The Worst Predictions About 2008

From Jim Cramer's "No! No! No! Bear Stearns is not in trouble", said on CNBC on March 11, 2008, to "I think you'll see (oil prices at) $150 a barrel by the end of the year" by T. Boone Pickens on June 20, 2008.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" -- Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG "could have huge gains in the second quarter." -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
continue reading


source: The Worst Predictions About 2008
BusinessWeek, Monday December 29, 10:46 am ET
By Peter Coy
http://biz.yahoo.com/bizwk/081229/dec2008db20081224028134.html?printer=1

Anglo-American bankers want more power

First we screw up and as a reward we want more power! - That is the ridiculous plea of leading central bankers in London and Washington. In some parts of the world CEOs of corporations that went bankrupt were asked to commit suicide, but that is not part of the thinking amongst the anglo-american elite. They just want more power.

BoE Deputy Governor Gieve:
"This is a major storm we have not seen the like of for a hundred years. It would be very surprising if we were not learning some lessons from it."

Please do, but first it would be nice to see your resignations.

click for video

Martin Feldstein - a very long and very damaging downturn

A depressing outlook on the economy with Martin Feldstein, former Council of Economic Advisors chairman/National Bureau of Economic Research president emeritus. Double digit unemployment rate possible!
click for video















source: Digging Out of the Recession
CNBC video with Martin Feldstein
http://www.cnbc.com/id/15840232?video=970465549

The party is over for the next 20 years says BCG

Boston Consulting Group, one of the leading global management consulting firms, warns corporate banks of the "new normal" in the form of slower economic growth, higher loan losses and scarce liquidity.

“The speed with the adjustment that’s happening now is quite surprising,” said Juergen Schwarz, a senior partner at the Boston Consulting Group who wrote the report, said in an interview. “We will revert back to the ‘new normal’ over the next two years and it will stay there for at least the next 10 to 15 to 20 years.”


source: Corporate Banks Face ‘New Normal’ After Slowdown, Report Says
Bloomberg, 12/9/08
http://www.bloomberg.com/apps/news?pid=20602007&sid=a_hGusUTIcEk&refer=govt_bonds

Roubini on the economic outlook

The man who saw it all coming, Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor, warns of a severe recession with a global deflationary risk.
click for video



source: 2009 Recession Will Be Severe: 'There Is a Global Deflationary Risk,' Roubini Says
Posted Dec 04, 2008 12:18pm EST by Aaron Task in Newsmakers
http://finance.yahoo.com/tech-ticker/article/138999/2009-Recession-Will-Be-Severe-%27There-Is-a-Global-Deflationary-Risk%27-Roubini-Says?tickers=^dji,^gspc,TLT,UDN,UUP,GLD,SPY

ECB lowers rates by 75 basis points to 2.5 percent in December 2008

From the introductory statement:
Looking further ahead, on the basis of our current analysis and assessment, we see global economic weakness and very sluggish domestic demand persisting in the next few quarters. ...Eurosystem staff project annual real GDP growth of between 0.8% and 1.2% for 2008, between -1.0% and 0.0% for 2009, and between 0.5% and 1.5% for 2010. These figures represent substantial downward revisions relative to the previous ECB staff projections for 2008 and 2009 published in September.

Consistent with this assessment, the December 2008 Eurosystem staff projections foresee annual HICP inflation of between 3.2% and 3.4% for 2008 and declining to between 1.1% and 1.7% for 2009. For 2010, HICP inflation is projected to lie between 1.5% and 2.1%. The HICP inflation projections for 2008 and 2009 have been revised downwards substantially in relation to the September 2008 ECB staff projections, reflecting mainly the large declines in commodity prices and the impact of weakening demand on price developments.
Looking through the shorter-term volatility in headline HICP inflation rates, risks to price stability at the policy-relevant horizon are more balanced than in the past.

On monetary analysis:
It should be recognized that the intensification of the financial market turmoil since mid-September marks a potential watershed in the evolution of monetary developments. The most recent money and credit data indicate that this intensification has had a significant impact on the behavior of market participants. Thus far, such developments have largely taken the form of substitution among components of the broad aggregate M3, rather than sharp changes in the evolution of M3 itself.

The latest available data, namely up to the end of October, reveal a continued moderation of the growth rate of loans to the non-financial private sector. At the same time, for the euro area as a whole, there were no significant indications of a drying up in the availability of loans. The annual growth rate of loans to households also moderated further, in line with the weakening of economic and housing market prospects and tighter financing conditions. The data do signal an impact of the intensification of the financial turmoil on bank behavior. Looking forward, more data and further analysis are necessary to form a robust judgment.

A few thoughts from JCT's press conference:
"situation in money markets is tense"
"it is a global phenomenon"

"bank lending surveys clear indicate hardening (conditions)"
"published figures show loans to non financials 11.9 pc increase in Oct08 vs 12.1 in Sep08. Growth remains very impressive. But acceleration of previously committed credit lines and (other factors) are important."

