"Circumstance has handed the IMF the chance to prove its inherent worth to its members. Hopefully the organisation will take it."
When I wrote that on 27 October about IMF conditionality and the luggage the dogma was producing for the organisation it was without believing a scant 2 days later this press release (or any sort of suppleness at all) would appear.

This is a huge and welcome departure from trend and potentially a key weapon to defend developing/emerging markets against credit crisis fallout: it puts content ($100bn) where before there was mainly style. Conditionality is not going anywhere. But under this facility it is now, as circumstance demands, more pragmatic, less dogmatic and carries less (if any) of a stigma.

Well worth listening through Mr Strauss-Kahn's press conference (click image below for link) and reading this analysis by the Wall Street Journal. The Managing Director's comments on stroppy, IMF-hating Argentina, from 7'30" to 9' 36"are particularly diplomatic (and entertaining).

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It has been awhile since the Baltic Dry Index (BDI) featured here. May 22, in fact, when some scepticism was shown at a Marketwatch.com headline “Shipping Index underlines global resilience”.

The argument then was that supply constraints, not demand, were priming record prices. Of course, it is true that shipyards had been building up the order book for years. But port infrastructure lagged significantly. While spanking new shipyards in China were on track to double ship capacity by 2010 existing vessels were waiting 3 weeks to be loaded in Australia and Brazil. Still, the ‘Supercycle’ thesis (alongside that of ‘decoupling’) was ever present holding it all up and keeping everyone happy.

And then, in 7 autumnal weeks, the violins went from Vivaldi to a composition by your 2-year-old non-prodigy. The BDI slipped under 6,000 right down to 925. Suddenly, unpleasant thoughts dawned: the US consumer, 20% of global consumption, might start to save; construction projects are being shelved the world over; and China will not be able to offset its falling exports by stoking domestic demand. Notably, the forward freight agreement market captured little inkling of this collapse.


So gone are the heady summer days when buyers would pay the same price for a 7 year old capesize ship as they would for a new one of similar tonnage. Gone are the amazing shipping IPOs (often sponsored, incidentally, by private equity). And gone will be much of the capital of the buyers and financiers who until mid-2008 judged that the outlook for freight rates justified bubble prices. [UPDATE: see what I mean?]

Entertainingly, gone also will be the leverage serial price gougers of China inputs – notably that of iron ore extractors like BHP Billiton and Rio Tinto – enjoyed for so long. They may not be looking forward to the next round of negotiations when the past slapping of 75% increases (an annual norm it seemed) are certain to bite back. Already China’s steel mills by some reports are reducing production as inventory levels build.

But despite the collapse in rates alongside the threat of serious shipping over-capacity some will be pleased. Scrappers have been living off crumbs for many years as ship owners kept in service vessels that, in leaner times, would have long been sent to the breakers. They are contemplating a feast of business, a potential investment opportunity covered here back in August 2007.

What is left for shippers? Some (small) comfort, perhaps, can be found in the following chart:

This relationship is not as dead as it looked in December when credit market fear drove yields down extra low. In the short term, rates seem set to rebound modestly - pending new news on the credit crisis and global downturn.

NB: "and all the boards did shrink" - coerced poetry in youth worth something after all. Full Rime here.

Ad: Free subscriptions for qualified pros. Full catalogue here

(BusinessWeek offer is a free trial)

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Diverting 4 odd minute report from the UK's Channel 4 (24 October):

And now, "Tory boom and bust" being a thing of the past, Britain will get a taste of Labour's version.

NB: Thanks, Simon.

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As the Great Unwind continues with the carry trade, Japan is sensing an economic bonking of almighty proportions by the appreciating yen - crushed exports, spectre of deflation etc etc. So they put in the bat call to friends in the G7 and painfully extracted this excerpt via an unscheduled Sunday statement:

“We are concerned about the recent excessive volatility in [Japan’s] exchange rate and its possible adverse implications for economic and financial stability…We will continue to monitor markets closely and co-operate as appropriate.”

Just to make sure everyone got the message – communiqué speak can be tricky - Christine Lagarde, the French finance minister clarified yesterday:

“We wished to support this possible intervention of the Japanese authorities, knowing it would be about a purely Japanese intervention.”

