the severity of recession, as well as causing the cascade of losses from raw loans up to securities and their derivatives. So, it might rescue some institutions, but they will be primarily the highly-levered trading ones rather than direct credit-extending ones. If the objective is to restart the flow of credit in the economy, bailing-out traders rather than lenders is less than optimal.

Secondly, the discussion around the price at which assets will be purchased has been highly disingenuous.

If the Tarp buys assets at true market value, the selling institutions will incur additional losses as these are very likely to be below their book value. The institutions most in need of assistance are the ones least able to absorb such losses — or they would have already sold. If the Tarp buys at market value from healthy institutions, it will create reference transactions which will have to be used instead of mark-to-model at other institutions holding the same or similar assets, and by forcing the realisation of losses probably reveal insolvencies elsewhere.

Likewise, if the Tarp buys assets at book values, it will most reward those who have been least honest, and it will be buying assets for more than their worth to prop up distressed institutions. This will as above create false marks which will be used elsewhere, and thus perpetuate the uncertainty of true balance sheet values. If the desire is to effectively give away money to failing banks, it should be done openly and without creating a false market and its associated inefficiencies.

The meretricious idea that there is some magical “held-to-maturity value” of the assets being purchased by the Tarp, which value is not evident to the market (including PIMCO, pension funds, endowments, insurance companies, and others with essentially permanent capital and long-term investment horizons), but which will be discoverable by Secretary Paulson or his designees, and which is enough above true current market value to prevent institutions which sell at such a price from incurring lethal losses, is ostensibly laughable.

What more can be done?

The financial sector has two separate but related problems stemming from the credit crisis: a solvency issue and a confidence issue. The steps thus far taken are intended to address the latter, but have not yet made any impact on the former, and thus in isolation are bound to fail. Four proposed steps which would collectively restore some order to the financial system:

Step 1: Stem financial sector panic

Interbank rates are essentially notional at this point, as no banks are lending to each other; instead, the Fed is a single counterparty to the entire industry. To combat this, the Fed should on a temporary basis explicitly guarantee all interbank lending with maturity of less than one year, as well as bank and bank holding company commercial paper. This would remove fear without much incremental cost, as the Fed is clearly not prepared to let any bank fail if it would take down other insured institutions as well.

Step 2: Quantify the losses

Uncertainty is the killer of financial markets, much more so than losses. Given that there are massive undisclosed losses within the financial system yet and that hardly anyone’s balance sheet is what it appears, it is perfectly rational for market participants to fear lending to each other. We must identify where the losses are in order to address them, resolve their owners if necessary, and remove suspicion from those who remain healthy. Banks must be forced or strongly encouraged to sell bad assets in the market in arms-length transactions, and to recognise the losses — whatever their magnitude.

There is ample precedent for this from the S&L crisis, where banks were encouraged to sell their mortgage portfolios at market, even if they subsequently bought back similar assets in the market. I have no doubt but that the same might happen in this instance.

There will undoubtedly be resistance to selling at “fire-sale prices”, but unfortunately it is almost axiomatic that the bottom of the market will be where and when these holders sell – holding longer in hopes of a market upturn will only prolong the agony. This is validated not only by previous experience in the US, but by our own Asian crisis experiences in Thailand, Indonesia, Korea, Japan, and so forth. The requirement to sell at the bottom is also mitigated by the ability for banks to get out there in the market and buy the troubled assets of others as and when they see compelling value.

Step 3: Provide capital support

If institutions are going to be forced to potentially reveal their insolvency, the government must be prepared to correct it in some way, or no one will comply, as it would be corporate suicide. This can take the form of regulatory forbearance, as during the S&L crisis, where the government agrees to let banks take realised losses for tax purposes (and thus claim substantial refunds from prior year profits) but amortise the losses for regulatory capital purposes over 10 or 15 years.

In the current environment, forbearance alone is not likely to be sufficient, and so capital injections will be required as well. If this is done via preferred shares with potential conversion options or warrants (as was the case in Japan), or via a combination of common and preferred equity as the UK authorities have this week proposed, it should be sufficient.

Step 4: Address the underlying problem

All the while, these weak mortgages are still out there, and still defaulting. Propping up property prices is difficult (some wacky proposals include buying foreclosed houses en-masse and bulldozing them), and risks re-inflating the bubble. Buying raw loans at discounted prices from banks does not directly help the problem either.

As unpalatable as it is, the best solution is to recast mortgages to keep people in their houses. It is a distorting subsidy, but at least one which does not prop up property prices in general, and it would be a broad subsidy from taxpayers to taxpayers. With T-Bill rates at very low levels, the government could in effect pass along its cost of borrowing (via re-finance of mortgages via the GSEs or subsidy to existing mortgage holders) to borrowers on owner-occupied, first mortgages originated between, say, 1Q04 and 1Q08, for the next 10 years.

These rate-subsidised mortgages would not be transferable or assumable, so they would not stimulate anyone to go out and buy new houses. They do not cut the principal amount due, although that should also be considered when it is the best response, as encouraged by the Frank-Dodd housing bill last summer. Over time, as people move or refinance, all the loans will disappear or reset to market rates.

Even with these actions, the US will continue to see a high level of foreclosures and will most likely have to endure a stiff recession. Consumers will have to cut back, begin to save once more, and repair their own personal finances, even as banks do likewise. Trust in the financial system and its major actors will not fully return for a long time, if ever. However, if comprehensive action is quickly taken, perhaps we will be able to say that this is at least the end of the beginning, rather than the beginning of the end.

http://www.asianinvestor.net/article.aspx?CIaNID=86604&eid=13&edate=20081510&eaddr

Posted by Digital Blonde (388 days ago)

Nobody was robbed, as far as I can tell, Banks lent to people with bad credit ratings, that was bad judgement, those people started defaulting, they failed to pay their obligations, supposed ordinary people. In fact a bank will have borrowed money from a little old lady to lend to a Muppet who couldn't afford a loan but got one anyway. Who is doing the robbing, the intermediary who was the fool for thinking there could be money for nothing, or the person who took the loan they would not repay in the event the asset they invested in price would fall or could not pay because they simply could not afford it.

Everything else, deleveraging producing lack off liquidity or a lack of buyers and then credit markets seizing and equity markets gyrating is a direct function of that central premise. People borrowed money who simply couldn't afford it, and while they could do that people who could afford it were borrowing more cheaply, retail banks were stupid in pursuing such a terrible business strategy and investment banks did a great job diversifying the risk, to the point where it finally became anonymous, no one knew who was sitting on what so everybody panicked as soon as it became obvious that some banks would fail.

Little old lady for the last 30 years has probably had an IRA account and has done exceptionally well for 30 years straight with the exception of a few here and there, and she did so because of greed and she wasn't the only one that benefited. a few hundred million people if not a billion have been lifted out of poverty, entire economies have been transformed and some third world nations are now first in the space of a single generation because of the concept of greed. People who have money to lend, lending it to those that need it to invest for interest. That is greed it is profit motive and if you are Muslim your religion forbids you from doing it

At some point that system is going to produce people who think it is fine to rob, and some people will have gotten paid far to much in relation to the value that they added, these are quirks, of the system, if you need a stronger word than that call it perversion if you like. This is the price we pay if we want to live the way we do. If we want to be able to walk into a shop and buy anything we want when we want it, then we let markets allocate resources and capital. They do that based on sheer greed, not because it is moral.

What is clear is left to their own devices markets do not tend to equilibrium as economists love to suggest or theorise, equillibrium may even be a fools notion, they tend to extremes and not every market allocates resources in the best possible manner or one which society in general feels is the best outcome or even the most efficient, That is not news, I have been saying that for years and it was not my idea nor am I the first.

We need greed so that as a society we function, if it is not allowed manifest it is unnatural, what happens is the president of the Soviet Union goes home after meeting his American nemesis and sees children using loaves of bread to play football and becomes melancholy as a result because he realises at that point that no one actually knows the value of anything in his society.

Little old ladies were not victims here, we, at least everyone in the developed world and in our generation have all been beneficiaries of the de regulation of finance since the eighties. Yes there needs to be more regulation, no the market is not always right, and yes the process of financing needs to be reviewed reassessed and re evaluated. Some people will have made more than their fair share that is no surprise and in their rush to grab some of the stunning wealth that has been for everyone, a few might have even bent the rules, that is no surprise either. That is always going to happen no matter what you do no matter what industry you take. Behind every great fortune there is a great crime.

Whatever emerges from this no doubt will still be a system based on greed, because that is the underlying premise behind capitalism. Logical conclusion might be for young men to rob little old ladies but that is why we need to regulate it and legislate it.

Posted by Ed (388 days ago)

Shall we call it sheer stupidity because surely it is stupidity to a) give huge mortgages to people who did not have income to justify them and b) then allowing them borrow against the increase value of their home allowing them to spend like sailors on shore leave?

Essentially those behind all of this re-created almost exactly the same conditions that lead to the Great Depression.

I have heard the argument that we all benefited from this insanity and I am not at all good with that

Those behind this arrogantly gambled with the future of every person on this planet without their knowledge and without their consent.

Yes, some might have done well out of this but is there any solace when most of their nett worth may be wiped out?

If you are going to take my pension money and go to the tables in Macau, pocket 20% on the front end then gamble the rest taking another cut off every winning hand until finally losing the lot (and knowing full well the house always wins eventually) I really, really need you to ask me beforehand if this is ok...

Yes people are to a certain extent to blame for taking on outrageous debt, but they were lead down the garden path and there was complicity all along the line from the guy who sold the mortgage to the einsteins who packaged this garbage and unloaded it knowing full well that it was toxic and fundamentally dodgy.

People are naive and often stupid so if you tell them don't worry buddy, this is a win win situation what do you expect them to do? Of course they will want the million dollar house on the 50k per year salary with no money down. And when you say hey buddy your house is now worth 1.1M, how about a low interest loan for 100k so you can buy a nice new Hummer? Most people are going to say sounds good to me, where do I sign!

Why did those on this assembly line of deception do it?

I do not think they are at all stupid. They were chasing commissions and bonuses.

On a higher level, how was this allowed to happen?

I have no doubt that regulations were rolled back by finance industry lobbyists shuttling politicians to the Super Bowl on private planes, contributions to campaigns etc...

Will anyone face the music over this?

No, because there is not one person or persons you can finger - its the result of a system that is corrupted and the system needs to be fixed so these things cannot re-occur.

Will that happen?

It's been pointed out that this is an industry changing event. The government now holds board seats.

But it seems that whenever you try squash greed it simply morphs and finds another way around the roadblock because ultimately greed is corrupting and there will be those that try to find ways around well-intentioned attempts to reign in abuses.

So we will drop in some new regulations and we will move along and then we'll repeat the cycle in 5 or 6 years as we always do. Hopefully though we can limit the heavy duty messes to once/century or so....

You might get a chuckle out of this but it is the definitive explanation of how we got where we are - I suggest everyone download this and email it around to friends

http://dump.attack11.com/mortgage-crisis.pps

Posted by Digital Blonde (388 days ago)

Mate I am not entirely sure what point you are making

(1) you suggest no further regulation is required yet you then go on to make the point that what is currently in place is inadequate and even biased.

I am not disagreeing with that assessment, but which is it, no further regulations or better regulations, because if it is the latter I assure you that is a synonym in the case of financial services for more regulations, in fact you cannot have one without the other in this case.

