Wednesday-Night

May 8
The house-price bust has a long way to go
(The Economist) SOUNDING more like a cartographer than a central banker, Ben Bernanke this week showed off the Federal Reserve’s latest gizmo for tracking America’s property bust: maps that colour-code price declines, foreclosures and other gauges of housing distress for every county. His goal was to show that falling prices meant more foreclosures, and to urge lenders to write down the principal on troubled loans where the house is worth less than the value of the mortgage. His maps—where hotter colours imply more trouble—also make a starker point. The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.
April 27
Wall Street, Run Amok
By BEN STEIN
(NYT) How did all of the mechanisms operated by the mind-bogglingly well-paid men and women of the Street go so wrong that we saw a major investment bank, Bear Stearns, essentially disappear? How did Wall Street firms of ancient lineage take such immense losses that they made banks clam up on lending — at great risk to the economy?
Weren’t fail-safe devices in place to guard against risk? Weren’t government watchdogs there to make sure that catastrophes could not happen? Weren’t ratings agencies on the job to police what was going on in the canyons of Lower Manhattan?
April 23
UBS/Wealth mismanagement
(The Economist) HOW did UBS, a Swiss bank whose core business is the staid one of wealth management, manage to lose $38 billion betting on American mortgage-backed assets, battering its core capital and share price in the process?
On Monday the bank released a summary of an internal investigation into the causes of the write-downs that had been demanded by the Swiss Federal Banking Commission. The 400-page report gives three broad explanations for the bank’s woes. The investment-banking arm’s preoccupation with growth, the reliance of the control team on flawed measures of risk and the culture of the bank.
April 15
Dollar May Fall Versus Euro on Reduced G-7 Intervention Outlook
By Ye Xie and Bo Nielsen
April 15 (Bloomberg) — The dollar may fall against the euro on reduced speculation that finance officials of the Group of Seven nations will intervene to support the U.S. currency.
The greenback’s biggest drop yesterday versus major currencies was against the Mexican peso after Wachovia Corp.’s first-quarter loss fueled concern that the worst of the credit crisis hasn’t passed. The pound appreciated against the euro and dollar as a report showed British producer prices rose in March at the highest annual rate since 1991.
April 14
There’s just one problem with Alan Greenspan’s attempts to defend his record on the financial crisis: The former Fed chairman is guilty as charged.
(Foreign Policy) Alan Greenspan’s fingerprints are all over what is fast becoming the worst financial calamity since the Great Depression. Sensitive to mounting criticism that his stewardship of the Federal Reserve led to today’s wrenching crisis, the former Fed chairman has launched a massive public relations campaign to set the record “straight.” Greenspan does make an inarguable point in stating his case for the defense—that it is critical to get the lessons of this crisis right.
Mr. Greenspan has been blinded by a dangerous combination of politics and ideology in his own search for those very lessons. [This] blend of politics and ideology led to bad economics and a succession of policy blunders whose severity is only now becoming clear.
April 12
IMF steering committee communique
Full text of the communique the International Monetary Fund’s International Monetary and Financial Committee
April 9
Blame the Banks
(Foreign Affairs Update) )The most striking fact about the ongoing financial mayhem is that it is concentrated not in lightly regulated hedge funds but in more heavily regulated commercial and investment banks. It is banks that created subprime mortgage securities. It is banks that mispriced them. And it is banks that filled their own coffers with this toxic paper, losing hundreds of billions of dollars. A somewhat breathless March 31 Financial Times article proclaimed the closing of the worst month for hedge funds since the collapse of the infamous Long Term Capital Management in 1998. But the average fund tracked by the Chicago-based firm Hedge Fund Research declined by a mere 2.4 percent in March, bringing the cumulative fall for the first quarter of 2008 to 2.7 percent. By contrast, the bank-heavy financial services component of the S&P 500 fell 12.3 percent in the first quarter.