One analyst, Mr Mellor, quoted in the Bloomberg link above implies this is a step towards G7 activism at some future point. However, talk is cheap and it sounded alot more like 'We’re right behind you (all the way back here, in fact)'. The study quoted further down in the article (direct link to the paper here) lends academic credence to this obvious point.

Somewhat separately, and very unfairly for the admirable Madame Lagarde, her quote unfortunately recalls another high flying (but otherwise entirely dissimilar) female French politician who produced an incredible series of gaffes in her brief tenure as Prime Minister including, to her discredit, attribution of the following characterisation of Japan:

  • a “nation of ants" and "yellow dwarfs" who "sit up all night thinking of ways to screw us" (link).

Realpolitik comes in many flavours with the result, apparently, that the coordination seen on 9 October by the sparkly new virtual global central bank only comes into play when the pain is equitably distributed (which may, with the attendant G7 coordination, come along presently). Another Edith demonstrates:

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With no chance of making the "too big to fail" argument US builders are doing what they must to survive: slashing prices to clear inventory. But with inventories still at historical nose-bleed levels there is some way to go yet.

Latest data points:
New houses for sale = 394,000
New Houses sold = 464,000

NB: US Census Bureau report here

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IMF October deals:

A Thai friend commented at the time of the Bear bailout on the contrast (OK, hypocrisy) between a US policy of lowering rates and dishing out $168bn in tax rebates (plus the associated liquidity measures) and the IMF’s conditional bailout policies during the Asian crisis.

At that time, Dr Mahathir Mohamed, no admirer of the IMF (or much west of Malaysia for that matter) described IMF conditions (open local financial markets, raise rates and taxes) thus:

"All these conditions are designed to enable the countries to pay back their debts to foreign banks and institutions so that they will get back their money but the people will suffer," (link)

Thailand itself was resentful in particular at being compelled to open its banking industry - a precondition perceived as a threat to its financial sovereignty. The IMF, of course, was hopeful that foreign entrants would help increase competition and efficient asset allocation.

On this count it is notable that a 2006 discussion paper from the Institute of Developing Economies concluded that, while foreign ownership has increased, competition has decreased. Understandable, then, that the IMF suffers a severe ‘image problem’ in Southeast Asia.

Part of the institution’s solution to this was to rename it infamous “enhanced structural adjustment facility” (ESAF) the “Poverty Reduction and Growth Facility” (PRGF). Behind the name change there were also efforts to address concerns voiced by Dr Mahathir by, for example, increasing lender and borrower collaboration and striving to mitigate the adverse short term effects of ESAFs/PRGFs on the most vulnerable.

The IMF also hired PR outfit Edelman in 1998 to spread the great news and this summer spent $2 million hiring Hill & Knowlton alongside Amo/Euro to handle external communications (of which the most notable of their short tenure might be dealing with coverage of the Director’s randy fraternisations with senior economists).

Did all this (arguably) style over substantive policy change improve the IMF's image – and more pertinently - its legitimacy? Doubtful. The fastest way to commit political suicide in Asia still appears to be praising (much less considering a loan from) the organisation. Ditto Latin America, where, if Argentina (and Brazil to a lesser degree) is anything to go by, early repayments coupled with the verbal abusive hairdryer treatment of the IMF were the political rage in 2005 (and '06 and '07 and '08 etc). The irony from where the Argentinean economy now sits is palpable.

But does it matter today? Need clearly weighs heavier than distaste or pride. Yet on the largest agreement to date in the Ukraine it is striking how little detail on the conditionalities has been so far made public or submitted to the country's parliament who must vote the accord.

Possibly that is mere accident. Ignorance and opacity have been the destructive hallmarks of this crisis to date and it would be mistaken to assume they have a place in the efforts for solution.

Or the future dealings of key international macroeconomic organisations suffering a legitimacy deficit. Circumstance has handed the IMF the chance to prove its inherent worth to its members. Hopefully the organisation will take it.

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No need for the abacus today.

(table via the WSJ)

Theme tune for the week (if long):

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Free press + seething Icelandic public officials = the other side of the story:

"A transcript of a conversation between the UK chancellor, Alistair Darling, and his Icelandic counterpart appears to question the British government’s claim that Iceland had refused to compensate UK savers." (full article in the FT here)

But why let it get in the way of a great headline, story and publicity for The Man?