(2) Bernanke and Paulson are not responsible for the crisis, that is an outright false accusation. If you want to blame someone you need to blame Greenspan who remained laissez faire through out his tenure, knew there were problems as we all did but didn't see the need to do something about it on his watch. If the world was awash with liquidity for the last decade its because he cut interest rates and that caused both a housing and credit bubble. If you really want to blame someone, then its Thatcher and Regan who embarked on deregulating financial services altogether. Because prior to those two, you couldn't by law even do the things that had to be done to cause the mess we are in.

(2) Why on earth do you think that Jean Claude Trichet simply mentioning the Bretton Woods agreement or the gold standard is revolutionary? He was not advocating fixed exchange rates, nor would he. Economists refer to Bretton Wodds all the time and the gold standard a central banker doing so is not extraordinary, not unless they were suggesting we fix exchange rates.

(3) Why is it a conflict of interest for an ex Goldman Sachs CEO who has no financial connection to the firm, holds no shares and doesnt receive any payment from them to be Secretary of Treasury, and if you say there is one then it means that no one with any executive experience, who has run something significance in the private sector is qualified for the job because by your definition, everyone has a conflict.

(4) Henry Paulson by law could not hold his Goldman Sachs stake whilst he is Treasury Secretary, I am not sure what the maximum holding is, but there is a reason he didn't have to pay capital gains. If the US Government imposed a capital gains tax on the people they appoint into executive positions, no one with any credibility would take the job of Treasury Secretary, because in this day and age to be the Secretary of Treasury you have to have an understanding of what is actually going on in financial markets, either as an issuer or an intermediary and those people tend to be CEO's of big companies or banks who hold stakes which exceed Federal limits. If candidates were stuffed with a punitive tax simply for taking the job, there wouldn't be anyone of any worth who would answer the President when he called them about the job. Why would they?

Did he take the job just to evade capital gains? well its probably the best way to liquidate what he was holding tax free and do that legally, I am sure it factored into his thinking, but its not the only way to achieve that end. Was it the reason for him taking the job. I doubt it.

In all honesty. You seem to offer a lot of criticism, but almost no solutions, other than point the finger what is it that you are trying to say?? because really my friend and I say this sincerely, pointing the finger without pointing it at yourself is

(a) disingenuous. You benefited just as much as anyone else, there are people that perhaps obtained better financial rewards, but you wouldn't be living the life you have led had it not been for those same people.

(b) A waste of time if you offer no solution

If you ask me, I prefer having a former CEO of GS as point man during this type of crisis, I know the guy has what it takes to make tough calls, and he may get it wrong, but I have more confidence in Paulson, then I do in any of the other Bush appointees

Posted by Digital Blonde (388 days ago)

I don't find it patronising, without wanting t cause offence, because I don't dislike you, in fact quite the opposite I find you quite decent and civil and you are obviously well read, though that is no substitute for education. A much lesser person would have taken offence at some of the things I have said to you, and been incendiary in their responses. Either you haven't read what I have written, or you have read between the lines and seen that I am not consciously trying to offend you. If it is the latter, that says an awful lot about you as a person.

But I have to say the ideas you present, they are not patronising, they are at best naive and if we did what you suggest we did, yours and my way of life would be not just be threatened, it would cease to exist.

Markets are no solution to anything, it is the misguided belief that the market is self regulating that got us into the mess to begin with. Markets were responsible for retail banks entering into sub prime lending as a business, They were responsible for investment bankers inventing securitisation and they were responsible for the diversification of risk to the point where it is opaque. They caused treasurers and fund managers to buy assets they knew were not investment grade simply so they had proxy exposure to real estate lending. If anything markets cause excess, not regulators. Markets by no means produce equilibrium and there is no evidence to suggest that if banks were free to set interest rates, they would set them at rates beneficial to the macro and ignore the micro. They would never do that, sheer profit motive would prevent them.

We allowed a bank to fail and what happened in interbank markets, they ceased to function altogether until governments nationalised or guaranteed deposits, and we saw massive corrections in equity values and overwhelming loss of wealth and a credit crisis that threatened to spread into the real economy the very next day rather than the next quarter.

I have to say I agree with the notion that banks should fail, but it is not a practical suggestion. If you read my earlier post I find the concept that we have to save banks that were badly managed, behaved irresponsibly and recklessly, incredulous. There is something deeply wrong with the system if we must do that in order to avoid catastrophe. Nobody seems to be proposing any viable alternatives though

What exactly do you mean by monetary discipline, forget the lengthy discussion give me a bullet point. Not whether banks should behave responsibly and lend to people who can pay, that goes without saying. What do you mean by monetary discipline

You will never separate an industry from those that regulate it, never. That is not viable it will not happen, what ever rules you impose the rent seeking industries will behave in such a fashion so as to influence those that wield power of their rents. If lobbying in its current form is outlawed, then they will find new and more innovative ways of doing it.

Fiscal discipline, I could not agree with you more

Bonus systems, well they will be revised once the government is the major stakeholder because bankers are now civil servants. Well not exactly but there will be changes to compensation no question

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lynn&sid=anezWmk6Rurg

That is very tongue in cheek and I had a good laugh.

Finally I think society in general does have integrity, as much as it can have anyway, anymore would be to change human nature itself and good luck doing that!!!

Posted by Ed (387 days ago)

This article from the BBC:

BANKS ARE STILL NOT LENDING:

Something very strange and worrying is going on in money markets.

First the good news.

The two trillion pounds of taxpayers' money that governments all over the world have put behind the banking system, both in the form of capital injections and guarantees for lending between banks, has reduced the perceived risk of banks going bust.

This reduction in the probability of banking failure is measurable, in that the price for insuring bank debt in the credit-default-swaps market has roughly halved over the past few days.

Here's what you've been expecting: the less good news.

Banks are still not lending to each other at anything like a normal rate of interest relative to official rates.

The statistics (kindly updated for me by Barclays Capital) are extraordinary.

Back in the first half of 2007, before the onset of the credit crunch, the gap between what banks charge each for three-month loans, the three-month sterling LIBOR rate, and the average of expectations of the overnight interest rate for the following three months (the OIS rate), was 0.09 percentage points.

In other words, the three-month lending rate was closely aligned to expectations of what the Bank of England would charge for overnight money.

And that's where the gap stayed for months - until the onset of the credit crunch in August of that year, when the gap widened to 0.23 percentage point, or 23 basis points in bankers' lingo.

Which was wider than normal, but not devastatingly so.

Since then this interest-rate gap, known as the three-month sterling LIBOR-SONIA spread, has risen and fallen as the money-markets have become more or less stressed.

The more stress, the wider the gap or spread.

But the spread never got much above 1 percentage point, or 100 basis points.

Or at least not till September of this year.

Since when the gap has been widening and widening.

Last Friday, the spread reached what was probably an all-time record, of 219 basis points. That was a staggering 2.19 percentage points.

And it's only narrowed a very little since then, to 202 basis points, or 2.02 percentage points.

You may think "so what?"

Well the "what" is big.

It means that banks are only prepared to lend to each other for three months at an interest rate that is a full two percentage points above the rate at which they expect to be able to borrow funds from the Bank of England over those three months.

Which means they just don't want to lend to each other.

And, of course, if they're not prepared to lend to each other for less than 2 percentage points above the expected policy rate, what chance that they'll lend at a keener rate to consumers, households or businesses?

Slim to none, seems a fair bet.

A glance at the chart of the LIBOR-SONIA spread shows that last week's half percentage point cut in the Bank of England's policy rate has been more-or-less totally absorbed: almost none of that interest-rate cut has been passed on in the form of lower interest rates charged by banks when lending to each other.

Which is why only a relatively small number of mortgage rates and business lending rates have been reduced by the full half percentage point.

That's distressing, because it seems to indicate that monetary policy has become toothless, ineffective.

At a time when we're in a recession, it's particularly worrying if cuts in interest rates by the Bank of England aren't leading to reductions in the cost of credit for real people and real businesses.

And don't forget that in the last few weeks, central banks - including the Bank of England - have literally been spewing loans of short-term and medium-term maturity into the banking system. And these central banks have been providing these loans in return for more and more eccentric and eclectic collateral.

Yet although there's a ton of cash or liquidity sloshing through the system, banks want to hoard it rather than lend it.

What's going on?

Well the widening in the interest-rate spread may in part reflect the margin demanded for the new interbank lending guarantees demanded by the Treasury.

But that would seem to me to be a relatively minor factor.

It may simply be the case that banks are so badly shaken by the 14 months of crisis in their industry that they have lost almost any appetite to lend.

They've made a decision to lend less, to deleverage, and no amount of cajoling or even bullying by the authorities is going to persuade them to do otherwise.

Which is highly undesirable, to put it mildly, when the real economy is showing every symptom of having caught a very bad cold from the sickness in the financial economy.

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/banks_still_not_lending.html

Posted by widemoose (386 days ago)

To Ed. Just because you mentioned that you have enough cash (and hedged gold) to last one year, may I offer a point for you to consider? Based on what you said, if the gold price falls in the next six months, your business may not even last one year. You can disagree and continue to hold gold, but I say this out of sincere concern. Depending on what percentage of your "liquidity" is in gold, your holding gold is very risky. Two major reasons why the gold price has rallied in the past few years is due to the fear of inflation and the high oil price. We have a lot of evidence by now that these two issues are likely to abate. The other, which is propping up the gold price, is the potential for weaker US$. If, as you seem to agree, we are entering a recession or a depression, the first two reasons (inflation and high oil price) are pretty much gone. The third reason is still out for debate as people all over the world still seem to want US$s when the global risk arises. Once gold holders start to accept that the three reasons for the gold's price rise are abating slowly (or suddenly), people are going to start dumping gold, much like what happened with commodities in the past three month. I believe it took about three months for commodities to drop 30+%. Gold may be next.

Maybe not. But the way I look at it, the upside of gold from the current price level is minimal (given the elimination of the first two reasons and the highly debated third reason). But the downside is significant. The herd mentality is scary. Gold is one of the hardest commodities to monetize because you can't eat it or use it, and it must be turned into currency to use. So once it starts falling, the crash will be severe. So many people are in gold right now for speculative reasons...

If you are using gold to diversify for long term (two or more years), maybe it's worth the risk. If you are relying on it for liquidity (less than two years), that's VERY risky. If you need liquidity, and you are bearish on the US$/HK$, maybe you're better off holding a basket of currencies instead of gold. Long term, maybe all currencies will be destroyed and only gold will be left. But if that were to happen, it will be the end of the world anyway because people will be killing each other for gold. It seems to me your immediate concern for your business is to have sufficient liquidity for a year or two. Gold doesn't seem to be the solution for you if you want to sleep at night. I hope you make the right decision for you business, which may very well be to hold gold. But given the recent gold price movement (from its high), it looks like the trend is against you. Good luck and thank you. I find axiaxpat.com to be a very helpful forum.

Posted by Wolves306 (386 days ago)

In the news today an 84 year old lady with a mentally disabled son was identified as an investor of one of the derivatives products that have been in the news a lot these days. Should we have sympathy for her situation? Sure. Are we all to blindly believe in hers and many cases like hers that these people could not have avoided buying these things from their banks, in the same way people were unable to avoid getting involved in the second world war? Some perspective on an emotive subject, but living in HK we all get cold calls from phone companies, credit card companies, and dare I say, bankers offering products. Do I own 14 mobile phones and 25 credit cards and five zillion mutual funds? No. If my banker called me to say it's safe to jump out of my apartment window, do I follow without question?

