The markets are having a very bad day today. After we saw the Europeans were also vulnerable to this credit crisis, stock markets worldwide sold off, with many European markets seeing their largest drops since 1987. For Europe, today is as bad as last Monday's 777 point fall was for the U.S.
Sectors being hit include oil, mining, commodities, and financial services as recession is widely anticipated and investors flee the banking sector. Signs of increased volatility include VIX, LIBOR-OIS Spread, and the TED Spread.
European currencies are getting slammed with both Sterling and the Euro down multiple big figures against the dollar and the yen. Investors are fleeing riskier assets and putting their money into relative safe havens like bonds and gold and silver. Below are links to commentary on the turmoil and charts of the various markets.
Articles
European Stocks Tumble, Stoxx 600 Has Biggest Slump Since '87 - Bloomberg
Euro Falls Most Since 1999 as Credit Crisis Deepens in Europe - Bloomberg
Government Bonds Rise Worldide as Credit Freeze Prompts New Bank Bailouts
Money-Market Rates Climb as Banks Hoard Cash, Crisis Deepens - Bloomberg
VIX Jumps to Record, Topping 50, on Concern About Global Growth - Bloomberg
Brazil's Bovespa Plunges 10 Percent, Trading Halted; Vale Sinks - Bloomberg
Mexico's Peso Plummets to Record Low as Investors Fall Into `Fear Mode' - Bloomberg
Charts
World Indexes - Bloomberg
Benchmark Currency Rates - Bloomberg
Commodity Futures - Bloomberg
CBOE SPX Volatility Index - Bloomberg
TED Spread - Bloomberg
S&P 500 Index - Bloomberg
Monday, October 06, 2008
Noontime markets update
Dick Cheney and his dangerous shadow presidency
In the Vice-Presidential debate, Sarah Palin, in one of her few unscripted moments, gave wholehearted support for Dick Cheney's dangerous expansion of Vice Presidential power. Joe Biden vigourosly disagreed, calling Cheney "the most dangerous vice president we've had probably in American history." I have to agree with Biden. Unquestionably, Dick Cheney has been the most influential vice-president in US history. Especially after the terrorist attacks of 9/11, he took a remarkably expansive view of the ill-defined powers of his office. He energetically enlarged his own role relative to that of the president, and the power of the White House relative to that of other branches of government. It was nothing less than a constitutional revolution. Angler (the title comes from Cheney’s Secret Service codename) is the best account so far of the vice-president’s drive for “power without limit”. It is an absorbing if depressing book. Barton Gellman bases his narrative on a Pulitzer Prize-winning series of articles that he and Jo Becker (now with The New York Times) wrote for The Washington Post last year. He draws on the reporting of other journalists too. Readers familiar with the original articles in The Post, and steeped in recent books by Jane Mayer (The Dark Side), Jack Goldsmith (The Terror Presidency), Bob Woodward (too many to mention), and others, will find no striking new disclosures. But they will find, in one place, a remarkable tale extremely well told. Cheney emerges as a difficult man to like and one who prides himself on the fact. Yet he is not the one-dimensional monster of popular lore, a tyrant for all seasons, driven by lust for power for its own sake. He “served the country with devotion, at some cost to himself”, Gellman writes. He “suffered eight cardiac events in eight years. He relinquished millions of dollars in stock options and income forgone. The author found no evidence of self-dealing ... involving Halliburton or anything else.” In Cheney’s mind, the administration he co-led overthrew not the constitution but one contested – and, after 9/11, suicidal – interpretation of the constitution. He believed that the country was in mortal danger and did what he deemed necessary. From the beginning he was a shrewd manipulator of the people around him, no respecter of custom or precedent, and a believer in the maxim “personnel is policy”. Cheney had served as President Ford’s chief of staff and the first President Bush’s defence secretary. As vice-president, there was little he did not already know about Washington power politics and the importance of putting the right ally in the right place. Defence secretary Donald Rumsfeld, the third member of the new ruling triumvirate, was an old and trusted friend. Hired as the vice-president’s lawyer, David Addington became the main architect of the new constitution. Cheney’s relationship with Bush was solid. He had been the head of Bush’s vice-presidential search committee. Bush chose him without interviewing anybody else. They had an understanding and the pattern was set. The president was content to lean on his deputy. Cheney could not have appointed a better boss – better even than having the top job himself, since that involved a lot of useless ceremonial and pandering to public opinion. To talk of Cheney as co-president is scarcely an exaggeration, the book shows – especially during the first term. After 2004, and what was almost a mass exodus from the Justice Department over torture, secret surveillance and presidential prerogatives, Bush was a little less trusting of Cheney’s judgment and began paying more attention to other advisers. Still, reading Angler one often feels that at crucial moments Bush even chose to be the junior partner. In an interview this year, Cheney was asked what he thought of the fact that most Americans, according to polls, believed the Iraq war was a mistake. “So?” he replied. The interviewer pressed on: “You don’t care what people think?” Cheney said: “Think about what would have happened if Abraham Lincoln had paid attention to polls, if they had had polls during the civil war. He never would have succeeded ... ” Yes, says the author, Lincoln ploughed on when doing so was unpopular. But that was not all. “He rallied the people and won them over ... It was not mere force of will that distinguished Lincoln, but successful leadership of a public nearing despair.” Cheney saw no need to bring the country along. That was not his idea of leadership and it is why his remorseless drive for presidential power has left the presidency so enfeebled. Clive Crook is the FT’s chief Washington commentator Sources
Obviously, George Bush has been the most unpopular President in the United States since Presidential polling began. However, it is Dick Cheney, his Vice President, who is responsible for many of the disastrous policy mistakes that has discredited the United States Presidency around the globe. Barton Gellman has written an interesting book, Angler: The Shadow Presidency of Dick Cheney, that chronicles how Cheney is responsible for much of what ails America, in foreign policy and domestically.