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I tawt I taw a puddy cat...

Wednesday, October 22, 2008 | | 1 comments »

Another stunning US close.

Exhibit A: Dow Jones, 30 minutes intervals, 8-22 October

Large final minutes 200+ point upwards scramble and the cat still hisses above some support. Some signs, though, that the splat to 10 October lows cometh.

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A tool from Deutsche Bank research to use alongside the ever-wilder headlines.

A few related articles:

Ukraine financial crisis delays vote
Hungary Raises Benchmark Rate to Defend Its Currency (Update2)
Hungary raises rates to bolster currency

3 Oil-Rich Countries Face a Reckoning

And two fine country risk links:
  1. Belgium's export guarantee department, the ONDD. A number of governments have such sites published but this is the most user friendly I have seen (including Sweden's the UK's and the USA's)
  2. Coface, the French equivalent and a close presentational second to the ONDD.

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Sons are put on this earth to trouble their fathers. And, as the DNA results long made clear, the prodigal son, US housing data, continues to dog parental bank balance sheets around the world. Concerned citizens Paulson, Brown, Merkel, Sarkozy et al may all be frantically sort out the problems left by Junior but lenders aren't yet free.

The permit and construction data is poor with new home construction at 17 year lows. And sales data to be released on 27 October is set to be equally dismal. The current sales data picture:

Exhibit 1: US single home sales & stock, 1970-2008

Looks like the lad impregnated the entire village. The stock to sales ratio has never been this high out of a recession and yet sale stock is still at historical peak levels. Polygamy not being an option (outside Utah) all rests, it seems, on disinheriting the wayward youth in as a politically palatable way as possible.

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Snap Shot test

Friday, October 17, 2008 | | 0 comments »

Capital Chronicle now runs the Snap Shots tool that tries to enhance links with visual previews of the destination site, interactive excerpts of (for example) Wikipedia articles and inline videos, RSS, MP3s, photos, stock charts and more.

This tool also carries advertising impressions a share of which on Capital Chronicle are donated directly to the charity Save the Children. Capital Chronicle receives no revenue.

Should you decide Snap Shot is too intrusive just click the Options icon in the upper right corner of the Snap Shot and opt-out.

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Jeremy Grantham interviewed by Barrons:

But this is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [firms like Merrill Lynch and Lehman Brothers] have turned out to be much less than I had expected; that's very disappointing.

If past form is a guide this indicates that Mr Grantham is really depressed.

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Robert Shiller produces the well known cyclically smoothed price/earnings series that featured in his book Irrational Exuberance (seem to recall he was right about that). He also keeps the data up to date here. The latest point (my update for September) produces an adjusted p/e of 16.

Prices have truly taken a hammering from the very great heights of 1999/2000. Yet the real "generational" buying opportunities of 1920 (p/e circa 5), 1932 (p/e circa 6), 1949 (p/e circa 9) and 1982 (p/e circa 7) were at altogether lower levels.

A price/earnings ratio of 16ish is, in fact, the mean average of the series. Which suggests the recent track of p/e levels is probably being a little over weighted by today's cheerleaders.

NB: All data bar the p/e for September 2008 from Robert Shiller's website.
NB1: The FT's John Authers did a fine piece on this 2 days ago. Video here.

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Extensive discussions amongst some of the sharpest of my Diaspora via Facebook on this crisis have led to me casting myself (inadvertently) as a serial pessimist. I prefer the term anti-optimist.

I have my bounce list like many and I see an easy money trading bounce this week (at least). What I don’t see amid the confident (frequently self-interested) calls of ‘turning-point!’ and ‘generational opportunity!’ is a reason for undue haste.

Why should the next 300 points of the SPX be smoothly up in a couple of years (or better)? Indeed, why should even the next 5 years of price evolution turn this episode into the proverbial chart blip on an inevitable ascent?

A small picture may help make the point. The graphic below rebases the monthly S&P500 during three significant crises and compares the result against that of 2007/2008 year-to-date:

Encouragingly, perhaps, the credit crisis of 1907 took a shade under three years to get back to its 1906 peak level. At the other extreme sits 1929 – 25 years to return to peak. Then there is the 2000 drop. Inextricably, in my view, linked with our current travails it was only in May 2007 that markets got back to August 2000 levels.