Many posts here have implicitly or explicitly said bankers are responsible for the mess we are in, and by we I mean everyone on this planet, and it's all because the bankers were lured by their bonuses to do the wrong things. I am not completely against laying blame, but if we are to go down that route, perhaps we shouldn't be so exclusive as to blame just one set of people. Mortgages, some argue, have been the heart of this crisis, but individuals, not bankers, applied for these mortgages, bought the homes and then were unable to repay the debt. Same with people with credit card debt problems. Banks faciliated, but what about individual responsibility?

People who proclaim that their work has nothing to do with finance and has never bought a share may think they are a victim in all of this. So your company would have been able to hire you on an expat package, pay for your kids to go to international schools if the banks didn't lend them money to do business in the first place? Or maybe take a history professor hired to work in HK University on a salary that is 3 times that of the UK, paying taxes that is a third. Could that have happened if HK wasn't a bankers' haven but instead a fishing village still operating on the barter system because banks and bankers haven't been invented here?

It's not only unfair, but infantile to blame bankers and play the victim card. The whole economy is inter-linked and we all played a part. The American consumer who spent too much on the credit card, or bought the house he/she couldn't afford, the UK householder who took equity out of the house and spent the money in Ibiza, the HK car owner who drive around in a 5 litre Merc pushing up oil prices, and yes, the little old lady who bought the investment with money she couldn't afford have all contributed to the excesses. We've all enjoyed it while the party lasted, and you think this is the time to point fingers, predict how much it is going to hurt you when you lose your job or when house prices collapse? Yes that is really helpful isn't it? Why don't we perhaps shift our debate onto ideas that might be useful in sorting out the mess.

Posted by Digital Blonde (386 days ago)

You lost all credibility with me after comparing the investment banking industry to the Nazi regime. I have got no interest really in trying to debate with a crank, so this is the last time I respond to you.

You resent people who make more money than you do, that is clear now, and if you have a chance to point a finger or say their salaries are unjust you will do that. If you have not achieved the financial rewards in life that you feel you deserve I am very sorry, but you do really need to find a way to not be bitter about your lot.

What is so decent about your product? are you in the business of making polio vaccinations?? Do you work for a non profit company? are you with an NGO or charity? do you spend your day improving the welfare of the less fortunate? How are the profits your company generates any more ethical than mine and why would your day be any more honest? What a load of absolute coddswaddle.

The system doesn't work without everyone playing the game, it just doesn't, it breaks down if even one of the particiapants refuses to play, which is what is happening now. Muppets who took loans that they couldn't afford stopped paying those loans back. Ordinary people refused to make good on their obligations, why are they innocent and the stupid banks that lent to them or had exposure criminals.

If you think that the system works without everyone not being complicit then you live on the wrong planet. Getting up from the table now and crying because you say you didn't understand the rules after winning for 30 straight years really doesnt generate a lot of sympathy from me. Its going to be bad for everyone going forward not just some. That some people won more than others really doesnt have a lot of relevance.

It imploded, if you didn't think it would, that is your own shortcoming. If you lose your job because your company can manage without you, then you should have done more for yourself to prevent that. You seem to want a baby sitter and avoid taking any responsibility. Its full scale myopia.

Perhaps its best for everyone that you cannot speak, because what seems to be said when you do open your mouth is angry drivel that has almost no basis in reality. You fail to address even a single point with anything other than an insult.

I didn't cause this anymore than you did, I am no more greedy than you are. You should spend more time trying to figure out how to be indispensable then trying to lay blame on someone else because your company feels you are disposable. In fact if I were you I would be more upset that my employer felt that way than some trader who bought a synthetic collateralised debt obligation.

I never called you stupid, Ed would never allow that, but since you have equated me twice with Nazi's, I have my doubts on the level of grey matter you do possess. If I get fired, I will survive, not because I have money but because ever since I started doing what I am doing, I have been planning for the day I have to leave, either because my employer was not happy with my performance, I am unhappy with the prospects or the system itself imploded.

In 15 years doing this job, I have acquired a different skill set unrelated to the job that I do that would be valuable to either myself or someone else should I ever choose to leave. If that choice is made for me. I wont be crying that I have been hard done by, regardless of the bonus that I have earned.

Good day though, it was nice talking to you. I wont be responding to anything you say from here on in.

Posted by Ed (383 days ago)

While on the topic of war and peace... I notice the article below online this morning... perhaps this crisis can have a silver lining - peace in the world.

Recall how in the past European countries were often at war but once their economies became interconnected it became unthinkable to go war because of the implications for each countries economy.

The Great Iceland Meltdown

Who knew? Who knew that Iceland was just a hedge fund with glaciers? Who knew?

If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like Icesave.co.uk.

As Dave Barry would say, I’m not makin’ this up.

When I went to the Icesave Web site to see what it was all about, the headline read: “Simple, transparent and consistently high-rate online savings accounts from Icesave.” But then, underneath in blue letters, I found the following note appended: “We are not currently processing any deposits or any withdrawal requests through our Icesave Internet accounts. We apologize for any inconvenience this may cause our customers.”

Any “inconvenience?” When you can’t withdraw savings from an online bank in Iceland, that is more than an inconvenience! That’s a reason for total panic.

So what’s the story? Around 2002, Iceland began to free its banks from state ownership. According to The Wall Street Journal, the three banks that make up almost the entire banking system in Iceland “grew quickly on easy credit” and “their combined assets rose tenfold in five years.” The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts.

In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies,” The Times reported. When depositors rushed to get their money out, the Icelandic banking system had too little reserves to cover withdrawals, so all three banks melted down and were nationalized.

It turns out that more than 120 British municipal governments, as well as universities, hospitals and charities had deposits stranded in blocked Icelandic bank accounts. Cambridge alone had about $20 million, while 15 British police forces — from towns like Kent, Surrey, Sussex and Lancashire — had roughly $170 million frozen in Iceland, The Telegraph reported. Even the bobbies were banking in Iceland!

So think about it: Some mortgage broker in Los Angeles gives subprime “liar loans” to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank’s assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.

And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.

Globalization giveth — it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away — it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.

The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones — on a global basis. It’s starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel’s Koor Industries. Japan’s Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain’s Banco Santander, which was spared from the worst of this credit crisis by Spain’s conservative banking regulations, is purchasing America’s Sovereign Bankcorp.

I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids — a world in which key global economies are more intimately tied together than ever before.

It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity.

We are all partners now.

http://www.nytimes.com/2008/10/19/opinion/19friedman.html?_r=1&em&oref=slogin

Posted by Digital Blonde (383 days ago)

You need to look at macro models and understand them properly before you start opining on them. My father has a heart condition and to be honest since the angioplast I have become quite well versed in what his condition is what its prognosis happens to be, the potential treatments and that has all come from reading up what I can in much the same way you do with your economics. I would never dream of opining on different treatments for his condition of practising medicine with someone who has the same condition. I talk to the specialist cardiologist who spent years studying how the heart works and take his recommendation, and ask him about things I have read up on.

In fact let me expand the example further with my story. The condition my father has, has caused a blood vessel to burst on his left retina and he has had a stroke. He is half blind in his left eye and desperately would like his entire vision back because he can no longer drive and has problems reading.

In a prestigious newspaper, some half baked journalist, who had half knowledge on his subject material wrote about experimental treatment using stem cells that would correct my dad's vision after a simple procedure. The journalist did not know what he was talking about, and me like the bufoon flew my father to America to see a specialist to discuss that treatment, because he was so hopeful that it would work and we were told that it was 10 years away. I am a little incandescent with the journalist for suggesting that the treatment was even remotely possible, it is still in clinical trials.

I am not educated and I made the mistake, that my father made, and we, he, more than I got our hopes up. Learning from news stories or sources of the internet, is not some kind of replacement for academic study no matter how good the information you get is. Nor does it give license for opining.

When an economist explains something, they tend to do so without alluding to the fact that there are actually mathematical models involved, which take time to understand and require some mathematical skills. I spent 5 years studying those models and it could have quite easily have been 10 had I chosen to go on to get a doctorate. Perhaps it does annoy you, that I suggest your understanding of those models can be little more than basic. It is not my intention to offend you, but I know what you cannot know because you did not study them. You do not get to throw around terms like M3 and say you know what effect it has, without having done the proper study. Not with me. And it does not mean your opinion is somehow more informed then a person who does not know the exact definition is either, which is what you tried to do with axptguy, when you asked him whether he knew what it meant and suggested that the fact that he didn't made your view somehow more important than his.

The beauty of economics however is, that doesnt preclude you from taking a view of what will happen in the future and it being any less valid than mine and even more correct than mine. You are right, you do not need to have studied to be able to do that. If you want to use or quote cite the impact of the change to an input into a macroeconomic model though, you must have studied the model first. Knowing a definition is not enough. No matter how erudite you happen to be or how bright you are.

Saying that education is meaningless, criticising the system and then using it simultaneously to lend credibility to your view, well given that I spent 5 years studying the same things you casually toss around, how exactly do you want me to react? There is a reason that no matter what central banks evolve into, that academics will always run them and our monetary policy. If we start letting quacks like Ron Paul run monetary policy, you watch how quickly disaster would occur. It would be overnight, and The Great Depression would seem like a party.

(1) How would you change the Fed? clearly the market has not been able to self regulate it never has been, and right now it is imploding. So if you don't envisage quite the same role for the Fed what role do you envisage? because a market based system of determining official lending rates would result in banks charging rates that benefit themselves and no one else, and on a macro level that would not benefit countries or economies, nor would it help contain inflation, interest rates would just reflect them, as they do now to a large extent already, though they can be manipulated by regulators.

(2) The answer to that is in any first year text book, and there is a very famous quote about able administrators and what their role and goal should be, written well before neo classical economics was even a thought and it still rings true today.

(3) isnt there a simple answer to both of those questions??

(4) If not fractional reserve what system do you propose in its place??

Posted by Digital Blonde (383 days ago)

Cartel pricing has really very little real impact other than when production decisions are announced and that is largely cosmetic. Markets take note that production will obviously change, but for a start a significant proportions of oil production is now non cartel and more importantly, Cartels almost always fail at enforcing production quotas on their members. The goal of a cartel is to maximise profits, though in the case of OPEC their stated objective is to stabilise prices.

Notwithstanding, if you apply profit maximisation, since we can all understand that principal, from a mathematical perspective that occurs where marginal cost is equal to marginal revenue. That is first year stuff even secondary school. The reason markets dont take cartels particularly OPEC very seriously is because if you apply that profit maximisation principal to an industry, then you get an output that it should produce. The fact of the matter is that individual memebers of the cartel have their own production functions and cost structures, for them profit maximisation occurs at a different output to the quota set by the cartel. So what happens in reality is individual members end up cheating on their agreements, and OPEC members are notorious for doing that and cartel output decisions are largely impotent. As was the case when the price was touching US$137 and OPEC was announcing production increases. Everybody knew everyone except the Saudis were pumping at or near capacity.

Most producers will not be able to reconcile cutting production with a decrease in foreign exchange earnings, and they will simply continue to produce more even increasing thei production as the price falls to compensate for that. You try telling a country like Iran which is running inflation at 30% suffers from economic sanctions and anaemic growth and persistently high unemployment and a restless population, that whilst the price of oil falls they should start selling less and reduce their earnings, in the hope that in future they can maintain the price at higher levels, and though they may understand the theory they will not be able to bear the practicality of it.