April 8
Credit crisis could cost nearly $1 trillion, IMF predicts
(Bloomberg/IHT) WASHINGTON: The International Monetary Fund said Tuesday that financial losses stemming from the U.S. mortgage crisis might approach $1 trillion, citing a “collective failure” to predict the breadth of the crisis.
Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.
April 6
From Socrates to Soros
From Economist.com
Pondering the crisis, and peddling a new paradigm
CRISIS breeds opportunity, as the bottom-fishers starting to circle beaten-up mortgage bonds and leveraged loans can attest. For George Soros it offers a chance of a different sort: to revive his favourite intellectual theory. In his latest book, “The New Paradigm for Financial Markets”, published on April 3rd, he sets out to illuminate the credit crunch through the prism of “reflexivity.”
April 2
False ideology at the heart of the crisis
By George Soros
(Financial Times) The proposal from Hank Paulson, US Treasury secretary, for reorganising government regulation of financial institutions misses the point. We need new thinking, not a reshuffling of regulatory agencies. The Federal Reserve has long had authority to issue rules for the mortgage industry but failed to exercise it. For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations - risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments - were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.
UBS to Write Down Another $19 Billion
By NELSON D. SCHWARTZ and JULIA WERDIGIER
The Swiss bank, which also announced the resignation of its chairman, said the write-down would result in a $12 billion quarterly loss.
The mortgage crisis set off fresh shock waves Tuesday, with the biggest banks in Switzerland and Germany announcing huge write-downs totaling $23 billion, adding to the hundreds of billions in losses that financial firms already face from the subprime mortgage fallout.
April 1
Paulson the plumber
A plan to fix America’s financial regulation
(The Economist) MUCH of it will take the best part of a decade to see the light of day, if it ever does. Even the short-term recommendations face a rocky path to implementation. Yet a plan unveiled by America’s Treasury on Monday March 31st is an important first salvo in a fight over the future of financial regulation in the world’s biggest capital market.
The review began a year ago in response to fears about America’s waning financial competitiveness. Then came the mortgage-inspired credit crunch and a host of new problems. The result is a hybrid document—albeit a keenly argued one—that emphasises agency consolidation, while advocating deregulation in some areas and new rules and institutions in others.
Doubts Greet Treasury Plan Regulation
(NYT) WASHINGTON — As Treasury Secretary Henry M. Paulson Jr. laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation’s financial system on Monday, lawmakers and lobbyists from an array of industries opposed to the plan predicted that most of it would be dead on arrival.
The Destructive Rise of Big Finance
(Huffington Post) Economic, financial and regulatory issues should dominate politics and government in the United States for the next two or three years, which is important enough. National discourse may also have a new and deserving bogeyman. Franklin D. Roosevelt had Big Business, Ronald Reagan had Big Labor, and my guess is that the new president inaugurated next January will have Big Finance.
Today’s financial services sector, by contrast, is a grasping, gargantuan combination of banks, stockbrokers, insurancemen, loan sharks, credit-card issuers, hedge fund speculators, securitization mavens and mortgage operators. Over the last five years, financial services has reached a swollen 20-21% of U.S. GDP — the largest sector of the private economy.
March 31
(Reuters) Treasury regulatory overhaul plan sparks debate
The proposals, in the form of a 218-page “blueprint” that was started before markets unraveled in August, offer no quick fix for the credit contraction that threatens to tip the U.S. economy into recession. The plan was already meeting some resistance from Capitol Hill and competing corners of the government bureaucracy as a potentially protracted debate took shape.
The Politics of Paulson’s Proposal
(TIME) Democrats are skeptical that the Administration has finally seen the merits of tighter financial oversight. They say Bush’s move, while a good start and potentially capable of getting bipartisan support, fits more closely with the pattern he has established since they took over Congress in 2006: a near freeze on new regulations unless and until the legislative or scientific ground gives way beneath him, at which point he launches savvy, preemptive moves to limit the scope of any new regulatory power.
