The Economy – What went wrong & What’s next?

See also Wednesday Nights 1375 ; 1376 and 1378

Old-School Banks Emerge Atop New World of Finance
by Carrick Mollenkamp and Mark Whitehouse
(WSJ) More than 200 years after it was born at the base of a buttonwood tree, Wall Street as we have known it is ceasing to exist.
The rapid demise of 158-year-old investment bank Lehman Brothers Holdings Inc., together with the takeover of 94-year-old Merrill Lynch & Co., represent a watershed in the banking industry’s biggest restructuring since the Great Depression.
For decades, the world of banking was divided largely into two kinds of businesses. Commercial banks took deposits and made loans, eking out a decent return under the burden of heavy regulations designed to protect depositors. Standalone securities firms such as Lehman, Merrill and the now-defunct Bear Stearns Cos. took no deposits and were lightly regulated, freeing them to take big risks and make fat profits at the cost of occasional losses. More recently, some of the biggest institutions, such as UBS AG and Citigroup Inc., combined the two.
Now, as many securities firms are consumed in the wake of a disastrous foray into financial wizardry, the balance of power is shifting. On the wane are the heavy borrowing and complex securities that financiers embraced in recent years. On the rise is a more old-fashioned business of chasing customer deposits and building branch networks, conducted with the backing of federal insurance programs to keep depositors from pulling out en masse.
Of the five major independent investment banks that existed a year ago, only two — Goldman Sachs Group Inc. and Morgan Stanley — remain standing. Two others, Merrill and Bear Stearns, have been acquired by big deposit-taking institutions, Bank of America Corp. and J.P. Morgan Chase & Co. Other giant commercial-banking players, such as Wells Fargo & Co. in the U.S., as well as Germany’s Deutsche Bank AG and Spain’s Banco Santander SA, have emerged as some of the most powerful players in an industry that is likely to be safer but less lucrative for shareholders.
Soros expects more bank woes
15 September
AIG Gets Up to $85 Billion Fed Loan; Cedes Control
Sept. 16 (Bloomberg) — The U.S. government agreed to lend as much as $85 billion to American International Group Inc. in exchange for a 79.9 percent stake to save the country’s biggest insurer from collapse.
(BBC) China’s central bank has cut interest rates for the first time in six years amid growing turmoil in global financial markets.
Russia Market Drop May Temper Medvedev Georgia Moves
Sept. 15 (Bloomberg) — When it comes to containing Russia, the invisible hand of the markets may be the West’s most potent weapon.Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia.
Appearing on ABC’s This Week Sunday, former Federal Reserve Chairman Alan Greenspan said the United States is in a “once-in-a-century” financial crisis. Columnist Paul Krugman accused Paulson of “playing Russian roulette with the U.S. financial system.” Pimco’s Bill Gross sees the “risk of an immediate tsunami” from Lehman’s liquidation. Now, some fear that speculators will take aim at other troubled financial firms.
Lehman’s CEO, by the way, took home a $22 million bonus for 2007.
After Frantic Day, Wall St. Banks Falter
By ANDREW ROSS SORKIN
In one of the most dramatic days in Wall Street history, Lehman Brothers said it will file for Chapter 11 bankruptcy, while Merrill Lynch agreed to sell itself to Bank of America for about $50 billion.
Bill Copp comments: If things go on like this much longer the U.S. banking system may begin to look like Canada’s where a half dozen banks and other assorted financial institutions have done a better if imperfect job over the years.
14 September
Greenspan: This Is The Worst Economy I’ve Ever Seen
11 September
Did speculators use unregulated markets to drive up oil prices?
(McClatchy) Federal regulators have uncovered evidence that oil speculators operating in unregulated “dark markets” may have helped drive the price of crude oil to record highs this year, McClatchy has learned. The Commodity Futures Trading Commission is expected to issue a long-awaited report before Monday, perhaps as early as Thursday, on what role oil speculators played in the 50 percent rise in oil prices earlier this year.
10 September
(FT) Medvedev fails to halt Russian market slide
September 7
U.S. Unveils Takeover of Two Mortgage Giants
WASHINGTON — The Treasury Department on Sunday seized control of the quasi-public mortgage finance giants, Fannie Mae and Freddie Mac. September 6
Mortgage Giants Agreeable to Rescue Plan, but Its Cost Is Unknown
Under the plan, the Treasury Department will buy billions of dollars in new mortgage securities issued by the companies and inject an unknown amount of capital into them in quarterly installments, according to these people.
August 22
The US Banking System Is in Trouble
… Chris Whalen is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions. If you are one of their clients, you can go to their web site and drill quite deep into all aspects of every bank in America. And what they have done is come up with various metrics which compare how well-capitalized a bank is, how much risk it is taking, and what kind of losses (or profits) it can expect. It is a one of a kind firm, and the data gives Chris a very special perspective on the US banking system.