That argument that speculation drove up the price of crude, well it would have been a good one had we actually seen hoarding, and though in the run up over the last few years there was a lot of investment in storage, we rarely if ever saw any increase in inventories, in fact we saw a net decrease which suggests with crude oil anyway hoarding was not occurring. Why would people sell the future today when they know they could get more for it tomorrow by simply holding on to it for longer. The fact that they did not do that meant as far as I am concerned and I appreciate it if people take a different view, that it was demand that drove the price of crude oil up rather than mere speculation. Did the same thing happen with Iron Ore, Coke, Copper Zinc et al. I don't know I don't actually trade those markets.

Regardless, I wouldn't be too concerned about what OPEC says they are going to do now that prices are falling, they will talk up a great game but in reality individual members will do what they feel needs to be done for them to appease their populations or their treasuries today. There is only one producer who can truly behave in a profit maximising manner and that is because they have a political system in place which facilitates that. Its no good however if every other member cheats all the way down and they will. I have no doubt.

I don't see Asia being a big loser, It had eight years of straight recession, for a start SE Asia is used to it, it has largely restructured over the last decade and most importantly though there has a been a boom over the last 3 years, it was by no means long enough to make firms here fat and bloated. We have seen it all before, and whatever contraction occurs will not result in mass lay offs or require painful restructuring like in the US and Europe, which has not felt real pain in over a generation. That is my view anyway.

China is the most likely biggest loser in all of this regionally, it is the country who is the largest financier of America's current account defect and it is the country that has the most to lose should a prolonged recession in America occur, which is almost a given. They can to a large extent rely on their own growth story however, as can the rest of SE Asia, They are building capacity in many industries simply to meet their own demand rather than cater to foreigners. Its not all flowers, but it wont be Asia that suffers the most here. We have had our comeuppance and just in the last decade and its memory is still very fresh and we are very very lean. The US and Europe are bloated and fat, have forgotten what restructuring an economy means and just how painful it is, and unfortunately for them, they are going to be reminded exactly what that means very very quickly.

Posted by Ed (383 days ago)

Op Ed in the IHT today - no doubt this is a major reason why the Libor remains high...

The bubble keeps on deflating

By now everyone knows that reckless and even predatory mortgage lending provoked the financial meltdown. But bad lending did not stop there. The easy money also fed a corporate buyout binge, with private equity firms borrowing huge sums to buy up public companies and pay themselves big dividends.

The process was much like a homeowner who borrowed big for a house and then refinanced to pull out cash. In corporate buyouts, however, the newly private company was left with the fat loan, while the private equity partners got the cash.

In keeping with the mania of the era, banks lowered their lending standards as they competed fiercely to make buyout loans. Lenders also did not worry much about being repaid, because they made money by slicing and dicing the buyout loans and selling them off in pieces to investors.

All of this means that the United States needs to brace for yet another round of trouble: a potentially sharp increase in corporate bankruptcies. This time, U.S. government officials and Congress must not be taken by surprise. So far, relatively few companies have gone bust. But that is not necessarily a hopeful sign. Instead, loose lending has very likely allowed many troubled companies to postpone a day of reckoning - but not forever.

Under the lax terms of many buyout loans (deemed "covenant lite"), borrowers could delay payments, say, by issuing IOUs in lieu of payment or adding the interest to the loan balance rather than paying it. But when the loans come due and need to be repaid or refinanced, terms will no longer be so easy. The likely result will be defaults and bankruptcies.

A rash of corporate bankruptcies would obviously be very bad news for employees and lenders, and for stockholders at troubled public companies, like the carmakers. It could also rock the financial system anew.

As with mortgages, huge side bets have been placed on the performance of corporate debt via derivative securities, like credit default swaps. Derivatives are unregulated, so no one can be sure how widely a big or unexpected default would reverberate through the system.

Various measures indicate elevated default risk at a range of businesses, including retailers, media companies, restaurants and manufacturers. A survey released this month by the Federal Reserve and other regulators is especially sobering.

It looked at $2.8 trillion in large syndicated corporate loans held by U.S. banks at the end of June. Compared with a year earlier, the share of loans rated as problematic had risen from 5 percent to 13.4 percent.

Regulators must continue to monitor possible bankruptcies. Even if they cannot prevent a failure, they can soften its impact by ensuring that it does not come as a shock, further spooking investors.

Congress must prepare to deal with higher unemployment from corporate failures. In the coming lame duck session, lawmakers must extend jobless benefits for people who have exhausted their previous allotment. Congress must also be prepared to investigate large or particularly disruptive bankruptcies to identify both possible unlawful activity and regulatory lapses.

So far, inquiries into the collapses of Bear Stearns, Lehman Brothers and American International Group have been little more than public hazings of corporate executives. What is needed is a serious effort to determine accountability and figure out what reforms are needed to make sure these disasters don't happen again.

http://www.iht.com/articles/2008/10/19/opinion/edbubble.php

Posted by onemorething (382 days ago)

I wanted to share these two:

http://www.guardian.co.uk/business/2008/oct/21/wall-street-bonuses

Quote:
HSBC's chairman, Stephen Green, told a Dubai conference yesterday: "The market and [banking] industry will need to consider whether badly aligned incentives contributed to the crisis: both the market incentives which, until recently, encouraged banks to grow fast and gear up [debt levels], persuading them to take on higher risk than was sustainable, and compensation structures, which have so often encouraged too much opacity and excessive risk taking."

http://www.bloomberg.com/apps/news?pid=20601039&sid=azo7aySdpFHw&refer=columnist_weil

Full column:
Morgan Stanley's Bonuses Get Saved By You and Me: Jonathan Weil

Oct. 21 (Bloomberg) -- Wall Street had it wrong: An investment bank's most precious asset isn't the army of employees who head down the elevators each day. It's the paychecks they take with them out the door.

You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool.

Morgan Stanley has accrued $10.7 billion of employee- compensation expense this year, almost twice as much as its pretax earnings. The vast majority of this remuneration hasn't been paid yet. Now it probably will be, assuming the firm survives through next month. Meantime, Morgan Stanley's stock- market value has dropped $34.7 billion, to $21 billion, since the company's fiscal year began.

The rescue of Morgan Stanley's bonus pool is an unpleasant downside of Treasury Secretary Hank Paulson's decision to inject $250 billion of cash into U.S. banks in exchange for preferred stock. It is one thing for a company to pay much more to employees than it earns for its shareholders. It's quite another to keep doing it while receiving taxpayer bailout bucks.

Before securities firms were public companies, a brokerage in need of capital would have called on its partners to pony up. That's how it still works at private partnerships, such as law firms. The reason they don't get taxpayer rescues is they can't credibly threaten to take down the world's financial system.

Global Threats

Morgan Stanley can. So can Paulson's old firm, Goldman Sachs Group Inc., which also is getting a $10 billion infusion from Treasury. Year-to-date, Goldman has reported $11.4 billion of compensation expense, almost twice its $5.9 billion of pretax earnings. During the same span, its market capitalization has fallen $41.7 billion, to $57.7 billion.

Morgan Stanley needed Treasury's cash. Goldman didn't, but got it anyway. As long as Paulson can't think of any better ideas, the government will keep throwing money at an industry that pays too many people more than they're worth, to perform services the world has too much of already. The bright side is we avoid a global meltdown, for now.

Here's all you really need to know to see who lost and who benefited most at the Five Families of Wall Street, otherwise known as Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. From the start of their 2004 fiscal years through yesterday, the big standalone investment banks lost about $83 billion of stock-market value. During the same period, they reported about $239 billion of employee-compensation expense.

Lined Pockets

So, for every dollar of shareholder value destroyed, the employees got paid almost three. Only a sliver of that money went to chief executives such as Goldman's Lloyd Blankfein, who got a $70.3 million package last year, and Lehman's Richard Fuld, who made $34.4 million. Morgan Stanley's John Mack, by the way, received $1.6 million for 2007.

The Five Families -- now down to just Goldman and Morgan Stanley -- weren't alone. Citigroup Inc., which is getting a $25 billion injection from Treasury, has reported $139.3 billion of compensation expense since the start of 2004, more than double its $62.8 billion of pretax earnings. Its market cap, by comparison, has declined by about $168 billion, to $82 billion.

For all the complaints about outrageous executive pay and how little Paulson is doing to curb it, a big reason why these firms have been scrounging for capital is they keep blowing huge wads of it on their rank-and-file, too. The Paulson plan will do nothing to change that.

In the interim, we continue propping up an industry that's bloated with overcapacity, because we're all too scared to let the market fix it. That's good for the people getting bonus checks at Morgan Stanley and Goldman Sachs. It's not so great for the rest of us.

Posted by Digital Blonde (382 days ago)

Of course he is making a case for better oversight and increased regulation. For a start he is not talking about trading, he is talking about banking, and in particular since he is chairman of HSBC, I think its safe to say in particular he was talking about lending rather than securities trading, but if we take his quote

"encouraged banks to grow fast and gear up [debt levels], persuading them to take on higher risk than was sustainable"

Its pretty safe to say the only solution to that problem is more not less regulation. Of course he is advocating the view that banks need more oversight and tougher regulations.

I take it you have never made a market, quoted a price, ran a book for someone else. If you honestly think that a trader whether he works for a bank a hedge fund or themselves in any market financial commodity should think about morality when they quote a price buy sell or hold, then you have a very warped sense of capitalism or you should convert to islam and use Sharia as common law

and if you read my comment properly I did say

"if you dont include investments"

Investment banks are financial intermediaries, they are not Industrial companies they dont own factories, machines, or other fixed assets like traditional secondary industries, if they have a "fixed asset" it is their people and the ideas they generate. As far as a tertiary industries go, there are perhaps two or 3 that make their cash solely from the execution of ideas which when they work are as profitable as investment banking.

Lawyers make a wedge, so do consultants, and you dont do so bad if you are a Doctor or medical researcher or anyone else that educated themselves highly for that matter does reasonably well with a few exceptions to the rule. As an industry IB probably pays the best, but they for much of the last two decade pound for pound were the most profitable.

How do I blame Jon, Do you think he would have had the kind of life he had up till now if bankers were not allocating capital in free markets and being paid well if the decisions they made were good and penalised if the decisions they made were bad. Do you honestly think he didn't benefit as well, that for the last 30 years of his life he hasn't come to expect growth rather than fear recession just like everyone else has, that he hasn't got a credit card or invested in foreign companies, bought his own house and paid lower rates of interest rates. Do you really think him, yourself or anyone else didn't benefit just as much as I did or the bankers that did the damage with their bad decisions or borrowers who seem to largely escape criticism for taking on debt they could not afford. That someone made more money than he did is really irrelevant, he partied hard like everyone else I assure you that much, as did you, and I. His view is nothing short of hypocrisy he points the finger, but wont tell you the other half of the story, that he himself has benefited from the system for the last 30 years, and he probably enjoyed himself doing it. He's probably got a nice HDTV, a lovely lap top and a job that pays him well, because there was someone sitting there allocating capital and being paid well for good decisions. In fact I have to say since he receives a cheque from Blomberg every month, he more than anyone directly benefits. Who do you think pays US$2000 a month per terminal, surely not the veterinary industry?