The point is not to prosecute the apocalypse case. It’s to suggest that economics and equity prices (ex noise) will align but the timing of that marriage is very uncertain given that history (not to mention the ongoing unprecedented dislocations) is suggesting a range of 3 to 25 years.

If one thing seems to be clear it is that, even as the ramifications of the issues continue to unfold, the political and social – both in terms of crisis fallout and official policy - are beginning (beginning) to reshape the economic and its subset, the financial, on a global scale.

That global aspect is an overweight characteristic of this episode compared to priors. Where it leads recoveries is, for the moment, guesswork.

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Was that a meow?

Tuesday, October 14, 2008 | | 0 comments »

Exhibit 1: Dow, 2 hour intervals including futures data

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Final pre-weekend chart via Chart of the Day:

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...via the email grapevine.

Have a calm weekend!

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"Is it capitulation?" (code for "buy") has been one of the questions peppering media reports of the carnage in markets - and to ordinary people's life savings. But while many hedge funds are still subject to margin calls; and the unwinding of credit default swap insurance continues (the Lehman auction is today) being early can be a financially capital offence (free pun day).

'Capitulation' implies a linearity to markets and to the market cycle that, in actual circumstances, can only be pure guesswork. This dislocation is so massive that the case for chaos - as in a large, lengthy readjustment to a new path of equilibrium (eventually upward, hopefully) - is all but undeniable.

I would like to be able to say with conviction that having Mr Bernanke, an expert on the Great Depression, is an advantage in this situation. Obviously, in current conditions, it would seem that having a central banker with an encyclopedic knowledge of 1930s what-not-to-do policies is a Good Thing. But a constant thought lingers: if we had had someone who had learnt the lessons of the 1920s we would not require Mr Bernanke's expertise.

And with that regret each day I turn on the computer and plug into a financial crisis that is inexorably poisoning intra and international social and political relationships. There is a fallout threatening these spheres too - just as occurred in the 1930s.

Unduly alarming, perhaps. As the recession, with its partner systemic financial risk, begins to double team key global economies I hope to be a contrary indicator on this call.

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Brutal Thursday

Thursday, October 09, 2008 | | 0 comments »

DJIA close on October 12, 2007 = 14,093.

DJIA preliminary close on 9 October, 2008:

or (39)% year-over-year.

How's that compare to the Tech Wreck?

Getting desperate. Possibly with more to come tomorrow:

NB: Chart courtesy decsionbysquiggle.com

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Someone requires sacking for this.

Transport for London (TfL) never, ever miss imposing an annual fare hike far above the rate of inflation. Yet they happily left £40m in a bank during a credit crisis. Not any bank. Kaupthing, an Icelandic bank. Have there really been no warning signs over the last 5 years sufficient to suggest to TfL's treasury department that maybe - just maybe - a better home might have been found for taxpayers money? Look forward, Londoners, to a special season ticket price gouge next year.

Pre-Kaupthing the bank was Singer & Friedlander and founded 101 years ago. From the moment Kaupthing began stake building in 2003 (up to 19% by 2005) one client became nervous. And when Kaupthing swallowed the lot in 2005, thus removing one of the last independent UK merchant banks, that client had had enough and began packing his bags. Shareholders got a good deal but it was clearly time for nervous clients to be considering Funds Out.

Perhaps, as someone the Financial Services Authority refer to as an "informed investor" (thereby indicating you won't get deposit insurance), this was expected of me. But if Gordon "F Word" Ramsay also has time to look up from preparing his seared tuna with vegetable couscous to safeguard (allegedly) his cash via a transfer to the Royal Bank of Scotland I do believe the case for dereliction of duty can be made against someone, somewhere at TfL.

Sadly, the credit crisis will provide cover enough for a great amount of such incompetence. Nonetheless, this fact is clear: any enterprise - and especially a bank - that manages to double in size every year between 1996 and 2005 needs special scrutiny.

Even an effing cook knows that.

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Gold bugs unite

Thursday, October 09, 2008 | | 0 comments »

Been wondering why gold isn't higher? Deflation threat, maybe?

The boys at Marketclub (I use their very helpful - but not free - scanner, they use me as an affiliate) have put out a video covering what's going on from a strictly technical analytical (TA) standpoint. Which is anathema to many - but every perspective informs.