Trichet makes the distinction between deflation and disinflation:
"Today we are not in a deflationary period."

click for video

















source: Introductory statement
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Brussels, 4 December 2008
http://www.ecb.int/press/pressconf/2008/html/is081204.en.html

Krugman on wages and employment in the 1930s

Nobel laureate Paul Krugman has some interesting thoughts on the effect of wage increases during a period of very low interest rates. At the margin low interest rates can lead to liquidity trap conditions, as experienced for example in the US in the 1930s and Japan in the 1990s. During those times nominal wage increases were generally believed to decrease output and employment (Y). Economists determine an aggregate supply curve (S) that depends on the ratio of the aggregate price level (P) to the wage rate (W):

Y = S(P/W)

Macroeconomic equilibrium is determined by the intersection of the aggregate supply (AS) curve with the aggregate demand (AD) curve, representing the demand side of the economy. By increasing nominal wages the AS curve is shifted upwards, which leads to a higher price level and lower output (see left panel on the chart below).

Krugman challenges this assumption:
"Well, in normal times the AD curve slopes down, we think, because other things equal a higher price level increases the demand for money, which drives up interest rates, which reduces desired spending. (In terms of IS-LM analysis, higher P leads to lower M/P which shifts LM left.) But in liquidity trap conditions, the interest rate isn’t affected at the margin by either the supply or the demand for money – it’s hard up against the zero bound."

click for chart









According to Krugman during liquidity trap conditions there is no adverse effect of a wage increase on output.



source: NOTES ON NOMINAL WAGES AND EMPLOYMENT Paul Krugman 12/2/08 http://www.princeton.edu/~pkrugman/nominal_wage.pdf

Peter Schiff was right

sooo many other s.c. experts were plain stupid and wrong! Laffert and Stein are two of them.

click for revealing video

Plate tectonics - a shift from paper assets to real assets

Renee Haugerud, founder and principal of commodities global macrofund Galtere recently was ranked number two HF manager in the world by Trader monthly magazine. She suggests a tectonic shift away from paper assets (equities) to real assets (commodities) is taking place and although the fund is mostly deleveraged she expects a second chance for commodity investments.

"The first sign that you get that deleveraging is over is when the US dollar decouples a bit from the equity market. We have seen some signs of this in the last couple of weeks."

"This is like plate tectonics. This is a shift from paper assets to real assets. This new cycle could last a couple of decades."

She admits that she never was "a big gold bug", but foresees good times for the metal in the future:
"For the first time in a long time I think that gold could be a repository of value going forward."
click for video










source: Hedge Clippings
CNBC, Renee Haugerud, Galtere Ltd. principal/founder
http://www.cnbc.com/id/15840232?video=940553955

Why isn't anyone in jail yet?

William Black, Associate Professor of Economics and Law at the University of Missouri — Kansas City and a former federal regulator.

Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says investigations have shown fraud incidence of 50% at (once) major subprime lenders like IndyMac and Countrywide.

El-Erian says fix everything and fix it now

El-Erian and Marc Faber, both astute investors, think the whole economic system is broken (at least in the US, possibly World). Only the government can fix it, and they have to act urgently now. If a recovery does not happen soon the economy will be worse than in the Great Depression.

El-Erian thinks this is a crisis "of the system" not "in the system":
"This is a crisis of the system, which means it morphs and is ahead of the policy makers still", he says.

A few more thoughts from his interview in CNBC:
"The bond market is telling you this is beyond a flight to quality, this is a flight to liquidity," El-Erian said. "There's damage to the system, and what you're seeing is a reaction to that and a reaction in the yield curve."

"TARP II would be done both with capital injection and asset purchases, dealing with impaired assets."

"There is a desire to say well lets choose between this (asset) and that (asset). This is not about local optimization, ...this is about attacking the problem holistically and urgently, otherwise you have to do the same thing again and it costs you a whole lot more."
click for video










Marc Faber, also called Dr. Doom, sees a strong rally happening very soon, because of all the money that governments are throwing at the broken system. He also thinks if the rally does not happen the economic downturn will be worse than the Great Depression.

Marc Faber said on CNBC Friday:
But "I assure you if you throw enough money at the system, eventually you can reflate, especially in the United States," Faber added.

Statistically a rebound should happen, but if it doesn't "the air is out" and the world faces an economy "worse than the depression of '29 to '32," he said.



source: El-Erian on the Markets
CNBC
http://www.cnbc.com/id/15840232?video=935557926

source: Strong Rebound Coming in Next 3 Months: Dr. Doom
CNBC
http://www.cnbc.com/id/27834889

Poole at The Cato Institute's Annual Monetary Conference

William Poole, Senior Fellow at the Cato Institute, and Former President Federal Reserve Bank of St. Louis, is speaking at a panel during the Cato Institute 26th Annual Monetary Conference on Lessons from the Subprime Crisis and The Way Forward. He identifies excessive leverage at the private sector as the main culprit for the financial crisis and warns of overreaction in the form of over-regulation which is undesirable in his view.

Poole is suggesting to tackle the tendency of excessive leverage by the private financial sector by changing the tax code (I kid U not) and give fiscal incentives to participants who lower their leverage ratios. What a crazy suggestion. There's no method in this madness since this libertarian think tank obviously resorts to tax cuts whenever there is trouble on the horizon and fails to recognize the obvious: changing the statutes of the Federal Reserve, who's misguided monetary policy is responsible for the current crisis, can help to solve it.



source: Cato Institute 26th Annual Monetary Conference, Lessons from the Subprime Crisis
Cato Institute
http://www.cato.org/events/monconf2008/index.html

The Big Three - another break in the bailouts

Volatility is returning into the EUR/USD exchange market as a bailout of the auto industry becomes increasingly elusive. Senate majority leader Harry Reid acknowledged that congressional efforts to rescue Detroit's Big Three might falter. The White House also quickly denied any desire to step in. In that case it would be up to the new administration to take action.