Posted by Ed (380 days ago)

Going through the news this morning - looks like we have http://www.heastonchurch.org/snowball.gif

More Home Foreclosures

A week into the big bailout, banks are beginning to charge each other less for loans and companies are finding it easier to borrow short term. The Dow has been up and down, but so far this week, it is back above 9,000. So has the worst passed? Probably not.

The unfortunate reality is that as long as millions of Americans continue to default on their mortgages and housing prices continue to slide, banks will continue to suffer big losses. Unless something is done quickly to help homeowners avoid foreclosure and stay in their homes, those losses could swamp the bailout effort by exceeding the sums being spent to rescue the banks.

Despite the danger posed by foreclosures, the Bush administration and Congress are still depending on banks and other participants in the mortgage industry to voluntarily modify troubled loans, say, by giving borrowers more time to pay or by reducing interest rates.

The voluntary approach hasn't been enough to stanch foreclosures. As things now stand, some 3.2 million homeowners will likely lose their homes to foreclosure this year and next, and millions more will struggle to catch up on delinquencies.

Unfortunately, the bailout legislation does not require banks to modify loans in exchange for the infusion of taxpayer dollars. That means the administration and Congress will have to turn up the political pressure on financial institutions that avail themselves of the government's largess.

Both John McCain and Barack Obama have recognized that this crisis won't be solved until a way is found to keep many more Americans in their homes.

McCain's plan is to buy troubled mortgages from banks at full value and replace them with mortgages at the house's lower market price. That may sound humane, but it is an unjustifiable waste of taxpayer money - it doesn't require the lender to accept any loss before the government buys up a bad loan.

Obama has a better idea. Rather than relying solely on the banks to do what is right and needed, he supports legislation that would allow bankruptcy judges to modify mortgages for bankrupt borrowers. That makes far more sense. But the bankruptcy fix faces stiff political opposition, and even if passed, would help only about 500,000 homeowners, versus the millions now in distress.

Obama has also called for federal agencies to work more closely with the states on efforts to modify mortgages. Attorneys general in 11 states recently imposed the first mandatory loan modification program on Countrywide Financial as part of a legal settlement over what the states said was predatory lending. More lawsuits and more settlements could lead to more modifications, and with them, a more stable financial system.

Still, it may get to the point, early in the next administration, when the president and Congress will have to require lenders to modify bad loans and take the losses.

Mandatory modifications, bankruptcy, lawsuits - no one likes them, but they are tough tools for a tough problem. The bailout has dealt with only half of the problem: the credit freeze. Unless the government deals as aggressively with foreclosures, the system will likely face the abyss again.

http://www.iht.com/articles/2008/10/22/opinion/edbailout.php

Posted by Ed (380 days ago)

Compounding the problem - many major companies are on the verge of bankruptcy

For hundreds of U.S. companies, the federal bailout may be too little, too late. Bankers, lawyers and credit analysts say the government's plan to invest billions into the nation's banks is doing little to ease the credit crunch for U.S. businesses. The result, they say, is that many companies now struggling to get financing may soon be out of business. "In the past few weeks, lending has been getting tighter, not looser," says Larry Flick, a partner at law firm Blank Rome, which helps companies get financing. "All the moves the government is making to end the credit crisis may have a trickle-down effect, but I am not seeing it yet."

In a report released Tuesday, ratings agency Standard & Poor's says there are 140 large U.S. companies in danger of not being able to pay their bills in the next few months, up nearly twofold from the beginning of this year. Among the troubled firms on the agency's list are such household names as clothing retailer Eddie Bauer, amusement park operator Six Flags and pizza chain Sbarro. Also on the list are doughnut baker Krispy Kreme and mobile technology titan Palm, as well as a number of the nation's largest airlines, including JetBlue and the corporate parents of United and American.

"We are seeing companies across a wide variety of sectors that are struggling," says Sam Rovit, who heads up Bain Corporate Renewal, the optimistically named restructuring division of Bain & Company. If the credit squeeze doesn't loosen up quickly, he expects a "tidal wave of bankruptcies among large companies."

Analysts say dozens of smaller businesses have the same or worse predicament. "If the biggest companies in the nation are having a tougher time getting financing, then it's going to be much more difficult for smaller firms to get credit," says Martin Fridson, whose firm Fridson Investment Advisors analyses corporate bonds.

Of course, plenty of large U.S. companies are still able to get loans. A number of banks, such as JPMorgan Chase and Wells Fargo, who were not hit as badly by losses in the mortgage market, say their lending business never slowed.

But the sudden disappearance of some big financial companies as well as a cutback in lending activity at many banks has made it tougher and more expensive for companies to get funding. Hedge funds, too, which are having their worst year on record, have retreated from the lending business. And observers say the government's bailout plan won't change the problems companies are having getting funding anytime soon.

The problem is that many of the moves so far, like insuring money-market mutual funds, have been made to shore up the nation's commercial paper markets. But small companies or those that are short on capital cannot access the commercial paper market, which is generally reserved for companies with good credit. What's more, while the Treasury is urging banks to boost lending in the wake of the government's $250 billion investment into these firms, industry observers are skeptical that it will actually happen. "The idea that more capital is going to influence how much banks lend is a misconception of how banking works," says John Simons of Corporate Fuel Partners, who has spent 35 years in the commercial banking business. "Banks look at the economic outlook when deciding to make a loan, and the outlook is looking a whole lot worse."

With fewer banks making loans, more companies are turning to other sources of capital. Gerald Joseph, president of asset-based lender [i.e., lending secured by an asset] Gerber Finance, says his phone has been busy lately with calls from executives who used to get loans from banks. But, like other non-bank lenders, Joseph says he is being much more selective about which companies he does business with. "We are tightening our lending criteria," says Joseph. "We are turning away many more new clients than we used to." GE Capital, one of the nation's largest non-bank lenders, has also reportedly decided to curtail its lending practices for the rest of the year.

For companies that have loans that are coming due in the next few months and need to refinance, the continued credit crunch could mean they will be forced to file for bankruptcy or shut down. Bain's Rovit estimates that there will be 75 bankruptcies this year among companies with at least $100 million in assets, up from just 13 last year. He expects the number of bankruptcies to continue rising next year as well. S&P says its watch list used to be filled mostly with homebuilders or mortgage companies. But the latest additions are coming from industries such as retailing and media that are generally far removed from the mortgage and housing bust.

http://www.time.com/time/business/article/0,8599,1852671,00.html

Posted by widemoose (380 days ago)

DB, very brave of you to enter the stock market right now, the higher the risk, the higher the return. So you could be looking at a big payoff. It seems people these days are so focused on what's happening daily, or weekly, as opposed to what will happen in six months, one year, two years, or five years.

Could you share which sectors you are getting into right now? Or that you are waiting to get into? I highly value your opinion (or anyone else's who has a strong opinion of how to navigate the markets right now.) I personally believe DOW will hit 7500ish and gold will reach $500-600ish over time. The trend for gold is down. I believe the US$ will be stable relative to other currencies. I believe in staying in cash (US$). I don't believe in trying to get in at the absolute bottom (because that's based on luck--not skills), which is why I think getting into the stock market right now is a good strategy. I have no problem giving up 10% on the downside, if my upside is going to be 10%+ over two to five years.

Having said, I find it interesting that people are so quick to blame the "talking heads" for leading them astray. You will always have herds and contrarians. Agreements and disagreements. If you surround yourself with people of one opinion, that's all you'll be exposed to. That's all you'll know. And that's what will shape your decisions. This is why I am reading this forum. I would like to hear from people of all background and experience. People who agree and disagree with me. I like to second guess myself until I reach a level where I feel confident in my decision no matter which way the wind blows. I listen to every "pundit" knowing that even a broken clock is right two times in 24 hours. But I also believe there are a lot of smart people out there. Their timing may be early, but the trends cannot be fought. I would choose trend over daily emotions.

So including DB, since DB has taken action, where is the next opportunity? By the way, not to discount some of the posters' need to vent, but at this point, what's the point of debating morality? Based on people's posts here, we know many people messed up. We know recession is here. We know things are going to be very bad before they get better. I would really like to hear where people think opportunities are. Also, if you have any advice or insight, please share.

And, qpzmgh, your last post leads me to conclude you believe the longer trend for the US$ is down. I don't disagree. But, when you say "the fundamentals of the dollar" bother you, what do you mean? And what is you time horizon for that? I ask because I believe the US$ will retain it's relative strength for at least two years.

Posted by Ed (379 days ago)

This is one of the best articles I have seen yet on what the crisis will mean to ordinary people.

Life Without Credit (What Deleveraging Really Means)

At ByDesign Financial Solutions, a debt-counseling service in Modesto, Calif., they're working overtime these days. "Our call volume went up 97% in the past five weeks, which has left us scrambling," says Martha Lucey, president of the nonprofit agency. "[The callers] are close to the max on their credit cards, and they just can't figure out how to manage. We've seen credit-card companies decreasing lines of credit, and the [debtors] don't have any room left. They just can't juggle things like they used to."

At Keller's, a popular Modesto housewares store, the end of that profligacy is shockingly apparent to owners Cherie and Joyce Keller. Sales are evaporating, and they are worried about the Christmas shopping season. "It was sudden death — there were no people shopping," says Joyce Keller. "It took the crash for people to understand that this wasn't just a problem in California."

Economic reality, in other words, is settling in across the nation. Every tumultuous period of financial boom and bust comes to be defined by a word or catchphrase. Tulipmania. The Great Depression. The dotcom bubble. The word that could define the financial times we are now living through — and the economic pain that has begun — is leverage.

Leverage was the mother's milk of Wall Street — and of Main Street — for the past 20 years. Leverage meant debt, specifically the number of dollars you could borrow for every dollar of wealth you had. It meant borrowing other people's money to invest in something you wanted to invest in, or to buy something you wanted to buy. On Wall Street, debt funded investments in pretty much everything a financial firm could bet on, including the toxic mortgage-backed securities that led the way into this crisis. On Main Street, it meant borrowing to buy a house or a condo — maybe two — then perhaps borrowing again off the increasing value of that property to pay for something else: a flat-screen TV, a new set of golf clubs, your daughter's braces.

The debt binge was fueled by easy money and the belief that prices of assets — those of houses in particular — never went down; only interest rates did. That era is over. It will be replaced by what will be one of the more painful, and consequential, economic chapters in our history: the great deleveraging of America. On Wall Street, the largest financial institutions on the planet are reducing their debt and trying to build up capital, which once upon a time was the seed corn of their business, and now must be again. Retail banks like Wachovia and investment banks like Morgan Stanley have been so burned by their own reckless use of debt that only recently — and after unprecedented government intervention — have they been willing to once again make the most basic short-term loans to one another. The gradual thawing of the overnight-lending market, which seemed to begin on Monday, Oct. 20, was the first sign that Wall Street's credit markets were, however haltingly, regaining some sense of equilibrium after the previous, harrowing month.

But the credit crunch is not anywhere near over. "It took 20 years for us to get into this situation — leveraged to the hilt — and it will take more than a couple of years to unwind it," says Paul Ashworth, senior U.S. economist at Capital Economics. "And even when we get back to normal, that normal is not going to be the same. We won't have this sort of freely available credit that we had before for households and businesses. It's going to be a different reality — a more austere one — when we come out on the other end of this."