They run a regularly useful TA blog also, an email alert form for which is here.

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Lots grunting and flashing lights from the global virtual central bank (see prior post). But results, if any, need to be seen here in, hopefully, the next few days:

Exhibit 1: Interbank lending, 7 October data via Bloomberg

Alternatively, we can look forward to a few more banks/nations doing an Iceland and going €4bn into hock to Messers Medvedev & Putin with an economy based (as of this week) largely on pulling cod out of the North Atlantic.

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I have been in three hurricanes and two earthquakes - but never a significant man-made disaster. Until now.

It is possible that $700bn + £500bn + other contributions of public funds + virtually free money = a crisis swiftly mastered. I doubt the 'swiftly' part but I don't know.

However, it is better than the alternative and perhaps we will now see an end to the EU Member State game of out-guaranteeing one another on retail deposits - surely in itself a source of panic.

More pertinently, the Brains Trusts at various economic research departments have been issuing Very Important Views on all these happenings. Here is a sample to mull from the Morgan Stanley team entitled "The Great Monetary Easing" issued earlier today:

I do hope they are right on the '30s view.

NB: Literary timeout: post title stolen/adapted from the Brazilian masterpiece of Joaquim Maria Machado de Assis The Posthumous Memoirs of Brás Cubas. If you are looking for great reading...

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From the forums of the Italkcash site

"If you had purchased $1,000 of AIG stock one year ago, you would have $42 left.

With Lehman, you would have $6.60 left.

With Fannie or Freddie, you would have less than $5 left.

But if you had purchased $1,000 worth of beer one year ago, drank all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have had $214."

I haven't checked the sums but you probably get the idea.

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Jeffrey Lacker, Richmond Fed President, says they don't have to ease. But "no" hasn't come easy on this front to the Federal Reserve this decade. As the Fed futures market well knows - the chart below implies a greater than 70% probability that something south of the current 2% rate is imminent.

Chart via the Cleveland Fed.

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At last, when 1929 is evoked, the objective can agree. This excludes Dick Fuld, formerly CEO of Lehman Brothers, who in his testimony to a US Congressional hearing self-servingly claimed (possibly to mitigate the litigation threat):

“No one realised the magnitude of these problems. I said what I believed to be true – that the worst of the impact to the financial markets was behind us. With the benefit of hindsight, I can now say that I and many others were wrong,”
But, of course, he is not alone amongst the experts in excusing his actions. And it is true that he did not make the rules of the game: principally, ridiculously easy money.

Yet today the cry, accompanied by visions of catastrophe if it is not forthcoming, continues for still more easy money. I am really not sure what world these mad voices are living in that they consider the actual state of affairs non-catastrophic but here is a small observation: the wheels already fell off. Iceland, for Heaven’s sake, is short of the foreign reserves necessary to import food.

Right now we are just looking for salvage – this is no repair job (please repeat so long as symptoms of denial persist). It is bad enough to be in a dire situation created by a macro-economic mismanagement that focused relentlessly on (the lack of) “core” inflation whilst ignoring rampant asset inflation as conveniently beyond mandates. But, look out, here comes the recession – linked but separate – to truly put the boot in.

Which brings me to the many research reports now tossing around the phrase “a generational opportunity to make money”. Nuance - it is firstly a generational opportunity to lose money. I concede freely that with a time horizon of five years it might be a good time to buy and forget. If you have the cash. But to make “generational” money long from here in under that requires luck, not skill.

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"Throughout the third quarter we felt quite positive about our ability to meet our expectations. Unfortunately, SAP was not immune from the economic and financial crisis that has enveloped the markets in the second half of September, causing us to report numbers below our expectations."
Henning Kagermann, Co-CEO of SAP

On the day the DAX fell over 6.5% and the Dow broke below 10,000 SAP missed - see the reaction in the chart below just after 16h when the company made the announcement.

Some are born unlucky. Some achieve unluckiness. And some have unluckiness thrust upon them. But unlike Twelfth Night, from which these lines are inspired, there is not much of a comedic subplot to entertain SAP or its owners.

Or many others for that matter.