When he leaves Washington, we must be clear that no US Vice President should ever be allowed to exercise the degree of power as has Cheney.
The Vice Presidential debate comments are in the video below:
Book Review
Out of the shadows - FT
VP Debate: Biden - "Vice President Cheney has been the most dangerous vice president we've had probably in American history." - Crooks and Liars
eBay to cut 10% of its workforce
This is not a financial sector post but I find it shocking enough that eBay is cutting 10% of its workforce that I had to post this. Now, this could be as unrelated to the current economic malaise as Yahoo's problems and rumored future job cuts are.
But, if high growth technology companies are cutting workers, this can't be good for the employment market in the U.S. or the housing market in Silicon Valley.Online auction house eBay is axing 1,000 jobs or 10% of its global workforce as it looks to save $150m (£85m) a year in the face of slowing sales, in the latest evidence that gloom in the world economy is starting to impact major dotcom companies.
But the company also shocked Wall Street by announcing it is spending $1.3bn on acquisitions, including $820m in cash on internet payments company Bill Me Later, which lets American shoppers make purchases online without having a credit card, to bolster its PayPal payments operation.
It is also buying Danish online classifieds site dba.dk and vehicles website bilbasen.dk for approximately $390m, also in cash.
The auction house's chief executive, John Donahoe, admitted: "To some it may seem a counter-intuitive to be making these deals but we believe it is an appropriate time to bring these companies into our portfolio."
He stressed that eBay's financials are strong and the current turmoil in the market will make "the strong stronger", but admitted "the economy and the strong dollar are impacting our business".
The company will announce its third-quarter results next week but eBay said today that it expects to hit the low end of its revenue guidance, although its profits per share will be better than expected. The job losses will result in a $70m to $80m restructuring charge which the company will take in its fourth quarter.
Bill Me Later has deals with over 1,000 retailers who use it on their websites or in their phone sales departments. It has more than 4 million signed up users who can buy from these retailers. They then receive a monthly bill which they can pay by cheque, money order or another bill pay system, but not a credit card.
Retailers, however, can use it to offer interest-free credit and buy now, pay later offerings which are likely to be extremely popular at a time when America's banking industry is in crisis.
On a call with analysts the eBay and PayPal management team stressed the expertise within Bill Me Later, which was set up just 8 years ago, but analysts have concerns that the deal will leave eBay even more exposed to the worsening US economy.
As one Wall Street analyst asked on the conference call: "Who's on the hook if the consumer cannot pay for that flat-screen TV?"
The resounding answer that came back was "Bill Me Later."
Source
Auction house eBay axes 1,000 jobs - Guardian
Dow 10,000
The Dow Jones Industrial Average has just fallen below 10,000 for the first time since 2004. Breaking through the 10,000 barrier was a huge deal on CNBC when we were partying like it was 1999, nine years ago.
Essentially, we are back to stock market levels that prevailed a decade ago -- proof that we are in a major secular bear market.
Picture of the day: 6 Oct 2008
Marshall Auerback sent me this picture from some treacherous highway. Kind of fitting.