The one exception, though, is Uncle Sam. Even before the financial crisis forced the government's hand, the U.S. had again become addicted to deficit spending — relying on the kindness of strangers (in this case, mainly Chinese and Japanese central bankers) to finance its spendthrift ways. In September the Congressional Budget Office's baseline deficit forecast for 2008 was $407 billion. Now, with the Treasury's massive intervention in support of banks and financial markets ($700 billion at a minimum) and with a second economic-stimulus package a political certainty, the government deficit could soar next year to $1 trillion.

In the short term, that may be a necessary price to pay to pump life into the economy, but the effects of deleveraging on Wall Street and Main Street still threaten the steepest recession in the U.S. since the early 1980s, when unemployment peaked at 10.8% in 1982. Here's why that's so, and how we can still emerge from this crisis a little bit wiser — and, eventually, a lot more solvent — for our trouble.

Wall Street's Newfound Virtue
In February 2000, one of the street's most powerful executives petitioned the Securities and Exchange Commission (SEC) to allow his firm and other investment banks to raise their levels of leverage. He wanted the commission to alter something called the net-capital rule, which he said was "the single most important factor in driving significant parts of our business offshore."

That exec was Henry Paulson, then the CEO of Goldman Sachs, now U.S. Treasury Secretary. Four years later, the SEC complied, amending the rule; the effect was to allow Wall Street to borrow even more money to finance its businesses. At the most aggressive investment banks, leverage ratios reached 30 to 1. That is, for every dollar in equity capital the firm had, it borrowed $30.

Now those ratios are being unwound with a vengeance. In interviews, Wall Street executives, like John Mack, CEO of Morgan Stanley, talk of reducing their leverage to a ratio of 12 to 1 — a regulatory requirement, now that both Morgan and Goldman have turned themselves into commercial rather than investment banks — as if there were some button they could push to make it happen. But the truth is that for U.S. banks, reducing their use of debt and rebuilding their devastated balance sheets is a long and painful process. Deleveraging is part of what creates a credit crunch: institutions that have been hammered by the decline in real estate prices will be making fewer loans available to businesses and consumers alike.

We've seen this movie before, and it's not a happy one. Japan's financial sector imploded in the 1990s as bubbles in real estate and stock prices (sound familiar?) burst. Eventually, Japan's central bank drove interest rates to near zero to stimulate the economy. But it was, as the economists say, "pushing on a string." Banks were reluctant to lend because they needed to hoard capital to repair their balance sheets — just as they need to do now in the U.S. Economic growth slowed, and demand for the credit that was available diminished. The result was Japan's infamous Lost Decade: 10 years of low or no growth.

Is that what the U.S. is in for? Not necessarily. One crucial difference is that the Federal Reserve under Ben Bernanke, a scholar of the Great Depression, has reacted to this crisis much more swiftly than his Japanese counterparts did in the 1990s. His nickname is "Helicopter Ben," because he believes it's the government's job to litter the landscape with money, if necessary, to prevent economic collapse. No surprise, then, that he endorsed the Treasury's plan to inject capital directly into the banks and this week backed yet another stimulus package for the economy.

Main Street's Pullback
For millions of Americans, the prospect of living within their means is a meaner one by the day. And it has consequences that are already showing in the bankruptcies of retailers such as Linens 'n Things, Mervyns, Steve & Barry's, Shoe Pavilion, Goody's and Sharper Image and in the possibility of poor holiday sales. The overleveraged consumer is the biggest economic problem the country faces, because debt has been the rocket fuel that has propelled growth for most of the past decade. Two-thirds of the $14 trillion U.S. economy is driven by consumer spending, and the relentless shopper has also been critical to the growth in once booming exports led by economies like China's.

American consumers had become more addicted to debt than Wall Street was. Total household debt at the end of last year was $13.8 trillion, up 20% since 2005. At the same time, the household savings rate ticked down close to zero; the rocket's engine was running on empty.

Now consumers everywhere are reeling. Christopher Adams is an architect who lives with his wife Rachel in a North Miami Beach condo project in which fully 25% of the 244 units are in foreclosure. That means higher maintenance fees for those — like the Adamses — who continue to pay their mortgages. And as his monthly payments have gone up, Adams' income has gone down. His firm has lost three projects over the past year as commercial developers canceled jobs. As a result, he and his wife make decisions that ripple through the economy. He cashed out of his 401(k) to pay bills. A plan to buy a new car? History. They took their son out of an expensive private school. Credit cards? They don't use them anymore. "Debit cards and cash only," says Rachel.

For a U.S. company in retail — the country's second largest industry, employing some 25 million Americans — those are about the most depressing words you can hear. And millions of Americans are now on the same page. Consider Maria Calderon, a single mother of two in Greenacres, Fla., who works for the Palm Beach County public defender's office. Two months ago, she lost a second, part-time job that had helped pay the bills. She soon surrendered to the gods of credit-card debt. She visited a West Palm Beach credit-counseling service to deal with some $20,000 in unpaid bills. "I wasn't ashamed," says Calderon. "I had to tighten up. It was a decision I had to make to take care of my two kids."

The great risk, as consumers like Calderon cut their spending, is that bad economic news begets more bad news. Bernanke recently called this the "adverse-reaction loop": as consumers spend less, the economy weakens more, unemployment rises, mortgage foreclosures increase, putting more pressure on the financial system, and on the downward spiral goes. Capital Economics' Ashworth acknowledges that the "scenario is out there. It can't be totally dismissed. This deleveraging process could get very, very scary."

Washington's Answer: Charge!
This, you'll not be surprised to learn, is what the government is trying to avoid at all costs. "We're going to see an evaporation of concern about fiscal restraint simply because the threat of an economic collapse is so great," says Robert Reischauer, president of the Urban Institute, a public-policy think tank. In other words, as the real world sheds debt, the government takes on more and more in the hope that at some point the economy will stabilize and then begin growing again.

The good news is that most economists believe all the weaponry the government is throwing at the problem will eventually have an effect. Interest rates are low and probably headed lower. More fiscal stimulus is on the way. Many economists are currently forecasting a couple of quarters of outright economic contraction. But many see a resumption of slow growth by the second half of next year. The sky, in other words, is not necessarily falling.

It just looks that way right now. "This is the worst economy I've seen since I've been in business," says Tom Slater, owner of Slater's Home Furnishings in Modesto. He's been in business for 39 years. Slater's behavior reflects the malaise: he has cut his personal spending at restaurants and retailers. But he realizes he's part of the solution too. "You can't stop and say, I'm going to keep my fingers crossed that someone's going to do business with me," he says. "We just have to do better business."

Less-leveraged business, in fact. The irony is that in the deleveraged society the U.S. is in the process of becoming, it's the careful consumer who may ultimately bail out the economy. Ashworth believes the U.S. savings rate will rise to 5% of GDP over the next two to three years. "We're going to save more and spend less, because now we don't have a choice," he says. That increase in savings, he figures, will amount to some $1 trillion — about the projected size of next year's deficit.

That would eliminate the need for foreigners to fund our deficits. The hope is that as we sober up from our debt binge, we'll at least be able to do it ourselves. An era of thrift may be necessary now, but at some point, Americans are going to have to feel like spending again for the economy to grow. It's just hard to see, amid the current economic gloom, when that day will come.

http://www.time.com/time/business/article/0,8599,1853129-1,00.html

Posted by Digital Blonde (379 days ago)

I don't believe anything to be a bottom I have never ever said anything remotely resembling that. You are afraid, you have as much chance as calling the bottom as I do, none, so why are you trying to, and if you compare the way you buy an equity to the way you buy a camera, I am not hugely inclined to take your view very seriously. Cameras are mass produced, manufacturers benefit from economies of scale and prices fall, the notion that that concept should be applied to an equity is non sensical.

You cant call a bottom so why are you trying to, at what point does it become a buying opportunity for you. I know when it was for me that is all, I have never said I see a bottom only that I know it will be higher than today in 5 years time. I am very confident and comfortable in that, and as such as far as I am concerned I don't need to get emotional about anything.

I didn't call a bottom, neither did Buffet, we just have long term views and his view is even longer than mine and even more specific which is surprising because he might not even be alive to exit his positions. Yes there are reasons why he said what he said and its not because he is a liar or has ulterior motives, its what he believes, and that is the way it is unless you want to suggest he is both lying and a conman. He used his own money from investment income to buy for his own personal account. Berkshire has made two poxy investments in GE and Goldmans in the last quarter. He is in his 80's and has consistently been correct more often than not rather than wrong when he has publicly taken any view. He has earned the right not only to be taken at his word but not to have his credibility questioned by people trying to validate their own view

If you are afraid, be that way, Its not for me to say what defines your fear threshold,and I don't begrudge you for being afraid, it is a scary market but you got condescending not I. As far as I am concerned in 5 years time the price will be a lot higher than it is today. If you think you can call a bottom and buy at a lower price good luck to you. I don't think you can make that call or to be honest from the way you talk have the guts to do it either. If you haven't got the stomach for a wild ride in the medium or short term don't condescend to people who do.

Lemmings commit suicide on mass, arguing that you are right because 9 out of 10 recommendations say sell rather than buy made by people who work for other people is more important than the 1 recommendation made by the greatest investor in the history of mankind, well if you ask me, I take my chances with that guy rather than anyone else.

Posted by Digital Blonde (379 days ago)

It depends on the extent of unsecured loan defaults, but the short answer is there will be limited impact of an increase in credit card defaults because the ABS market is far smaller than the MBS market

Defaults are most certainly going to increase, but the credit card debt and auto loans were no way near securitised to the extent mortgages were. Auto loans were securitised, because like with housing there is a fixed asset involved, though the value depreciates, but auto loan securitisation was no way near to the extent of mortgages have been. The credit card loans that were securitised were typically the highest quality rather than poor quality because if you are going to parcel up unsecured debt and sell it on, the investors that buy it will not tolerate anything less than the highest quality.

Credit card loans which are unsecured to begin with will mainly lie on the balance sheet of the card issuing bank, and not with some wholesale German bank that the lender managed to sell the debt onto. Though some of it no doubt will have, it is the least likely to default. There has been securitisation but the risk is not diversified into the system the way it was with mortgages which means, for a start people have a good idea who is in for what, unlike with mortgages and lenders that are over exposed to poor credits will get punished rather then the enitre system as was the case with MBS.

MBS spread the risk around so no one knew who is sitting on what. As property owners began defaulting everyone who participated in the system was affected. An increase in credit card defaults will increase as the economy contracts, that goes without saying, but the fall out will be restricted and confined largely to the card issuers, rather than the wider system. What was securitised will not have had the widest audience either because there are not that many investors keen on holding unsecured securities even if interest rates are high.

To be honest unsecured is the riskiest part of the portfolio to begin with, banks know that going in, the amount they have loaned out in that form will be limited. There are rather large provisions to begin with, but in the face of a full scale recession that may not be enough, nevertheless the damage will be restricted as I see it. To assume that nobody is aware of the threat and it is not priced in to a large degree would be naive in my opinion.

An increase in credit card defaults will not result in the insolvency or collapse of an investment bank like Lehman's for example, the way an increase in mortgage defaults did. The ABS market is just no where near the size. In fact I would be surprised if it led to insolvencies of anyone but the weakest. And if those lenders are being propped up through quasi nationalisation already because of mortgage defaults, hard to see markets taking it any harder then they have done and are already taking it today for example.