Exhibit 1: SAP today with reaction to its 3rd Q announcement at 16h plus a couple of minutes

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Ever wondered why there are so many "banques" in France that do not carry the term in their names: Credit Lyonnais, Société Générale, Caisse d'Epargne, Credit Agricole, Credit Mutuel etc etc all of whom (and I write under correction) were created in the 19th century at various stages of the Industrial Revolution?

One entertaining explanation is that the catastrophic fallout from the collapse of the Banque Générale Privée created by John Law in 1716 did not encourage anyone seeking commercial success in finance to name their enterprise a "banque" even a century later.

That extreme speculative episode may also explain some contemporary French prudence in borrowing matters too - variable rate mortgages are routinely decried as ludicrously dangerous and few house buyers have them.

But there is another thinking point, perhaps, from John Law's French adventure. That is, that money is not credit. It is not shares. Nor bonds. Nor anything represented by an alphabet soup abbreviation.

Amid talk of 'confidence' (and even more about who put the 'con' into the word) exists an investment world where price discovery has been so distorted that only those with no choice, the brave or the superbly well informed will enter where (suspended) mark-to-market rules fear to tread. In this world of guess-where-the-money-is rational investors will continue throwing good out with bad.

Blast from the past reading:

"But alas! the superstructure, then, became so far beyond the proportion of the foundation, that the whole fabric fell to ruin, and involved a nation, just emerging from bankruptcy and ruin, into new calamities, almost equal to the former.

As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner bursted, than the whole nation was thrown into astonishment and consternation. Nobody could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.

Volumes have been since written in France, by men of speculation, in order to prove, that it was a want of confidence in the public, and not the want of a proper security for the paper, which occasioned this downfal.

This, if we judge by what has been written, has been the general opinion of that nation to this day: and since it was found impossible, in France, to create confidence in circulating paper, which had no security for its value, many people there, and some even among ourselves, conclude, that a great part of the wealth of Great Britain, which consists in paper, well secured, is false and fictitious."

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Nice little table in this article from the Evening Standard (assuming their estimates are valid).

But to pick a nit, Sovereign Wealth Funds (SWFs) control circa $3 trillion (Citi research) of a global market capitalization worth circa $50 trillion. This probably does not qualify their role as:

"crucial to the future of the global financial system and perhaps even the basis of a new order"

as the Standard suggests. However, it is a sum that is significant and growing: some (Citi again) project SWFs to grow to $7.5 - $10 trillion by 2012.

Yet today SWFs are not worth much more than half of what the top 3 traditional asset managers control. Still, and fortunately for financials, SWFs have been overwhelmingly focused on their sector as the Standard points out (although this enthusiasm has been understandably tempered recently).

What the paper does not say is that those $60bn odd in 2007 and year to date 2008 equalled over 70% of SWF activity. Or, more accurately, the original investments were worth $60bn. And you could bury more than half of that in not much more than a couple of seriously diminished Benelux outfits nowadays.

Thus I'd suggest with the both the scale of the losses and politics of the sensitive banking sector one should be prepared to lose if one thinks SWFs are going to be the serious participants in some 'new order' when it comes to rebuilding a financial system in countries other than their own.

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C-span and on right now. Voting begins shortly after noon eastern standard time / 18h central European time.

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If you saw yesterday's debate between Mr Biden and Mrs Palin you may be in the camp likely to resist further helpings of dogma. Which makes it easier to accept the conclusion that the regulatory actions that led to our actual locale (insofar as they concerned financial markets) do not represent failures of deregulation. Or failures of over-regulation for that matter. As has been the truth of crises through most of the course of human endeavour it is all much more about simple incompetence.

An example. This excellent piece from the New York Times concludes that the SEC made mistakes as a result of the deregulatory impulse. Yet far more striking impressions left by the tale are the organisation's inability to follow through on its own initiatives and - as a direct consequence - its failure to transfer any sense of operational continuity to its incoming chiefs.

That's not a political philosophy. It's straightforward, simple stupidity and inertia. Just carry the can and don't bother dressing it up retrospectively as 'voluntary regulation'.

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As you prepare to kick back and oogle the C-Span performers at noonish eastern standard time (likely) - all the while looking for the love - enjoy:

  1. The odds of success chart to the top right which updates automatically by reloading the page
  2. The link below to another FT interactive special covering state bailouts to date
  3. The free mood music link, also below, if away from the i-pod

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Federal Reserve "Factors Affecting Reserve balances" stat release:

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Small follow up on the banks in the eurozone via this interactive graphic from the FT (a click on the map takes you to the FT site).