Treasury Secretary Henry M. Paulson Jr. laid out a plan that would create a set of federal regulators with authority over all players in the financial system.
The product of a lame-duck Republican administration facing a Democratically controlled Congress, the plan would consolidate federal agencies that regulate the nation’s securities and commodities futures markets and eliminate a third agency, the Office of Thrift Supervision, which oversees savings and loans. It proposes to create a commission that would set new minimum licensing standards for mortgage originators. By his own account, Mr. Paulson, along with other senior officials, do not want lawmakers to act on the proposal until after the housing crisis is over — and that is likely to be after a new president takes office.
The Coming Financial Pandemic
By Nouriel Roubini
(Foreign Policy March/April 2008)
For months, economists have debated whether the United States is headed toward a recession. Today, there is no doubt. President George W. Bush can tout his $150 billion economic stimulus package, and the Federal Reserve can continue to cut short-term interest rates in an effort to goose consumer spending. But those moves are unlikely to stop the economy’s slide.
The Recession Felt Around the World
By Nouriel Roubini
In an era of globalization, no country is immune when the United States falls onto hard times. Here’s a look at how economies elsewhere will fare.
The Losers:
Mexico and Canada: Living next door to world’s biggest economy has its advantages, but it has big drawbacks, too. Exports to the United States represent about a quarter of each country’s GDP, so direct trade links will bear the brunt of a slowdown. Expect the manufacturing sectors of both countries to feel the pinch.
China: The world’s fastest-growing economy can’t help but be affected when the world’s largest economy slows down, since China relies on exports to the United States as one of its main sources of growth. In recent years, China has boasted double-digit growth. Officially, Chinese economists expect growth to slow down to 9 percent in the wake of a U.S. recession, but only if such a recession is mild, lasting two quarters. If the U.S. recession is severe—four quarters or more—and is centered on a faltering U.S. consumer who buys fewer Chinese goods, then China’s growth is likely to slow to 6 or 7 percent, a hard landing, indeed
March 29
(NYT) Treasury’s Plan Would Give Fed Wide New Power
WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.
March 28
(Financial Times) Four-year low for M&A activity
The worldwide volume of mergers and acquisitions fell to its lowest level in four years in the first quarter of 2008 as the credit squeeze and market turmoil continues to put a brake on deal-making activity.
The figures underline how the end of the credit boom and wild swings in the stock market have made M&A deals harder to finance and harder to value. They will also fuel concerns among investment bankers about widespread job losses if activity does not pick up.
March 27
Bear Stearns chairman sells stake
The chairman of beleaguered US investment bank, Bear Stearns, has sold his entire stake in the firm as a takeover by JP Morgan Chase looms.
James Cayne received $61m ($31m) for his holding which at one stage was worth close to $1bn.
Analysts say that Mr Cayne offloading all his shares is an indication that investors cannot expect a higher price for their stake.
March 25
(Bloomberg) — Bear Stearns Cos. investors seeking a higher price than JPMorgan Chase & Co.’s bid of $10 a share asked a Delaware judge to halt a stock transaction that may prevent opponents from blocking the takeover. More
Who Gets Us Out of the Mess?
Are the folks who led us into the mess the best ones to lead us out? Yesterday in a speech on credit crisis, Hillary Clinton called for the president to appoint an “Emergency Working Group on Foreclosures,” led by “a distinguished non-partisan group of economic leaders like Alan Greenspan, Robert Rubin, Paul Volcker.” (emphasis added) This “proactive step,” she argued, would “help re-establish confidence in our economy.” The group’s first order of business would be to assess whether and how the government should “buy, restructure and resell underwater mortgages.”