It is hard to see how in this climate of multibillion dollar bailouts of Wall Street banks, a $25 billion cash infusion into the auto industry seems to be an overreach. After all Washington is populated with monetarists these days. After Lehman this could become the second assault on global financial markets (in particular financial markets in Europe) which inquisitive minds could view as Washington's financial equivalent of declaring war on the Euro currency. Maybe to trash a potential rival reserve currency is the only way out for a beleaguered US dollar!

click to enlarge













source: Democrats seek to lower expectations for bailout
AP, Wednesday November 19, 2:06 pm ET
http://biz.yahoo.com/ap/081119/congress_autos.html

Japan tackles hot topic - Tbonds denominated in foreign currencies

Yesterday, we got the Treasury International Capital (TIC) flow numbers which underscores an interesting development in recent weeks and months. In all this upheaval of the financial crisis all asset classes declined except the USD and US short and long dated government bonds, which actually increased in value. Brad Setser in his excellent blog for the Council on Foreign Relations (CFR) breaks down the numbers and concludes that "foreign demand for any US bond with a smidgen of credit risk has disappeared".

"Normally, this kind of fall-off in foreign demand would be associated not just with a credit crisis but also with a currency crisis. ....The US, though, isn’t a normal country. The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans."

To illustrate the point click to enlarge the chart













Granted Treasuries are perceived as risk free, yet even Setser admits that "holders of long term Treasuries are clearly holding a lot of currency risk". In this context Yves Smith from the excellent blog "naked Capitalism" picks up an interesting piece of news coming form Japan.

Japanese economists are increasingly concerned with the ability of the United States to finance its enormous deficits. Credit default swaps on the benchmark 10-year contracts on Treasuries have risen to 42 basis points from below two basis points at the start of the credit crisis in July 2007. While Setser still calls this an Armageddon trade foreign officials are not taking it in stride.

Many believe that the dollar looked strong in recent weeks for technical reasons. Money that US financial firms had invested abroad are being repatriated which caused a demand for dollars. Once this subsides there could be a run on the currency. Even if this is exaggerating the situation and we only see a substantial devaluation of the USD, foreign officials will not like to see their Treasury holdings decline in value. This is why economists in Tokyo are now calling for the new administration "to issue US Treasuries denominated in yen and other currencies".

The inevitable consequence of a lack of trust in US financial assets could be that Japan, China and other emerging market central banks will eventually reduce their holdings of US Treasuries. The so called sovereign wealth funds (SWFs) contributing to global capital flows is also increasingly unlikely since those countries will have to fight their own demons on their own turf. The only way to reduce foreign currency risk for the financiers of the US current account imbalances seems to come from US Treasury bonds denominated in foreign currencies. This will not change until the US and global economy are on a clear trajectory to recovery which might not occur for another year or two...and even then it is far from certain that investors will again bestow their trust in US financial leadership.

Yves Smith also delves into the interesting issue of motivation for Japan to tackle this hot topic, after all the author writes, "if America's good buddy and military protectorate is making noises about foreign currency Treasuries, it is hard to dismiss the idea out of hand".



source: You know it is a crisis when the trade deficit could have been financed just by selling t-bills to China and European banks
CFR, by bsetser, posted on Tuesday, November 18th, 2008
http://blogs.cfr.org/setser/2008/11/18/you-know-it-is-a-crisis-when-the-trade-deficit-was-financed-by-selling-t-bills-to-china-and-european-banks/

source: Japanese Float Idea of the Treasury Selling Yen-Denominated Debt
naked capitalism, Wednesday, November 19, 2008
http://www.nakedcapitalism.com/2008/11/japanese-float-idea-of-treasury-selling.html

original news source: Japan economists call for 'Obama bonds'
By Kosuke Takahashi, Asia Times
http://www.atimes.com/atimes/Japan/JK19Dh01.html

How far will the S&P500 fall?

The first phase in the corrective trend in Elliott wave movements has bottomed. A second wave is about to start once the severity of the current recession will be realized.
click to enlarge

President-elect addresses the nation via YouTube

President-elect Barack Obama in his weekly address to the country has broken new ground again. 75 years after FDR used a new medium to reach out to his fellow citizens the new president has chosen a new messenger, more appropriate for the 21st century, the video sharing website YouTube.

Today's address concerns the current economic crisis:

Merrill CEO Thain recalls 1929!

The man who won praise as Wall Street's Mr. Fix-It , Merrill CEO John Thain, says that the current economic environment more closely resembles 1929, the year of the start of the Great Depression. He become CEO of the battled Wall Street firm Merrill Lynch in September 07 and was one of the very few who early on recognized the severity of the downturn. Now he predicts a long and severe recession unlike anything we have seen in recent past.

"Although things are starting to improve, this is going to be a long process, and this is not going to get better quickly," he added. "It is not like '87, it is not like '98, it is not like 2001."


source: Merrill CEO says economic environment recalls 1929
Reuters, Tuesday November 11
http://biz.yahoo.com/rb/081111/business_us_merrill_thain.html

Will China's $586 billion dollar stimulus plan work?

China is jumping on to the stimulus train with a massive economic stimulus package. The government announced last Sunday that it would boost its economy with a RMB 4 trillion ($586 billion) capital injection. Stock markets around the globe cheered with the SSE Composite surging more than 7%. Though excitement was short lived and markets were again in the red the following day.