Posted by Ed (378 days ago)

I thought it was hubris... but Savant Idiocy is appropriate...

Alan Greenspan, ''Savant Idiot''

n 1914, John Alexander Smith, professor of moral philosophy at Oxford, addressed the first session of his two-year lecture course as follows:

"Gentlemen, you are now about to embark on a course of studies that (will) form a noble adventure…let me make this clear to you…nothing that you will learn in the course of your studies will be of the slightest possible use to you in after life--save only this--that if you work hard and intelligently, you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole purpose of education."

I happened upon Professor Smith long years ago, in the 1980 edition of John Julius Norwich's Christmas Cracker, and his words have stayed with me ever since. And never more frequently and more intensely than in conjunction with the public utterances of Alan Greenspan.

I have encountered Greenspan in the flesh but twice. The first occasion was at a small lunch some 20-odd years ago at a foundation that concerned itself with the great issues of what we used to call "political economy." Greenspan was then a Wall Street consultant, not yet at the Federal Reserve. For the better part of two hours, I listened carefully to what Greenspan had to say and studied him closely. I concluded as I left that here was a prize, chateau-bottled phony and opportunist. A prime example of a talker of rot.

Nothing since has inspired a change of mind. In 1998, I was privileged to write a savage review of Bob Woodward's Maestro, a study of Greenspan that gave new resonance to the phrase "boot-licking." I noted the interesting factoid that Greenspan attended the same Bronx high school as that other singular figure of the postwar era, Henry Kissinger--a virtual doppelganger when it comes to opportunism and blather--and wondered whether there might be something in the water up there. More importantly, I also rendered the opinion that the Great Man's policies were based on specious, if not outright false, assumptions. Now we know.

And now, apparently, so does Greenspan.

The Great Man's mea culpas before Congress are a matter of record. The consequence of his convictions, considered broadly, can be observed deeply woven into the current financial and economic mess. No news there. But there is another aspect to Greenspan's intellectual rise and fall that bears thinking about.

As credit has contracted, markets have fallen and national economies have become constrained, a kind of urban legend has grown up that much of this flows from the handiwork (principally in the mortgage and derivatives "spaces") of very smart people. Well, I am here to tell you that this is not so.

The fine fix we find ourselves in is mainly the work of idiots. Idiots with Ph.Ds. Idiots of a rather specialized genus, whom I call savants idiots, of whom the former Fed chairman is perhaps the most visible and emblematic example.

Most halfway-educated people know about idiot savants, people who are dyslexic, autistic or otherwise gravely impaired by "normal" cognitive and psychological metrics, but who can reel off complex algorithms and theorems or intuit great scientific truths.

I submit that there is a corollary genus, the savant idiot. This is one who is festooned with credentials, diplomas, laurels and prizes both professional and academic, who pontificates and expounds impressive-sounding "truths" and explanations--what a friend of mine used to call "chinstrokers"--that in the fullness of time and markets prove to be utter b.s. The idiot savant produces substance out of apparent ignorance; the savant idiot produces ignorance from apparent substance.

Lord only knows how the present crisis will play out. Many hard lessons will be learned. Among them must be a restored capacity for perceiving when men in power are speaking rot. This is a capacity beyond the grasp of idiots. Stupidity, like misery, loves company.

http://www.forbes.com/home_asia/2008/10/24/alan-greenspan-idiot-oped-cx_mt_1024thomas.html

Posted by Ed (378 days ago)

Here's something I hunted down after noting some comments on this above - surely this should not be permitted:

No curbs on Wall Street pay despite meltdown

By RACHEL BECK and JOE BEL BRUNO – 3 hours ago

NEW YORK (AP) — Despite the Wall Street meltdown, the nation's biggest banks are preparing to pay their workers as much as last year or more, including bonuses tied to personal and company performance.

So far this year, nine of the largest U.S. banks, including some that have cut thousands of jobs, have seen total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago, according to an Associated Press review.

"Taxpayers have lost their life savings, and now they are being asked to bail out corporations," New York Attorney General Andrew Cuomo said of the AP findings. "It's adding insult to injury to continue to pay outsized bonuses and exorbitant compensation."

Banks will decide what to pay out in bonuses in the coming months. Just because they've been accruing money for incentive pay doesn't mean they will pay it out in full.

That there is a rise in pay, or at least not a pronounced dropoff, from 2007 is surprising because many of the same companies were doing some of their best business ever, at least in the first half of last year. In 2008, each quarter has been weaker than the last.

"There are, of course, expectations that the payouts should be going down," David Schmidt, a senior compensation consultant at James F. Reda & Associates. "But we haven't seen that show up yet."

Some banks are setting aside large amounts. At Citigroup, which has cut 23,000 jobs this year amid the crisis, pay expenses for the first nine months of this year came to $25.9 billion, 4 percent more than the same period last year.

Even if you subtract what the bank has shelled out in severance pay and other costs related to the job cuts, overall pay is only slightly lower this year.

Typically, about 60 percent of Wall Street pay goes to salary and benefits, while about 40 percent goes to end-of-the-year cash and stock bonuses that hinge on performance, both for the individual and the company, said Brad Hintz, a securities industry analyst at Sanford Bernstein and a former chief financial officer at Lehman Brothers.

"The fundamental goal of the compensation plan is to allow an employee to get wealthy," Hintz said. He also pointed out that the workers' pay is supposed to be "exposed to the risk of the parent company."

This should be the year where that structure is tested. The financial crisis, brought about by mountains of bad mortgage-related assets, caused banks to falter or fail and lending to dry up and prompted Congress to pass a $700 billion bailout package. As part of that, government is pouring $125 billion through stock purchases into the nine large financial companies cited in AP's review of compensation.

Besides Citigroup, those include Bank of New York Mellon, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Merrill Lynch, Wells Fargo & Co., and State Street. Another $125 billion will be made available to other banks.

Those taking cash from Uncle Sam must follow guidelines limiting executive pay, including a ban on golden parachutes for departing executives. No restrictions are placed on across-the-board pay.

In total, those nine banks had pay-related costs of $108 billion for the first three quarters of the year. The average increase came to just shy of 3 percent, according to AP figures.

Some banks have set aside less.

Merrill Lynch's costs for pay were $11.2 billion for the first nine months of the year, 3 percent less than last year. That nearly matches the company's $11.7 billion overall loss so far this year.

Merrill spokesman William Halldin told the AP that the company thought a better measure would be to compare the 2008 compensation expense with the first three quarters of 2006. That would reflect an 18 percent decline from Merrill's last profitable year, he said.

Bank of New York Mellon sharply curtailed its bonus expenses in the third quarter. That cost was $242 million for the three months, down 30 percent from the second quarter and off 37 percent from last year. Spokesman Ron Gruendl said the decline was "due to operating results and a reaction to the current market environment."

But at the same time, the bank's total compensation cost has climbed 44 percent to nearly $4 billion because of higher salaries.

If companies decide to reduce bonuses, that could be a boon to the banks' finances because that would help the bottom line, said Jack Ciesielski, who writes the financial newsletter The Analyst's Accounting Observer.

Already, lawmakers are doing all they can to shame the banks out of paying anything. House Financial Service Committee Chairman Barney Frank, D-Mass., has called for a freeze on all Wall Street bonuses. Sen. Carl Levin, D-Mich., wrote this week to U.S. Treasury Secretary Henry Paulson saying it was "unacceptable for financial institutions ... to maintain past levels of compensation."

On Wednesday, insurer American International Group agreed to freeze payouts from a $600 million bonus pool and compensation packages for the company's chief executive and chief financial officers, as well as cancel unnecessary corporate trips and junkets.

AIG, which is not part of the AP review of bank compensation costs, has received government loans topping $120 billion to keep it from collapse. Cuomo calls it a "test case" for stopping unfair pay.

Certainly, workers are uneasy about whether the bonus money will really come. Many traders, bankers and financial advisers have received little or no word about how big their bonuses might be, or whether they will come at all.

http://ap.google.com/article/ALeqM5hHMjh4OJRaj63DrvbRGMptW6rkawD94148CO0

Posted by Digital Blonde (378 days ago)

Nobody said he didn't know, what I am saying is nobody said anything at the time, that replacing an equity bubble with a credit one was not the best strategy, that perhaps a longer recession back then would could have avoided a much deeper one now. The thing is with his job as the chairman of the fed, hindsight is a wonderful thing. Anybody can look back in time and say what should have been done. That is the easy bit, the hard one is making tough decisions in a timely manner. What would that author have done in Greenspans position with the Nasdaq selling off two thousand points. Do you really expect me to believe he would have managed to soak up the pressure of what trillions of dollars under management in global equity and credit markets were saying, taken a longer more prescient view and kept interest rates high as the US economy was contracting. I find that very hard to believe. In which case he is little more than an arm chair critic, editorialising from the safety of a living room and not having to take any real responsibility for his opinion. Saying what we should have done way back when is the easy bit.

Should Greenspan have kept rates low in response to , at the time what looked like a nasty recession hard to see anyone doing anything differently and he avoided a protracted recession, so at the time he did his job, but what occurred was a credit bubble as a result and a restructuring of the US economy.

To be honest. people want to blame fat cats but what about the culture of ordinary people in America for which the concept of saving up for what you want to buy rather than relying on credit seems to have been lost or has even become anathema. Why should banking fat cats be held any more responsible for this mess then the ordinary people they lent to who no longer have values. For people to ignore the basic rules of finance that all of our parents taught us even as recently as a generation ago is inexcusable we all know better than that. Why should fat cats be held any more responsible for this crisis than the dead beat borrowers they lent to. When did it become OK for us to blame the lender and excuse the borrower for not paying back what they owe. At what point did it become fine for people to live beyond their means on a consistent basis living pay cheque to pay maxing out credit cards and treating homes like piggy banks. Yes banks are to blame but why are ordinary people getting of so lightly or even completely they are just as responsible they are the ones that are defaulting.

Perhaps bonuses should be cut back on, but I see a distinct disdain for blaming the ordinary man in the street here and they are responsible more so then the bankers that lent to them. You save what you earn and buy what you can afford, when you lose sight of that principal, if your tax dollars end up having to be used to prop up lenders who enabled individuals to live beyond their means, I don't have a lot of sympathy for either of them.

Posted by Ed (377 days ago)

So When Will Banks Give Loans?

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.

As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.

I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.

http://www.nytimes.com/2008/10/25/business/25nocera.html?_r=1&em&oref=slogin

Posted by Digital Blonde (377 days ago)

Ed, if we did that, then honestly there would be zero lending to anyone, no one would do it. There would be total panic, depositors would start runs on every bank big or small well capitalised or not and economies would collapse, that is why a republican president whose very ideology cannot stand the thought of government intervention is advocating use of government money to prop up business that made bad decisions. There would be a nuclear winter that would make the great depression look like a party.

Eventually a new system would emerge from the rubble and it may even be a better and stronger one, but the damage such a move would do to not just to us in the developed wourld, but to people and countries who are emerging from poverty would be immeasurable, it's to bitter a pill, we as a society are not prepared for that kind of medicine. I see the argument and I sympathise, I cant stand the thought of bad managers being bailed out and dead beat borrowers having debts forgiven because people who save in China and India lend to the US government to finance the bailout of financial institutions caused by a culture which refuses to save and be prudent with their money.

There is a savings glut its about 4 trillion dollars in global savings I think, I am not sure, most people are responsible in the rest of the world, if we started letting banks go under, then those people who were responsible and have traditional values of living within their means would be punished as badly as those who have not.