German deposit guarantee sets up a German-British row
The Guardian is reporting that Gordon Brown and his Labour Government are increasingly on the defensive as the number of governments in Europe guaranteeing deposits increases. Brown is under intense pressure to match Merkel's actions or face an exodus of cash from British financial institutions. Britain has only extended protection to £50,000 - up from £35,000 - in UK banks. But Brown's official spokesman insisted: "Our understanding of the situation is that the German government will not be bringing forward legislation for a legally-binding guarantee of bank deposits." He added that it was "really a matter for the German government to explain their position". "We have been in the process of seeking clarification from Germany as to what they have committed themselves to," he said. Brown is due to talk to Merkel later today. Brown has been involved in "intense" international discussions over the crisis. Downing Street confirmed that in the past 24 hours Brown has held discussions with the prime ministers of Iceland and Denmark, the managing director of the International Monetary Fund, the head of the European Central Bank and Nicolas Sarkozy, the French president. Asked whether the government had contingency plans to partially or completely nationalise the banking sector, Yvette Cooper, the chief secretary to the Treasury, said Brown and Darling had promised to do "whatever it takes" to ensure the banking sector remained safe. "The chancellor said yesterday that of course that does mean looking at a whole series of pretty big steps that you might not take in ordinary times," she told BBC Radio 4's Today programme. But she said the government had already taken action through the special liquidity scheme and support for individual banks. "However, you would also I think understand... that it would be completely wrong for me to speculate about the pros and cons of individual approaches. "We have also made clear that if we think additional action is needed and additional measures need to be introduced, then we will do so." Asked whether Germany had informed Britain of its plans before its announcement, Cooper said: "We are still expecting clarification from Germany this morning about what their arrangements are, so we don't have the full details yet." British officials were furious with Merkel. They said she gave no indication of the move at a summit in Paris on Saturday designed to coordinate a European response to the economic crisis. Speaking of the decision by the Greek and Irish governments to offer blanket guarantees, the new business secretary, Peter Mandelson, said yesterday: "It would be better while operating on a country by country basis, we did so in a coordinated way and we brought a collective European view. We are all interlocked. We are in this together." Mandelson said every option, including recapitalisation to take a non-controlling stake in a bank rather than a government takeover, would have to be considered. In a significant shift in position, the Tory leader, David Cameron, said he favoured a recapitalisation to strengthen the banking system.
The first problem for the Prime Minister was that Building societies started complaining that Irish banks were advertising their government guarantees to British savers in a way that engendered unfair competition as Britons poured money into high interest Irish savings accounts denominated in Sterling.
Now, a fresh row with Germany is developing as Brown appears to have been blindsided by the German savings announcement guarantee. Labour have a lot of explaining to do. If I were in Government, I would suggest the UK do as the Germans have done before Britons begin fleeing the British banks.
Source
"We always look at all the options and I think you would agree that it's right in these sorts of unprecedented global times, the kind of events we are seeing right across the world, it is right that we should look at all of the options.
Gordon Brown seeks clarification over bank deposits from Angela Merkel - Guardian
Related articles
Europe's banks: 'Darling under pressure to guarantee 100% of savings' with mp3 commentary - Guardian
Q&A: Savings guarantees - Guardian
FAQ: What is guaranteed where? - Guardian
Foreign Press Alert: 6 Oct 2008 - Germany
Germany has moved center stage in the credit crisis despite having not experienced a housing bubble in the run-up to the bust. Switzerland and Japan, along with Germany are three countries I find notable in not having participated in the upside. But with a full scale assault on the global financial system underway, no country is immune.
As a result, the German press is abuzz with news on the credit crisis. Below is a select pick of articles in German making the rounds in the German financial press. The most compelling stories are that a Chinese insurer has lost billions on the Fortis failure and that the German railway, Deutsche Bahn, may have its IPO delayed because of market turbulence. But, not: German unions are still bargaining for huge pa increases despite financial market turmoil.
Things are rough for the German Economy. But, "Europe is not America." So says the ECB. The ECB sees no reason, not even the financial crisis in Europe, to have a European bailout package. We shall see.