Some analysts see the impact of the stimulus plan between 1 and 2 percent of GDP in 2009 (see Pettis, Nov. 11) and others have criticized it outright as being not effective enough. Among those is Mr. Pettis, economics professor at Peking University's Guanghua School of Management. Prof. Pettis is an expert in Chinese financial markets and he protests the argument of the Chinese government that the fiscal stimulus plan is intended to offset flagging external demand similar to the successful 1998 fiscal expansion. In his opinion the Chinese economy has dramatically changed since 1998 rendering the current plan less effective.

Pettis, Nov 11:
But, as I argue in Sunday’s entry, conditions have changed dramatically. First, China’s GDP is about 2.5 times bigger today than it was back then, and exports have grown much faster than GDP, so China is far from being a “smallish” country. More importantly, the world is looking for more demand right now, not more supply. In a global system with so much excess capacity, and with a marked tendency to excess savings (Americans have to save more, Asians don’t want to consume more), I am a lot more pessimistic about the domestic impact of China’s fiscal expansion, especially if the goal is to increase investment. The world will not simply absorb a lot more Chinese capacity. This package is only useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn’t seem to be in the cards.

The rush of Chinese officials to implement the plan is also of concern for Mr. Pettis. He suspects it is partly intended as "a shock to confidence" because the economy might be actually in worse shape than the numbers seem to suggest. Another reason might be the upcoming G20 meeting where China faces additional challenges. For a pragmatist like me this is naturally on top of the list. In any case we have no crystal ball and we have to wait and see how it plays out. The odds are certainly not in favor of this massive stimulus package rescuing the Chinese and the global economic malaise.

Pettis, Nov 11:
Of course part of the rushed timing is probably to head off potential trouble at the upcoming G20 meeting. By announcing such a large headline package, China can argue that it is contributing both to the global monetary easing as well as to global fiscal expansion. This will take the pressure off other demands – for example one way China can contribute to global expansion is by a more radical reforming of the currency regime, and it clearly does not want to do that. October’s trade surplus – announced today – was 20% higher than September’s all-time record. This won’t make it easier to argue that they desperately need to keep the RMB from rising too much.



source: The RMB 4 trillion fiscal engine seems to be losing steam (My Blog)
By Michael Pettis, Nov 11
http://piaohaoreport.sampasite.com/china-financial-markets/blog/The-RMB-4-trillion-fiscal-packag.htm

ECB cut IR by 50 bp - is not precommitted

ECB cut IR by 50 bp and lowers outlook for growth and inflation. In the QaA Trichet continues to point the way for 21st century central banks with a pragmatic approach to the level of IRs to guarantee macroeconomic stability.

The Federal Reserve has to follow the ECB by approaching interest rate decisions with more pragmatism and less preemptive precommitment. It will become the new paradigm for all central banks!


Q, On the question if the governing council is now trying to get ahead of the curve by slashing interest rates:
We are pragmatic and we look at facts and figures. (Trichet was referencing to ULC and employee compensation costs which have much increased over the last years) We are doing what is good at any given time without being hampered by being precommitted.

Q, on the role of central banks in general:
We are all doing what is expected under this exceptionally difficult circumstances

Q, Is there more discipline in macropolicy necessary?
We have to take into account to introduce a new framework that would permit to avoid the persistence of very big imbalances both domestic and external. An appropriate level of surveillance and discipline is lacking and has to be reintroduced.
click for QaA










From the introductory statement:
Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating.

There is also some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit to euro area residents, mostly taking the form of smaller holdings of securities. At the same time, for the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations. In particular, the maturity composition of loans suggests that non-financial corporations continued to obtain funding, also at relatively long maturities. However, more data and further analysis are necessary to form a robust judgment.

To sum up, the intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. Hence, when taking all information and analysis into account, there is a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.



source: Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 6 November 2008
http://www.ecb.int/press/pressconf/2008/html/is081106.en.html

http://www.thomson-webcast.net/de/dispatching/?ecb_081106_stream_video

The Speech - Change has come

favorite quote:
"And to all those who have wondered if America's beacon still burns as bright tonight we proved once more that the true strength of our nation comes not from our the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope."
read the full transcript here



source: FULL TRANSCRIPT: Sen. Barack Obama's Victory Speech
Sen. Barack Obama Delivers Victory Speech from Grant Park in Chicago
Nov. 4, 2008
http://abcnews.go.com/print?id=6181477

Obama's historic victory!

Taxpayers to the rescue for local communities - No thanks

Americas state and local governments and municipalities are asking voters to approve record borrowing to fund schools, sewers and other public projects. The approval of $66 billion of public money is needed but most of it might get rejected. Taxpayers are not as receptive this year with a slumping economy and weakening job market. During the general election of 1990, a time when the economy was also slumping, only 41 percent of the taxpayer funded proposals were approved. We wrote about a similar situation in Denmark where community life is deeply impacted by a lack of funding due to the financial crisis. On both sides of the pond taxpayers will have to cover funding shortfalls and they won't like it a bit.

from Bloomberg:
California leads U.S. state and local governments asking voters to approve $66.4 billion in borrowing for schools, sewers and other public works today as a contracting economy and higher costs damp taxpayers' appetite for new debt.