Alan Greenspan, former head of the Federal Reserve, is the official most directly responsible for the current crisis. He not only failed to demand and enforce regulation of the shadow banking system at the heart of the credit collapse, but he served as cheerleader in chief for both the housing bubble and the exotic financial innovations that turned the staid home mortgage market into a speculative casino. Bob Rubin, Secretary of the Treasury under Clinton, made financial deregulation his signature, including repeal of the Depression Era Glass-Steagall Act designed to limit the conflicts of interest at the heart of the current debacle. As chief strategist of Citibank, he presumably helped lead that bank into billions of losses in mortgage backed securities. He would have a direct financial interest in the terms of any federal refinancing of home mortgages.
Hillary isn’t alone. John McCain admitted that “The issue of economics is not something I’ve understood as well as I should.” But he said, “I’ve got Greenspan’s book.” Read More
March 24
JPMorgan in Negotiations to Raise Bear Stearns Bid
JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
March 23
(Financial Times) Economist forecasts central bank action
Central banks and governments in advanced economies will be forced to buy mortgage-backed securities within the next few months to stop the credit crisis, according to a former chief economist of the European Bank for Reconstruction and Development.
In Washington, a Split Over Regulation of Wall Street
… the entire discussion took a stunning turn last week after the Federal Reserve abruptly stepped in to prevent a systemic collapse on Wall Street.
Invoking its authority as the nation’s lender of last resort, the Fed offered a $30 billion credit line to JPMorgan Chase to help it take over Bear Stearns, which was about to go bankrupt. Even more significant, the central bank announced that it would lend hundreds of billions of dollars to big investment banks through its “discount window” — an emergency loan program that had been reserved strictly for commercial banks.
The Fed’s involvement highlighted what many experts see as the growing disparity in regulation between Wall Street firms and commercial banks. Commercial banks submit to greater regulation, partly in exchange for the privilege of being able to borrow from the Fed’s discount window.
But starting last week, Wall Street firms were getting the same protection without subjecting themselves to additional scrutiny. Some administration officials said they had little choice but to regulate Wall Street firms more closely.
Mar 19th 2008
(The Economist) Rescuing Bear Stearns and its kind from their own folly may strike many people as overly charitable. For years Wall Street minted billions without showing much compassion. Yet the Fed put $30 billion of public money at risk for the best reason of all: the public interest. Bear is a counterparty to some $10 trillion of over-the-counter swaps. With the broker’s collapse, the fear that these and other contracts would no longer be honoured would have infected the world’s derivatives markets. Imagine those doubts raging in all the securities Bear traded and from there spreading across the financial system; then imagine what would happen to the economy in the financial nuclear winter that would follow. Bear Stearns may not have been too big to fail, but it was too entangled.
Entanglement is a new doctrine in finance (see article). It began in the 1980s with an historic bull market in shares and bonds, propelled by falling interest rates, new information technology and corporate restructuring. When the boom ran out, shortly after the turn of the century, the finance houses that had grown rich on the back of it set about the search for new profits. Thanks to cheap money, they could take on more debt—which makes investments more profitable and more risky. Thanks to the information technology, they could design myriad complex derivatives, some of them linked to mortgages. By combining debt and derivatives, the banks created a new machine that could originate and distribute prodigious quantities of risk to a baffling array of counterparties.
(The Economist) In our special briefing, we look at how near Wall Street came to systemic collapse this week—and how the financial system will change as a result. We start with how financiers—and their critics—have laboured under a delusion
“A COMPANY for carrying out an undertaking of great advantage, but nobody to know what it is.” This lure for the South Sea Company, published in 1720, has a whiff of the 21st century about it. Modern finance has promised miracles, seduced the brilliant and the greedy–and wrought destruction.
Alan Greenspan, formerly chairman of the Federal Reserve, said in 2005 that “increasingly complex financial instruments have contributed to the development of a far more flexible,efficient, and hence resilient financial system than the one that existed just a quarter-century ago.” Tell that to Bear Stearns, Wall Street’s fifth-largest investment bank, the most spectacular corporate casualty so far of the credit crisis.