And what he sees is not pretty. There is a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. The total assets of those banks he estimates to be $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks. John Mauldin Frontline Weekly Newsletter
17 August
Dr. Doom
Profile of Professor Nouriel Roubini, who warned in September 2006 that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.” At the time, his audience laughed uncomfortably. Now he’s a sought-after authority. George Archer highly recommends his RGE Monitor website
August 15
Eurozone edges closer to recession
(FT) The eurozone moved closer to recession on Thursday after it emerged that the economy contracted in the second quarter for the first time since the launch of the euro.
The economy shrank by 0.2 per cent in the three months to June, as inflation driven by commodity prices wiped out growth.
France was hit badly, contracting more than expected.
Why China is not to blame for the surge in global inflation
(The Economist) A more nuanced argument, suggested in a recent speech by Donald Kohn, the Federal Reserve’s vice-chairman, is that lax monetary policies have recently caused emerging economies such as China to grow too fast, putting extra demand on resources. Mr Kohn concluded that central banks in emerging economies should tighten policy to restrain economic growth and so reduce global inflation.
August 4
Oil falls as fears for growth intensify
(FT) Crude oil prices fell below $120 a barrel for the first time in three months on Monday, as new data underscored the damage high energy costs are inflicting on US consumers.
August 1
Eurozone inflation surges to 4.1%
(FT) High energy and food costs pushed the rate of price rises a 10th of a point higher than in the previous month, setting another record for the nine-year-old, 15-member currency region. Read more
July 31
Deutsche Bank writedowns swell beyond $11 billion
(Reuters) Germany’s flagship financier had originally been seen as one of the few to emerge unscathed from the crisis, but as the problems on international markets continue Deutsche Bank is being sucked ever deeper into trouble.
July 26
Congress passes a bill to assist homeowners and to rescue Freddie Mac and Fannie Mae
On Saturday July 26th the Senate overwhelmingly approved the mammoth package, as the House had done a few days earlier. George Bush is expected to sign it into law this week. The bill is the most important attempt yet by Congress to stabilise financial markets and alleviate the pain felt by borrowers. Its centrepiece is authorisation for the Federal Housing Administration, a government agency, to guarantee up to $300 billion of refinanced mortgages for borrowers who could lose their homes. Participating lenders must accept 80-90% of the home’s current value. In return for more relaxed loan terms, borrowers will have to pay the government a 1.5% insurance premium.
July 24
Eurozone growth prospects crumble
(FT) The eurozone economy is fast running out of steam with growth prospects collapsing across the 15-country region, closely watched surveys indicated on Thursday.
July 21
Women Are Now Equal as Victims of Poor Economy
(NYT) After moving into virtually every occupation, women are being afflicted on a large scale by the same troubles as men: downturns, layoffs, outsourcing, stagnant wages or the discouraging prospect of an outright pay cut. And they are responding as men have, by dropping out or disappearing for a while.
July 15
Bernanke highlights risks facing US economy
Ben Bernanke highlighted the “numerous difficulties” facing the US economy in a sobering testimony on Tuesday that sent markets on a rollercoaster ride as he signalled serious risks on both the growth and inflation fronts.
July 14
Welcomes but warnings for Fannie, Freddie rescue plan
LONDON (Reuters) – A government plan to rescue mortgage agencies Fannie Mae and Freddie Mac was welcomed by one of the world’s biggest holders of dollar assets on Monday but fears remained about the state of the global financial system.
Japan said it hoped that a plan unveiled on Sunday by the Treasury and the Federal Reserve would support the troubled government-sponsored mortgage financiers, but a senior minister said that world markets were on the brink of crisis.
The central bank of Singapore, another major dollar-asset holder, issued a similar warning about risks to financial markets and institutions.
Treasury Acts to Shore Up Fannie Mae and Freddie Mac
WASHINGTON — Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
27 June
(NYT Op-Ed) Paul Krugman argues that the hyperventilation over oil-market speculation is distracting us from the real issues.
Back in May, Michael Masters, a hedge fund manager, made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials. He presented charts showing the growth of the oil futures market, in which investors buy and sell promises to deliver oil at a later date, and claimed that “the increase in demand from index speculators” — his term for institutional investors who buy commodity futures — “is almost equal to the increase in demand from China.”
Oil hits record near $143 on rising investor flows
NEW YORK (Reuters) – Oil prices rose to a record near $143 a barrel on Friday as a drop in global equities markets sent fresh investors into commodities.
U.S. crude settled 57 cents higher at $140.21 a barrel, as profit taking sent prices from the record $142.99 hit earlier. London Brent crude settled up 48 cents at $140.31 a barrel.