Voters in 41 states from Rhode Island to Alaska are weighing the second-biggest slate of bond measures after November 2006's $78.6 billion, according to Ipreo, a New York-based financial data provider. California has the largest referendum, $9.95 billion in funding for a high-speed rail network, with proposals around the state totaling almost $42 billion.

Taxpayers, who approved an average 82 percent of bonds on local ballots the past decade, may not be as receptive this year. Wall Street upheaval drove interest rates on tax-exempt debt to record highs, hurt consumer spending, increased unemployment and prompted emergency federal government action to shore up the financial system.

``With voters tightening their own belts right now, I would think they would want government to do the same thing and not take on the new debt,'' said John Matsusaka, president of the University of Southern California's Initiative and Referendum Institute in Los Angeles.
continue reading



source: California, Schools Seek Approval for $66 Billion of Muni Bonds
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=aYHheYymc6Hc&refer=govt_bonds

source: A crisis' real world example in Denmark's small communities
Monday, November 3, 2008
http://manonthestreet64.blogspot.com/2008/11/crisis-real-world-example-in-denmarks.html

Let the sun shine on credit derivatives

Starting today the Depository Trust & Clearing Corp. (DTCC) will publish data on CDS contracts which are still traded over the counter. This will bring much needed transparency to a huge market that has cast its shadow over the financial system in the last 12 month. The market is so opaque that nobody knows the actual size of it. The notional value of outstanding contracts varies from $35 trillion to $62 trillion. Some representatives of the industry claim misinformation for discrediting the credit derivative market, but policy makers are wary of such claims after the financial system had to be bailed out with public money to avoid a financial meltdown similar to the Great Depression.

from Bloomberg:
The Depository Trust & Clearing Corp. will publish details of the top 1,000 credit-default swaps today, bowing to regulatory pressure for more transparency in the $47 trillion market.

The data from the DTCC, which operates a central registry, will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world's companies and governments.

The industry has stepped up efforts to counter critics among U.S. lawmakers and regulators who say the lack of transparency in the market exacerbated the financial turmoil. The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many contracts were outstanding on the securities firm, or who had held them. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.

The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of the International Swaps and Derivatives Association.

After subtracting redundant trades, only $5.2 billion had to actually change hands, DTCC said last month in what was its first release of data from the warehouse.
continue reading


source: Depository Trust to Provide Credit-Default Swaps Data
Bloomberg
http://www.bloomberg.com/apps/news?pid=20602007&sid=a3sNLNa70g.4&refer=govt_bonds

A crisis' real world example in Denmark's small communities

This Bloomberg article addresses the impact the credit crisis has on community life in Denmark, where local banks traditionally provided funds to sponsor sports and cultural centers. The country has more banks than any other country in the EU. On average 33 lenders serve 1 million residents. This is changing rapidly in the current crisis and smaller banks get swallowed up. Funds for sports and cultural centers, swimming clubs, local fishing clubs, sailing and soccer clubs are now drying up.

from Bloomberg:
When Danish bank Ebh Bank A/S succumbed to the financial crisis six weeks ago, the fallout didn't just affect customers and clerks. Artists, musicians and swimmers also suffered.

On the day Denmark's central bank was forced to bail out the 110-year-old lender, Ebh Bank yanked sponsorship of a proposed sports and cultural centre in its home town of Fjerritslev, a few miles inland from the North Sea.

``We put the project on hold immediately,'' said Egon Korsbaek, chairman of Ebh, based 150 miles northwest of Copenhagen. ``We've supported large and small projects. We don't think we'll be able to continue with the bigger ones.''

Danes have three times more banks than the average European and the institutions are the biggest backers of sports arenas, fishing clubs and museums in small towns. Sponsorship is now under threat as Denmark becomes the first European economy to enter a recession. Eight banks have collapsed or were rescued or bought since the seizure in credit markets started last year.

Roskilde Bank A/S, rescued by the central bank in August in Denmark's first such bailout in more than a decade, will allow 25 ``major'' sponsorships to run out, spokesman Stig Bo Jensen said.
continue reading




source: Ebh Bank, Sydbank Desert Denmark's Athletes Amid Credit Crisis
Bloomberg
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8SbB1dEzIsQ&refer=news

In Iceland a call for revival of the class struggle

The people of Reykjavik had enough, now they are marching. In Iceland a call for revival of the class struggle has become louder. The means of the class struggle, the unions, the political parties have been practical inactive for the last 15 to 20 years says one demonstrator.
click for video

SPX off 25% since Lehman bankruptcy

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Quote of the day - its the c-banks fault!

European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said Thursday the world's developed economies face a deep slowdown. In his opinion the world's central banks are to blame for the global financial crisis. I guess we all know the major recipient of his message!
Does he think that low interest rates rather than lack of regulation are to blame? There is at least one smart central banker.

"This global, accommodative period, the risks of which were highlighted by some economists at the Bank of International Settlements, surely was the most important factor contributing to the crisis".

