Tuesday, September 30, 2008

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 Wesbur
y 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.

click for video

source: Attention Turns to the Fed



SEC And FASB: Clarifications on Fair Value Accounting

Friday, September 26, 2008

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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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.

click for video

source: Great Depression

From Wikipedia, the free encyclopedia


source: Wachovia Credit-Default Swaps Soar to Record After WaMu Failure



source: The Bailout's Benefactors



Wednesday, September 24, 2008

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

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.

click to enlarge

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


source: Statement of Ben S. Bernanke before the Committee on Banking, Housing, and Urban Affairs

September 23, 2008


source: Austrian School



Monday, September 15, 2008

Who's afraid of Lehman Brothers?

When Lehman filed for chapter 11 on 01.45 a.m. Monday morning, it included a list of the 30 largest counter parties to the firm. On top of the list is Citibank with approximately 138 billion USD of unsecured claims as of July 2, 2008. Other counter parties are Bank of NY Mellon, a number of Japanese banks, BNP Parisbas, Svenska Handelsbanken and the Belgian KBC bank.

click for the full list

source: 30 Largest Unsecured Claims (Excluding Insiders)

Lehman Brothers Holdings


New Jersey Governor Corzine on financial performance

click for video

Bill Gross on Lehman

"We at PIMCO know exactly what our counter parties are, we know exactly how much we have on with Lehman.
There are 10s of billions of positions that have to be re initiated."

"What is missing from this rescue plan is the addition of capital as opose to liquidity, so the market awaits that in order to support prices."

"They (the Fed) will consider interest rate cuts down the road."

"AIG is a solvent company and the stock does not reflect that solvency."

"We need an additional balance sheet to prevent asset liquidation. We need a buyer of assets."

click for video

Sunday, September 14, 2008

Once-in-a-century type of event

Here is a quote from the "Maestro" himself. It takes a lot of guts or greenness coming from the one person who bears the brunt of the responsibility of this mess.

"Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event" -- the worst "by far" in his career, Greenspan said.

Friday, September 12, 2008

Will the Fed cut rates next week?

Currency strategists at dailyfx.com point out an interesting fact. Fed funds futures are now beginning to price in a slight chance of a rate cut as early as next week when the Fed meets and decides on interest rates. Futures are seeing a 14% chance of a 25 basis point rate cut up from 0% a week ago (see chart below). This constitutes a complete turn-around of expectations since a rate increase was priced into the fed funds futures market at the end of July. The Federal Reserve had declared inflation a concern and is therefore expected to keep interest rates unchanged for some time. In light of challenging developments in the financial services industry these expectations seemed to be revisited.
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source: US Dollar Down Over 2% vs British Pound as Markets Price In Fed Rate Cut Next Week
Written by Terri Belkas, Currency Strategist, Friday, 12 September 2008 19:22:02 GMT http://www.dailyfx.com/story/market_alerts/fundamental_alert/US_Dollar_Down_Over_2__1221247469051.html

EA industrial production down again in July 2008

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Industrial production in the Euro Area, EA15 and EA27, contracted in July 2008. In EA15 countries IP for the total industry was down 1.7 percent on a working day adjusted basis compared to the same month last year. That is the third month that IP contracted on a year over year basis. Durable consumer goods contracted 5.7 percent and intermediate goods 2.3 percent. Two examples of member states with total industry growing are Bulgaria up 2 percent and Denmark up 1.1 percent. IP was contracting in Germany, Italy, France and Spain by 0.5, 3.2, 2.8, 4.4 percent respectively in July 2008 compared to last year.

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source: July 2008 compared with June 2008 Industrial production down by 0.3% in both euro area and EU27

Eurostat news release


Wednesday, September 10, 2008

The European economy and German exports

Oil prices keep falling despite a hurricane moving into the Gulf of Mexico and OPEC's 520 thousand barrel output cut. At its meeting today in Vienna the cartel stated that the oil market was oversupplied. Now that fundamentals seemed to creep back into the oil market its worth noting that economic growth outside the U.S. has dramatically slowed down. Last week the president of the ECB during the press conference and the introductory statement to the council's rate decision "confirmed the weakening of real GDP growth in mid-2008". During that meeting the ECB also released its updated growth projections in the EA for the second half of 2008 and 2009. Real GDP growth for the remainder of 2008 is now expected to be between 1.1 and 1.7 percent, down from 1.5 to 2.1 percent in the June projections (see table below).
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The European Commission
cut its growth estimate for the euro area this year and predicted a recession for the German economy. Business and consumer confidence keeps plunging in Europe's largest economy, yet inflation has stayed stubbornly high in part due to fairly tight resource utilization. The unemployment rate in Germany is at record low levels. Companies have so far not followed the U.S. example but market participants clearly expect layoffs to pick up in the future. One glimmer of hope for avoiding this unpleasant recession scenario is foreign trade in the form of exports which has so far held up pretty well. The latest export figures in Germany for July 2008 show a decline of 1.7 percent from the previous month. Exports in June were up a strong 4.1 percent. Compared to July of 2007 exports have increased by a healthy 7 percent (see chart below).
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Economic slowdown in the U.S. and China have as of yet not materially impacted export growth in Germany. The report did not specify the amount of trade with individual countries outside the European Union, but released the statistics for exports to "third countries" which were up 10 percent compared to July of last year:

"Germany exported commodities to the value of EUR 32.2 billion to and imported commodities to the value of EUR 26.2 billion from countries outside the European Union (third countries) in July 2008. Compared with July 2007, exports to third countries were up by 10.0% and imports from those countries by 19.6%."

read also: German exports again strong in June 2008

Thursday, August 7, 2008


source: German exports in July 2008: +7.0% on July 2007
Press release No. 337 / 2008-09-09


source: Introductory statement

Jean-Claude Trichet, President of the ECB,

Lucas Papademos, Vice President of the ECB

Frankfurt am Main, 4 September 2008




Tuesday, September 2, 2008

How the financial crises engulfs Russia

Exacerbated by the military crisis in Georgia Russian cooperations encounter difficulties in accessing international capital markets. The German newspaper Handelsblatt notes that Russian firms placed only $80 million bonds in August according to data from US investmentbank JP Morgan. In April to July period between $4.1 and $5.4 billion were placed.

According to Reuters Russian firms have issued 73 billion Rubel denominated bonds (2.02 billion euro) in the last 5 weeks with interest of about 13 percent. According to the Handelsblatt article, citing a dealer in Moscow, two thirds of smaller firms had to pay even higher interest rates.

Russian banks are joining other financial institutions around the world in some sort of capital squeeze. Yesterday the Russian Central Bank injected 149.1 billion Rubel (around 4 billion euro) into the market. Citing Natalja Orlowa, chief economist of Moscow's Alfa bank, Handelsblatt argues that the amount of money injected is twice as much as expected. In addition reserves deposited at central banks accounts by about 1300 Russian banks are with 700 billion Rubel at a record low.

In addition to slowing global growth, high inflation and high energy prices this poses just another challenge. Firms that have to refinance loans in the months ahead will have to pay a high price. This seems certainly true for Russia but these days it is truly a global phenomenon.

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source: Russische Firmen kommen nur noch schwer an Kapital

von Andrea C√ľnnen, handelsblatt.de