Honestly as much as I hate the concept of propping up organisations that made bad decisions and forgiving people who borrowed irresponsibly, the notion that decent people should be punished for the bad behaviour of others more anathema to me than not punishing irresponsible people who got uus into this mess.

Just so you know, it is unlikley that in the immediate term these bailouts are going to be funded by tax payers, the US government will be borrowing the money from the Chinese the Indians the Japanese et al. they keep rolling over debt and their national debt keeps increasing, so in reality what the tax payers will be paying for is the interest on the cost of the bailout rather than the bailout themselves.

In fact it is a massive leveraged trade, they get to borrow at the lowest interest rates in the world to buy banking shares when they are at their lowest multiples they will ever reach in recent history, its actually quite a good deal, because those banks will turn the corner and multiples will return, and the tax payer will have made a fortune. If you were a hedge fund you would be falling over yourself to have the funding or borrowing ability of the US government and be able to invest in shares of companies who are seriously low valuations.

Posted by widemoose (377 days ago)

I do think that the use of the word "bailout" is a bit misleading. While taxpayers are footing the bill initially, you can also look at it a structured investment a la Warren Buffet. Yes, the preferreds will yield 5%, as opposed to Buffet's 10%, but there's an obvious explanation for that. You charge what your lessees can afford, if you want guaranteed repayment. Another point people forget, but is relevant, is that approximately 80% of the taxes are paid by top 20% income earners (with similar statistics for charities). By letting the financial system fall, you can imagine the implication it will have on the federal, state and local income tax receipts. Budget shortfalls mean firefighters, teachers and policepeople will not be getting paid...I don't need to go in depth about the consequences and the domino effects from a sudden fall in tax receipts. We saw what almost happened when the State of CA no longer had a Wall Street firm to issue state bonds.

Certainly, when Paulson and team considered the bailout, they considered the Main Street impact more so than the Wall Street impact. That's why the mistake of letting Lehman fall occurred. You may debate whether that was a mistake or not, but one thing is clear. If Lehman's fall had such a drastic impact at the corporate and government levels, imagine the fall of the rest of the financial institutions.

Also, this "bailout" is as much about guaranteeing bank deposits and money market funds. It will take time for banks to assess where time will take them and when they can return to business as usual. Just because the bailout was approved does not mean that we should expect to see results immediately. It's been less than a month. By demanding immediate results from this bailout, we are once again displaying the culture of instant self-gratification. "I lent you money so show me exactly what I want to see NOW!" It will take time for the bailout to take its effect, and it will take some time for the taxpayers to benefit from this bailout. And taxpayers will see the benefits because markets will eventually go back up. They may go down more before they go back up, but they will go back up. Maybe not as fast as we would like, but that may be just as well if we are to rebuild a solid foundation for rebirth.

Some of these posts started from resentment toward bankers who are expected to receive a bonus this year. Approximately 50% of a bank's operating costs are compensation BECAUSE it is people intensive business. They don't own factories and there are no tangible products. What the misleading article was referring to when it said "[No curb on bonus payment]" was just an accounting entry at banks, which is accrued every quarter and it is based on the previous year's data. We did not see the meltdown until September, and that's why you see no material difference between last year's accounting entry and this year's accounting entry. The actual payment amount this year will have nothing to do with the accounting entry that was made in the 1Q, 2Q and the 3Q of 08. Remember, for many WS banks, 3Q ended August 2008, before the meltdown, or September, right after the meltdown.

The base salary for bankers are relatively set low, as it is understood that total compensation will be based on performance. So it is too early to lash out about bonus payments. Like I said, you will want to be careful what you wish for. You will see bankers getting laid off. You will see bankers losing expat benefits. You will see bankers getting paid less. As a result, you will see people retreating. In HK, a financial capital, where can you go if there are no finance jobs? You will see less businesses getting access to cost-effective capital to grow. You will see decreased spending. You will see property markets fall. What this bailout does is it slows that process down, so that there isn't a sudden shock and chaos in the markets. It also buys banks time to fix themselves. Imagine all the bankers getting laid off all at once.

This bailout is for EVERYONE as it is an attempt to return to business as usual as much as we can for EVERYONE given the depth of the damage. Wish for the financial institutions to fall, and you're wishing for your life to take a drastic turn as you've never known before. This bailout is necessary for everyone. We won't know whether it is brilliant or flawed until at least two or more years have passed. So, I for one, is hoping for the best, since it is happening.

By the way, just so that people don't think I'm serving my own interest, I used to work for an investment bank, 10 years ago. I'm not defending the short-term sighted greed on Wall Street. It's just that I saw so much greed at many levels, not just on WS. So I find that blaming everyone on Wall Street is misdirected. I also never bought property, never really invested (except for 401K), and never levered up. I'm less angered by this bailout since I don't see it as such. I was more angry that a relatively high income earner like myself could not afford to buy property in the cities I worked in without resorting to leverage. I don't wish ill on anyone, but I welcome this chance to go back to fundamentals.

Posted by Digital Blonde (377 days ago)

Why, they are simply borrowing money, or selling equity stakes on distressed terms to an entity that is borrowing money from Peter to pay Paul to begin with at the lowest interest rates conceivable today. You don't seriously expect civil servants to start taking over management and imposing bureaucracies. That would be the worst thing.

For a start a few banks that are receiving bailouts are doing so for a precautionary measure rather than a requirement. BofA is not insolvent nor was it even close. ML was not bankrupt or even insolvent, perhaps it may have ended up that way, but it never got that bad for them.

If Banks feel compelled to pay bonus to key staff there will be reasons, These will be retention bonuses to people who will help the bank turn the corner far quicker and that is why they want to keep them and that is why they will get bonus. Its based on last year not this year and these will be the people who mitigated the companies losses

With all due respect I appreciate that your business doesnt pay out bonus, when business has not been good but it is a much smaller business with few departments and business lines. Suppose you had a very bad year, but there was one manager without whom you would have had to fold up, he brought in so much revenue it allowed you stay afloat and he's a talented guy and could do that for another media portal or his own, would you say to him year end, oh by the way we arent paying bonus because we have made a loss. To the guy who single Handley saved your company from going under. There are multiple product lines and some thrive in this environment in fact banks are gearing up to see what kind of businsess mix emerges from here on in, so they want to keep the ones they think will produce the most profits in the new world.

Head of structured products for an example will get some kind of bonus as per his contract, but it will be terrible because his results are terrible. If you were a prop fund shorting property indexes you will have made a fortune for the bank and those guys are going to get paid, and there is pressure on the banks by shareholders who are now the government to limit executive pay and they will have to do that.

Banks are much larger with many divisions, some of them will have been very profitable, whilst some departments will not. What are you going to say to the banker who was very profitable, sorry but no thanks no bonus. The guy will leave and he will find someone who isnt on government funds and make a fortune for them. So the idea of paying bonus is to ensure that certain key rain-makers stay rather than leave, because if they leave, it will take longer to be able to turn the corner

that a few people get them does not mark the entire industry you are really talking about a small phenomenon compared to the wider trend of retrenchment. 3/4 of Bear is out of work. ML is expected quite significantly to cut GS is cutting 10%, trust me banking salaries and compensation going forward is going to fall.

Posted by widemoose (376 days ago)

Ed, I agree with your philosophy regarding bonus because it stems from values like team work and accountability.

But there is one key point that you're not considering, which is a reality at a complex financial institution. You are lucky that in your business, you can see things black and white, which allows you to stick to your principles. And I mean that in a positive way.

Simply put, at a financial institution, with as many as 40 profit teams, it's more likely that select teams have profitable years (get big bonus) while others have losing years (get little bonus). For example (this is only an example), if you were a banker covering the Chinese markets, you may have made a killing in bonus the past few years while bankers covering Japan may have hardly made any. (The media would have had more fun writing about the Chinese bankers than the Japanese bankers.) Did the Chinese bankers share their bonus with the Japanese bankers? No. Because it is performance based (and there was some luck involved). Let's say this year, the Japanese bankers finally made a ton of money but the Chinese bankers brought in no money. In fact, the Chinese bankers lost SO much money that the money the Japanese bankers brought in was wiped out. Is it a good business decision to suddenly change the compensation rule and say no one gets bonus this year? If you were the Japanese banker, who waited your turn and busted your ass, how would you react? As the head of the Japanese team, how would you react?

It's hard for many people to feel sympathy for bankers because they think all bankers were compensated like the Chinese bankers. That is far from reality.

Your point about where will bankers go? to Lehman's? only really addresses underperforming bankers. High performers will ALWAYS have places to go to. That's how capitalism works. I hate to label people as such, but as a business owner, I'm sure you can identify select employees you can live without. They in turn have no where to go so they stick around. Is that how you would run your business because you insist on sticking to your principles? The engine that powers an economy is efficient allocation of capital. I can't imagine the world's financial institutions being run by underperforming bankers who stay because they have no where else to go. No business should be run by underperformers who stay because they have no where to go.

Again, I don't disagree with your principles. Perhaps if the bonus pools at banks have always been EQUALLY distributed from the beginning, then it would make sense to say no bonus for everyone. But that having been not the case, saying no bonus is not leveling the playing field. An equal distribution basically means a communist-like system where it doesn't matter what you do. You can show up at work, surf the net from 9 to 5, and get the same pay everyone is getting. That's not how growth happens.

Posted by widemoose (376 days ago)

"Bonuses are paid out of profit". Yes.

Not all banks had/have losses. For example, looking at Yahoo Finance, Morgan Stanley had $1.4 billion in net income in the 3Q08 (as well as similar net income levels for the 1Q and the 2Q). Plus the compensation expense (including bonus) is treated as an operating expense and is accrued every quarter. It's already been expensed. So looking at MS's net income, which is after tax, you're wrong when you say that MS's profit is zero. Again, what you're proposing is across the board application, which does not work because not all banks are reporting losses.

If you're talking about the "bailout", that's a LOAN in a form of preferred, where tax payers will receive a guaranteed 5% interest (as opposed to Buffet's which is not guaranteed) until it is repaid.

If you took out a mortgage loan, or a business loan, should the bank expect you to treat your salary as their profit? No. As long as you pay the interest on that debt, the bank does not have claims to your company's net income or your salary. Therefore, the tax payers do not have claims to the banks' net income as long as they are receiving the 5% interest. They can hate the plan since they had no choice, but that doesn't give them the right to tell businesses what to do. Just like a bank you borrow from does not have the right to tell you how to run your business.

Also, not all banks needed the bailout money. It was forced upon all of them so that we don't know which banks needed the bailout. The number one priority for Paulson was that "no one" knows which banks needed the capital injection so that there wasn't market chaos. Of course that doesn't stop people from speculating but that's another story. He achieved his goal of shoring up bank confidence by forcing all banks to receive the bailout. I'm not pro-Paulson. But I'm not against everything he does either.

I think what people have real problem with is the amount that people on Wall Street can make in bonus. I've heard many ask, Are they really worth that much? Markets set the price. It is what it is. Would people be this upset about getting rid of the bonus if the bonus amount was typically 100% of base? And it was going to be reduced to 50% of base? Would you still cry out to eliminate all bonus when facts are: not all banks are losing money and the bailout is a loan, not a cash gift.

What you're simply proposing, treating everyone and every bank the same just doesn't cut it.