CDS settlement and Lehman - the eye of the storm

CDS settlements are pivotal if one strives to understand the current capital market crisis caused by a severe debt crisis. Yves Smith, creator of the most excellent blog "naked capitalism" sheds light on an interesting link between credit default swap settlements and interbank market rates like LIBOR by referencing a discussion in the current issue of the Institutional Risk Analytics. One of the few positive news in the last couple of weeks coming from Don Donahue, CEO of DTCC, is being challenged. To refresh memory, the DTCC claimed that the net payments on Lehman contracts were a mere $6 billion. This is only part of the truth according to the article since a large number of total holders of CDS for Lehman do not wish to take cash settlement and are expecting to receive the underlying bonds instead. The actual funding needs for CDS contracts linked to Lehman debt might therefore have been closer to the initially suggested $300 billion. This horrible number makes much more sense in light of the devastating effect in interbank lending markets after the surprised Lehman collapse. In the wake of the bankruptcy European Central Bank President Jean- Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for banks to shore up confidence in the global financial system. ``It has to go, for the sake of the U.S. and for the sake of global finance,'' Trichet said quoted by Bloomberg.

Here are the key passages:
This process of funding the CDS is reportedly a factor behind the high rates of dollar LIBOR in London and illustrates how cash settlement derivatives actually multiply risk without limit. Through the wonders of cash settlement, the derivative-happy squirrels at the Fed, BIS and ISDA created a liquidity-sucking monster in OTC derivatives that multiplies risk many times, for example, above the amount of underlying debt of Lehman Brothers.

We hear that there are more than a few EU banks which wrote CDS on Lehman over the past several years, CDS which were written at relatively tight spreads. These banks did not participate in the DTCC auction and instead have chosen to take delivery on the Lehman debt, forcing them to fund a nearly 100% payout on the collateral. A certain German Landesbank, for example, took delivery on $1 billion in Lehman bonds that are now worth $30 million, and had to fund same. Does this example perhaps suggest a reason why the bid side of dollar LIBOR in London has been so strong?

....the normal operation of the OTC derivatives markets is creating a cash position that must be funded in the real world and is thus distorting these benchmark cash markets such as LIBOR. This distortion is magnified by the dearth of liquidity due to the breakdown in the rules regarding valuation and price. So far, the Fed and other central banks have addressed the on-balance sheet liquidity needs of global banks. But as retail and corporate default rates rise, funding the trillions of dollars in notional off-balance sheet speculative positions in CDS, which become very real and require funding when a default occurs, could prolong the economic crisis and siphon resources away from the real economy.

On September 15 Lehman filed for bankruptcy. A look at the EURUSD exchange rate might help to understand. Decoupling has been put to rest once and for all.
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source: How Credit Default Swap Settlements Are Draining Liquidity From Interbank Market
Yves Smith, naked capitalism, Oct 29, 2008
http://www.nakedcapitalism.com/2008/10/how-credit-default-swap-settlements-are.html

source: In the Fog of Volatility, the Notional Becomes Payable, A Black Hole for Liquidity?
IRA, October 27, 2008
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

CBOE volatility index at all time high!

A prominent fear gauge, the CBOE volatility index (VIX) reached 89.53 last week and demonstrates how a high level of uncertainty has infused capital markets. Put buyers are committed to pay outsized premiums to protet their investments. Other volatility indicators are also elevated. VIX's predecessor, CBOE's VXO, which tracks projected volatility for the S&P 100 index .OEX options, surged 15.75 percent to 79.36. But it was well below the 150.19 reading set during the 1987 crash.

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A market veteran's view

A market veteran who obviously was a witness to the 1929 market crash and the following depression years thinks that the "market will turn around in a week or so". Let's see if he gets it right.

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source: On the verge of a new bull market?
Fox Business News
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=10403449

Global financial rescue plan - a drop in the bucket

Willem Buiter, Professor of European Political Economy @ the London School of Economics and Political Science, submits following "rather specific" action plan to solve the financial crisis:

(1) Public guarantees of interbank lending between banks in different national jurisdictions. This could be implemented by national central banks acting as counterparty of last resort in the (unsecured) interbank markets.

(2) International agreement on limits on public guarantees for other bank liabilities and for liabilities of other highly leveraged institutions. This includes agreements on terms and conditions attached to such guarantees.

(3) International agreement on recapitalisation of banks with significant cross-border activities.

(4) Fiscal bail-outs of countries whose systemically important banks have a solvency gap that exceed the government’s fiscal capacity.

(5) International agreement on mandatory debt-to-equity conversions for banks and other highly leveraged institutions.

(6) International agreement on avoiding a moral hazard race to the bottom for deposit insurance through limits on deposit insurance (this is really as special case of (2)).

(7) International agreement on common access rules and common methods for valuing illiquid assets in different national TARP-like structures.

(8) International agreement to adhere rigorously to mark-to-market accounting and reporting principles and on common rules for relaxing regulatory requirements attached to marked-to-market valuations.


Buiter comes up with a great action plan, but I am not sure if it would solve the problem. In order to do just that first we have to understand what the problem is. Nouriel Roubini calls it the "mother of all bank runs", a run on the shadow banking system of over the counter derivative contracts called credit default swaps (CDS). The size of this unregulated market was $62 trillion at the end of 2007. It therefore by far exceeds all government measures combined.

Last Friday CDS contracts with bankrupt Lehman were auctioned at less than 10 cent on the dollar, which means that counterparty obligations are more than 90 cents on the dollar. Now everybody wants to get out and CDSs are sold at fire sale prices. This is eroding the capital of banks and drives them into bankruptcy. All the government actions combined cannot stop it because the capital injections are insufficient.