The loan-to-assets data goes a small way to explaining the relative strength of the French banks (see earlier post) but there is other, less reassuring, data elsewhere...eg Kaupthing has total assets equal to 623% of Iceland's GDP.

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From Intrade - but note that this is the betting on a bailout before end October, not just this week:

US Government bailout plan to be passed by Congress
US Congress to approve a government bailout of banks on/before 31 Oct 2008

Price for US Government bailout plan to be passed by Congress at intrade.com

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UPDATE: Retreat!!

Why is France pushing this €300bn plan (and providing the press with further opportunities to use gratuitous photos of the Presidential wife) if their core banks are so solid?

UBS research of yesterday describes French corporate and investment banking styles as

"offering a generational opportunity in the new environment to gain market share"
and have buys on Société Générale and BNP Paribas.

Citi research (of last week) is less sanguine but not exactly downbeat. Also rating BNP Paribas a buy it regards everyone else as a hold and, in the case of Société Générale and Natixis (the latter of which rejoices in a corporate structure possibly only France could have come up with), high risk.

Nonetheless, such ratings are gold in today's poisonous financial atmosphere and do not readily account for the motives behind the French idea, “catégoriquement” denied as a firm proposal by Christine Lagarde, Economic Minister (see Bismarck Rule on this). Which is somewhat at odds with what Madame La Ministre said yesterday in interview with a German daily:

“What would happen if a small [European Union] country faced the threat of a bank failure? Perhaps it would not have the means to bail out the firm concerned? The question of an EU emergency fund becomes relevant”
Where the €300bn came from is anyone’s guess. But it’s easy to see how 1+1 became 3 and set alarm bells ringing in national treasuries across the EU. Yet the impression remains that the core of the French banking system could not reasonably be described as in dire straits. So, besides the obvious political playing to domestic galleries, what's up?

Here is one explanation. Being behind the curve has been a legitimate criticism levelled at regulators and legislators in the United States. It is entirely plausible that this idea is more forward planning than specific set-up. Which does not imply an inexplicable altruism. France is surrounded by neighbours with banks in various states of acute distress and with whom their own have many commercial ties. There is little point hoping these troubles will respect the national frontiers of the (more) prudent - for in this crisis no economy is an island. Pre-emptiveness is self interest.

Which, of course, does not preclude une bombe.

Related links:
Europe : un plan de sauvetage à 300 milliards ?
Berlin rejette l'idée française d'un plan européen pour les banques
Bercy dément le projet d'un plan de sauvetage européen de 300 milliards d'euros

Many thanks to CDT for the UBS report

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"Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown." (Nouriel Roubini)

"The rescue is being constructed so hastily that it may include all manner of flawed provisions: too much power for the Treasury secretary; authority for bankruptcy judges to modify mortgages." (Newsweek).

"If Wall Street gets away with this, it will represent an historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims." (William Greider, The Nation)

"This is a bad idea." (John Hussman)

"Paulson had his shot. It's time for the Democrats to pass a nationalization in the taxpayers' interest bill and dare Bush to veto it. If he does, then announce that the congress will pass it again the day after the election. And if he vetoes it again, announce that congress will pass it yet again on January 21, 2009." (Brad DeLong)

"At any rate, it won't take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all, Warren Buffett just did. " (Michael Lewis, Bloomberg)

"But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do." (Anatole Kaletsky, The Times)


"Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall." (Andy Kessler, Wall Street Journal)

"The economics behind this is sound. Government support to the banking system can break the cycle of panic and pessimism that threatens to suck the economy into deep recession." (Economist)

"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic." (Bill Gross, Washington Post)

"When the sarcastic slogan “Leave No Banker Behind” started sticking to Hank Paulson's bailout package Monday, we got the first hint that Main Street hadn't quite come around to the Treasury Secretary's view on the need to rescue Wall Street." (Andrew Willis, Globe & Mail)

A worthy non-commital

"It’s a powerful example of the way government can shape markets without ever passing a law or a new regulation. Unfortunately, it’s also an example of the limits of such intervention." (James Surowiecki, The New Yorker)

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