Global stocks slumped to three-month lows putting the Dow Jones industrial average on the verge of entering a bear market for the first time since 2001.
“The renewed attraction of commodities as an investment vehicle is contrasting with the unattractiveness of the stock market,” analysts Ritterbusch and Associates said in a research note. ”
26 June
The Petro-Manipulators
Timothy Egan
(NYT Op-Ed) Consider the present dilemma: oil doubling over the last year, gas at $4.50 a gallon in places and the oversized influence of speculators in a market where few used to tread. Big investors are free to run up oil futures contracts thanks in part to former Senator Phil Gramm. He is the Texas Republican who co-sponsored the so-called Enron loophole in 2000 at the behest of what was later found to be one of the nation’s biggest criminal enterprises.
Market manipulation seems obvious.
Over the last five years, investment in index funds tied to commodities like energy and food has gone from $13 billion to $260 billion. At the same time, the prices of those commodities have risen 200 percent.
Take away the excess speculators who are in the market purely for the ride, and oil prices could drop by half. That’s the view of Michael W. Masters, a hedge fund manager who’s been advising Congress this year.
24 June
Economy on brink of recession, Greenspan says
JOHANNESBURG (Reuters) – Former Federal Reserve Chairman Alan Greenspan warned on Tuesday the U.S. economy was on the brink of a recession, with the chances of that happening at more than 50 percent.
Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. “As far as I’m concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon.”
22 June
(The Economist) SENATOR Joseph Lieberman will chair a congressional hearing on Tuesday June 24th on bills he has drafted that are aimed at curbing what he considers is excessive speculation in oil markets. The various proposals under consideration would stop big institutional investors from trading in futures markets, limit investment banks’ participation involvement as middle-men in “swaps” and close loopholes in the law. This will not matter much if, as seems likely, the laws of supply and demand rather than avaricious speculators are to blame for the high oil price. See background article
19 June
Paulson to push for oversight reforms: reports
(Reuters) – U.S. Treasury Secretary Henry Paulson is expected to urge that the Federal Reserve be given new powers to regulate Wall Street after the collapse of brokerage Bear Stearns Cos. Inc., U.S. media reported on Wednesday.
June 18
SAN FRANCISCO (Reuters) – The economy will likely avoid a formal recession, but its outlook through the end of next year is decidedly “subprime” with the deep housing downturn restraining growth to just above 1 percent, a UCLA Anderson Forecast report released on Wednesday said. More
June 17
U.S. stocks fell for the first time in four days as Goldman Sachs Group Inc. predicted banks will have to raise $65 billion in new capital to cover losses and housing starts and industrial production trailed forecasts. More
June 12
Investors are caught between the desire for growth and the fear of inflation
(The Economist) When 2008 started, most investors assumed that the lingering effects of the credit crunch would allow interest rates to fall, or at worst be kept on hold. But over the past week markets have priced in a number of rate rises later in the year from the Federal Reserve, the European Central Bank (ECB) and the Bank of England. That has caused turmoil in short-term government-bond markets (see chart), as yields have been forced sharply higher.
The problem is inflation. Central bankers may hope that soaring oil and food prices will prove to be just a blip, and will not result in secondary effects such as higher wages. But they know that higher inflation expectations, once entrenched, are difficult to eliminate. So they are sounding as tough as they can.
June 3 – 4
OECD boss hails high oil prices
(BBC) The soaring cost of oil is welcome as it sends a clear signal to consumers and firms to curb their use of fuel, the head of the OECD has said.
OECD members are trying to agree plans to tackle climate change and lessen the effects of the world financial crisis.
The OECD is uniting business, pressure groups and governments in an effort to find common ground on how to cut greenhouse gas emissions and slow global warming.
The meeting will examine the feasibility of increasing nuclear energy and biofuels to meet growing energy needs.
And it will look at the role companies can play in encouraging clean technology.
May 31
Greenspan sees lower oil – temporarily
JAY BRYAN, The Gazette
Former Fed chairman Alan Greenspan, who spoke to a business group in Montreal yesterday, brought some good news and some much worse news.
In the longer run, the cost of oil is not only “on a long-term uptrend,” but so is inflationary pressure in general.
On the other hand, he said, skyrocketing prices for oil and other commodities, notably grains like rice and wheat, do not signify the growth of a new market bubble following the ones in U.S. housing and, earlier, in technology stocks.
Once inflation pressure is evident, “you don’t get bubbles,” he said, since a true bubble is fed by the complacency created by a long period of low inflation, low interest rates and economic stability.
Instead, Greenspan agrees with a number of other analysts that rising oil and food prices are based on changes in supply and demand.
In the case of oil, it’s the failure of global supply to keep up with growing consumption, partly driven by the increasing importance of production in countries where national oil companies don’t always respond to price signals. More on Alan Greenspan
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 JPMorganChase & 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.