Instead of focusing only on capital injections we should also convene a global international banking conference, where CDS contracts will be mutually canceled. After all they have been agreed upon over the counter, it should be possible to cancel them the same way. The number of banks could be limited too, since only large banks are system relevant. Nevertheless every bank should be allowed to participate and CDS should be worked off contract by contract.

We all witnessed the carnage on the balance sheets of banks when subprime securitzed mortgage loans were sold at fire sale prices. The subprime market was $1.5 trillion. Now we are in the middle of face two, the selling of CDS contracts at fire sale prices. Only this time the market is about 50 times larger. Without global agreement on canceling this contracts the meltdown will continue.




source: Action plan - my foot
Financial Times, Maverecon Blog, Willem Buiter
http://blogs.ft.com/maverecon/2008/10/action-plan-my-foot/#comment-5245

RGE monitor
Nouriel Roubini
http://www.rgemonitor.com/

You Know times are different

when villains try to become saints. Criminal narrator boosting crude, aka CNBC, is pleading to CEOs of financial firms to become clean and tell the truth. "It is your duty", says the anchor. Where were those converts when we needed them.
Witness this holy conversion on video here















source: An Open Invitation
CNBC managing editor Tyler Mathisen sends an open invitation to fund managers and other financial leaders to come on CNBC and discuss what's going on right now. http://www.cnbc.com/id/15840232?video=884904528

A day of reckoning for financial counterparties

From dailyfx.com:
"The auction of Lehman CDS contracts will be a major event today as it will determine the level of what will be the biggest CDS payout to date. The proximity of this may have been a big reason why credit markets have remained frozen despite the considerable policy interventions. Counterparty losses could be considerable; Lehman's $128 billion of bonds were trading on Thursday at an average of 13 cents on the dollar, suggesting credit swap sellers may have to pay 87 cents on the dollar to the buyers of default protection. More than 350 banks and investors have signed up to settle credit-default swaps tied to Lehman. Earlier this week the value for bonds of Fannie Mae and Freddie Mac were priced as low as 8.5 cents on the dollar, at most, because the debt is backed by the government."


update Oct.10 4:19 p.m.: What a day in the markets!
Bloomberg reports:
Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market. Based on the results, sellers of protection may need to make cash payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said. The potential payout is higher than the 90.25 cents indicated by initial results from the auction earlier today. Lehman bonds traded yesterday at 13 cents on the dollar, suggesting a payout of about 87 cents was expected.

The auction started at 10:30 a.m. and ended at 2:00 p.m. NYT. Here are a few charts that illustrate the disappointment and the relief-rally which underscores tremendous volatility and uncertainty in the markets. The clearing of Lehman's credit default swaps is an encouraging sign but it is only a first step towards functioning credit markets.
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The global credit crisis might be on the mend, at least for now. "Lehman credit default swap sellers posted collateral and no firms failed", according to a statement from the International Swaps and Derivative Association.



source: Lehman Credit-Default Swaps (CDS) Auction on Tap - Debt Insurers Expect Losses
dailyfx.com, Friday, 10 October 2008 07:19:43 GMT
http://www.dailyfx.com/story/market_alerts/fundamental_alert/Lehman_Credit_Default_Swaps__CDS__Auction_1223623206912.html

source: Lehman Credit-Swap Auction Sets Payout of 91.38 Cents on Dollar
By Shannon D. Harrington and Neil Unmack, Bloomberg, 10/10/08
http://www.bloomberg.com/apps/news?pid=20602007&sid=aLkOZnNcDmSQ&refer=govt_bonds

Warren Buffett's usual suspects - the three "I"s

Warren Buffett in his fine, crafty style demonstrates again why he is the most successful investor in the history of capital markets. In his conversation with Charlie Rose he is on the beat at the current crisis and he offers three "I"s as his usual suspects:

"The innovators, the imitators, and the idiots"

Keywords during the conversation:
bailout, credit crisis, philanthropy, wall st., Berkshire Hathaway, Melinda Gates, Bill and Melinda Gates Foundation, Warren Buffett, economy

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source: An exclusive conversation with Warren Buffett
Charlie Rose on PBS, 10/01/2008
http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

Wesbury the Anti-Roubini

I always defended Brian Wesbury because I thought that his outlook for the economy was spot on. Wesbury, chief economist at First Trust Advisors, insists that the troubled US economy will avoid a recession which is a fairly lonely position these days even among economists. Though his view on FASB 157, SEC imposed fair-value accounting rules, misses the point.

"Things would heal very rapidly in this market", if the SEC would suspend fair value accounting rules, opines Wesbury. Fair-value accounting has made things worse for banks. The real value of troubled assets on the balance sheet of banks is much higher as these rules suggest because 75 percent of subprime mortgage payments are still current and on time.

Asked about the fact that the market should set the price for this hard to value assets and financial institutions should be honest about it, he maintains that the rule is bad. The bid on the table (market to market) counts only if you have to sell. "Even if you don't sell you will have to take the loss, that's why the rule is bad", says Wesbury. What he does not seem to understand is that banks use assets on their balance sheet as collateral for doing business. Hence market to market accounting is a necessity.

As everyone except Wesbury knows "Enron accounting" is illegal and banks had to reroute risky assets (from ABS to credit derivatives) from off shore accounts and SIVs onto their balance sheets. The banks are now stuck with these assets because there are no bids on the table or the bids are so low that they would bankrupt the balance sheet. A suspension of FASB 157 would therefore do nothing to alleviate the solvency problem of financial institutions caused by erosion of their capital. Only a massive injection of capital can avert a financial implosion. To his credit Wesbury is in favor of the $700 billion bail out plan, which would help to recapitalize financial institutions.