For the critics of modern finance, Bear’s swift end on March 16th was the inevitable consequence of the laissez-faire philosophy that allowed financial services to innovate and spread almost unchecked. This has created a complex, interdependent system prone to conflicts of interest. Fraud has been rampant in the sale of subprime mortgages.
Spurred by pay that was geared to short-term gains, bankers and fund managers stand accused of pocketing bonuses with no thought for the longer-term consequences of what they were doing. Their gambling has been fed by the knowledge that, if disaster struck, someone else –borrowers, investors, taxpayers– would end up bearing at least some of the losses.
… If the critics are right and something in finance is broken, then there will be pressure to reregulate, to return to what Alistair Darling Britain’s chancellor of the exchequer, calls “good old-fashioned banking”. But are the critics right? What really went wrong with finance? And how can it be fixed?
HAPPY DAYS
The seeds of today’s disaster were sown in the 1980s, when financial services began a pattern of growth that may only now have come to an end. In a recent study Martin Barnes [OWN] of BCA Research, a Canadian economic-research firm, traces the rise of the American financial-services industry’s share of total corporate profits, from 10% in the early 1980s to 40% at its peak last year (see chart 1)

Its share of stockmarket value grew from 6% to 19%. These proportions look all the more striking–even unsustainable–when you note that financial services account for only 15% of corporate America’s gross value added and a mere 5% of private-sector jobs.
At first this growth was built on the solid foundations of rising asset prices. The 18 years to 2000 witnessed an unparalleled bull market forshares and bonds. As the world’s central banks tamed inflation, interest rates fell and asset prices rose (see chart 2). Corporate restructuring, wage competition and a revolution in information technology boosted profits. A typical portfolio of shares, bonds and cash gave real annual yields of over 14%, calculates Mr Barnes, almost four times the norm of earlier decades. Financial-service firms made hay. The number of equity mutual funds in America rose more than fourfold.
A service industry that, in effect, exists to help people write, trade and manage financial claims on future cash flows raced ahead of the real economy, even as the ground beneath it fell away.
The industry has defied gravity by using debt, securitisation and proprietary trading to boost fee income and profits. Investors hungry for yield have willingly gone along. Since 2000, according to BCA, the value of assets held in hedge funds, with their high fees and higher leverage, has quintupled. In addition, the industry has combined computing power and leverage to create a burst of innovation. The value of outstanding credit-default swaps, for instance, has climbed to a staggering $45 trillion. In 1980 financial-sector debt was only a tenth of the size of non-financial debt. Now it is half as big.
This process has turned investment banks into debt machines that trade heavily on their own accounts. The banks’ course was made possible by cheap money, facilitated in turn by low consumer-price inflation. In more regulated times, credit controls or the gold standard restricted the creation of credit. But recently central banks have in effect conspired with the banks’ urge to earn fees and use leverage. The resulting glut of liquidity and financial firms’ thirst for yield led eventually to the ill-starred boom in American subprime mortgages. Read complete analysis
March 14, 2008
Another view from uber-controversial Greg Palast
The $200 billion bail-out for predator banks and Spitzer charges are intimately linked
While New York Governor Eliot Spitzer was paying an “escort” $4,300 in a hotel room in Washington, just down the road, George Bush’s new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.
Both acts were wanton, wicked and lewd. But there’s a BIG difference. The Governor was using his own checkbook. Bush’s man Bernanke was using ours.
This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.
Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.
Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.
March 10
(Forbes) The Biggest Business Blunders Ever
Entrepreneurs will need every drop of hard-earned wisdom to navigate the coming year–by all accounts, a challenging one, care of a deepening credit crisis and potential recession.
… we canvassed the last four centuries for the biggest business blunders of all time, in terms of wealth destroyed and opportunity lost.
The stories span industries from technology to real estate. Market miscalculations, short-term thinking and rotten ethics are the broad themes. Taken together, the collective devastation of these miscues in current dollar value creeps into the trillions.