If he is dead wrong on this critical issue of solvency I suspect that his outlook for the economy is loosing its merit too. Below is the complete CNBC interview.
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source: Attention Turns to the Fed
CNBC
http://www.cnbc.com/id/15840232?video=873327293

source: SEC And FASB: Clarifications on Fair Value Accounting
SEC
http://www.cnbc.com/id/26961218/site/14081545/

Republicans are building a new house when the hurricane hits

"WaMu becomes biggest bank to fail in US history". That is just one of the headlines flashing from news tabloids. House Republicans under the influence of their aspiring presidential candidate John McCain are retreating from a $700 billion rescue package for troubled financial institutions, proposed by their own Bush administration. By many this is conceived as nothing but political posturing by the Republicans and McCain, counting on a broad based public resistance to the administration's plan.

After years of agreeing to the bail-outs on Wall Street perfected under ex Fed-chairman Alan Greenspan, the Republicans seem all so sudden to become moralists and want to rely on the free market to solve the situation. In their opinion the free market approach is working and they point to JPMorgan's takeover of Wahington Mutual, the beleaguered mortgage lender, as an example.

The bank eventually failed in what has become the biggest bank failure in US history. A common thought is that JPMorgan Chase made a killing in this deal after all they had only to pay $1.9 billion for the thrift's banking assets. Other bidders for WaMu did not seemed to be that enthused. In the open bidding process there were evidently no bids for the troubled bank. JPMorgan is also expected to write down $31 billion of WaMu's loan portfolio. Another troubling aspect is the secret bidding process that obviously led to the final sell, and the way how it rushed through in an obvious attempt to avoid a general run on the bank that could have spread to other financial institutions. One can't help but ask is it really the free market that is working here or more likely panic that has befallen Wall Street and Washington alike?

Yet some Republicans under John McCain seem to suggest that the free market is working, contrary to all the indicators that point towards a banking system that is in a nuclear freeze. Diverse money market indicators, like the TED spread or LIBOR, have blown out, and corporate default swaps to insure debt obligations from Goldman Sachs and Morgan Stanley seemed to suggest imminent failure. Either the Republican aspirant for the Office of President is delusional about the current state of the financial markets or he is gambling the world's economic potential for political posturing.
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Clearly there is a sense of despair in Washington and Wall Street that is not unlike the one that ushered in the Great Depression in the 1930s. Then Secretary of the Treasury Andrew Mellon advised President Hoover to resort to a shock treatment. This famous quote ushered in the Great Depression: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system....". Purging it did but it also contracted GDP by almost 30 percent from 1929 to 1933.
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Jack Burman, a Republic Strategist, walks with Mellon's shoes when he opposes the bail-out plan and asks the question why are recessions important? "You need to sweep away the crooks, the bums, the inefficient..." He has also an answer to the possibility of a deep recession. "Its not the government's job to worry how deep the recession gets."

This sounds awfully lot like shock treatment and it does not resemble anything the followers of Keynes have stood for in the last 30 years. While I could certainly see a need to debate this issues I think this is not the time to do it. You don't change your strategy during a crisis. You do it either before or after.
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source: Great Depression
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Great_Depression

source: Wachovia Credit-Default Swaps Soar to Record After WaMu Failure
Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRTfhWFopT0E

source: The Bailout's Benefactors
CNBC
http://www.cnbc.com/id/15840232?video=868700977

In Germany Recession is closing in - Ifo September 2008

The Ifo Business Climate for industry and trade in Germany has again cooled in September.

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source:Ifo Business Survey September 2008
Ifo Institute for Economic Research, Munich
http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

Why are Broker/Dealers dropping like flies?

The chart below offers a perfect explanation. Broker/Dealers are faced with the challenging task to roll over a quarter of their assets every night. When crisis hit short term financing is harder to obtain and the roll over stops. In order to stay solvent they have to sell assets at fire sale prices (if they can sell them at all). Hence the margin/haircuts erode their capital base and equity shrinks. If they cannot get a capital infusion (volatility is high, equity is low and the dilution effect is high) they are forced to sell even more assets at fire sale prices. This creates a "loss spiral" that will eventually drive them into bankruptcy.

That's why it is crucial that the government steps in and buys up assets at a premium price (according to Bernanke testimony close to maturity). The idea this would stop the "loss spiral". The question being are 700 billion dollar enough or do we need another capital infusion of this magnitude? This could very well overwhelm authorities and make a financial meltdown unavoidable. The Austrian's Mises and Hayek might eventually be proven correct and the neoclassical concept of economics need revision.
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Unfortunately the chart does not include commercial banks. The situation might be similar. It would be interesting to see how much of their assets are financed in the overnight repomarket.



source: Thoughts on a New Financial Architecture Markus Brunnermeier,
Crisis on Wall Street Panel Discussion - September 23, 2008
http://econ.princeton.edu/news/crisis-panel.html

source: Statement of Ben S. Bernanke before the Committee on Banking, Housing, and Urban Affairs
September 23, 2008
http://banking.senate.gov/public/_files/BERNANKEStatement092308_SenateBankingCommittee.pdf

source: Austrian School
Wikipedia.org
http://en.wikipedia.org/wiki/Austrian_school_of_economics