Kommentar: Europa ist nicht Amerika - FAZ
Finanzkrise: Inland
Finanzkrise: Keiner traut sich - und den Banken schon gar nicht - FAZ
Schutz für Anleger: Wie die Einlagensicherung funktioniert -FTD
Kommentar: Jetzt muss Merkel helfen - FTD
Finanzkrise: Dax sackt trotz HRE-Rettung ab - Spiegel
Rettungspaket für Hypo Real Estate: Experten fordern globalen Krisenplan - Spiegel
Turbulenzen an den Finanzmärkten: Steinbrück zweifelt am Bahn-Börsengang - Spiegel
Finanzkrise: Ausland
Krise des Bankensystems: Europa bettelt um das Vertrauen der Sparer - FTD
Finanzdebakel: Chinesischer Versicherer verliert Milliarden durch Fortis-Rettung - Spiegel
Das Kapital: So schnell wackelt GE - FTD
Reaktion auf Finanzkrise: Nikkei fällt auf Vierjahrestief - FTD
Wegen Finanzkrise: Politiker verlangen stärkere Haftung für Manager - FTD
Milliardenverluste bei den Superreichen: Finanzkrise plagt russische Oligarchen - FTD
Banco Santander: Die spanische Bank, die Kapital aus der Krise schlägt - Spiegel
Kreditkrise: UniCredit beschafft sich drei Milliarden Euro - Spiegel
Hypo Real Estate
Chronologie: Das Drama um die Hypo Real Estate - Spiegel
Milliardenbelastungen: Hypo-Real-Estate-Krise bedroht Dexia - Spiegel
HRE-Chef unter Druck: Steinbrück fordert Funkes Rücktritt - FTD
Chaos um HRE: Ruf des Pfandbriefs in Gefahr - FTD
Krisengipfel in Berlin: Hypo-Rettung könnte Steuerzahler über 50 Milliarden Euro kosten - Spiegel
Rezession
Neue Studie: Der Mittelstand spürt die Finanzkrise - FAZ
FTD-Interview: Porsche zeichnet düsteres Szenario - FTD
Folgen der Finanzkrise: ThyssenKrupp schmiedet Krisenplan - FTD
Trotz Finanzkrise: Gewerkschaften beharren auf hohen Lohnforderungen - Spiegel
Get ready for a rough day in the markets
On the heels of weekend trouble at European banks, markets in Asia and Europe are selling off this morning. At the weekend, we learned that Hypo Real Estate, a finance behemoth in Germany with $700 billion in assets was feared to collapse. Later the German government rescued the bank and guaranteed all German private savings deposits, a sum the German blogger egghat informed me amounts to 568 billion euros (update 6 OCT 2008 1130 ET - the Bundesbank now claims this figure is $1,6 trillion).
The French and Belgians stepped into the European meltdown breach as well selling the Belgian-Luxembourg portion of failed Dutch-Belgian Fortis to French bank BNP Paribas. Whether this will count as a bankruptcy in the Credit Default Swaps market, I do not know.
And Denmark got into the act as well, guaranteeing all bank deposits.
Nevertheless, stock markets, at a minimum, are getting hammered. I haven't looked at the credit markets yet. The FTSE in London is down over 3%. The DAX in Germany is down over 5%. The CAC-40 in Paris is also down over 5%. In Asia, the Hang Seng, the Nikkei and the Straits Times indices all closed down over 5%. And Dow Futures are trading down over 250 points right now.
So, brace yourself for a rough ride today. It could get ugly.
Related posts
Germany: banking system collapse possible due to Hypo Real Estate
The Germans guarantee all savings deposits
BNP takes over Dutch-Belgian bank Fortis
Denmark gets on the deposit guarantee train: all aboard!
Denmark gets on the deposit guarantee train: all aboard!
EU governments have woken up to the need to defend the banking system by guaranteeing all or some of their citizens' bank deposits. After Germany, Ireland and Greece, Denmark is the latest to do so. And Denmark may also be the one country that needs to do so the most of the remaining EU holdouts. Commercial lenders will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses, the Copenhagen-based Economy Ministry said in a statement on it's Web site today. ``Had a solution not been found it would have had serious consequences for the country's companies and citizens,'' the ministry said in the statement. ``The financial crisis has led to a freezing of the money market, making it extremely difficult for even healthy, well-run Danish banks to secure the necessary liquidity.'' The 35 billion kroner are equivalent to 2 percent of Denmark's gross domestic product, and emphasis had been placed on reaching a deal that wasn't paid by tax payers, the ministry said. The decision comes after the U.S. last week passed a bill to spend $700 billion on purchasing assets from troubled lenders, and as European leaders agreed on steps to limit the economic fallout of a deepening credit crisis. ``The financial crisis means that banks won't lend to each other,'' Finance Minister Lars Loekke Rasmussen said in the statement. ``This is not linked to the fundamental economic situation in Denmark.'' The agreement can be extended should there be need for such a move, the ministry said. Before today's deal, the ceiling on deposit guarantees had been set at 300,000 kroner.
UPDATE 6 OCT 2008 918 ET: I just found out that Austria followed Germany in Guaranteeing bank deposits (See story here). So, that makes Ireland, Greece, Germany, Austria and Denmark.
Just 12 days ago, the Danish daily Berlingske Tidene pointed out that the Danish Banking system is in dire straits.Danish banking crisis the worst in Europe
Let's hope the move by the Danes will have a calming effect on the markets as we now seem to have started a trend with bank deposit guarantees to calm jittery depositor nerves. Note: this is a blanket guarantee unlike the partial guarantee offered by Angela Merkel's government in Germany. It's only a matter of time before other European states employ similar tactics to restore banking confidence.
The Danish crisis is quite different and much worse than what we see in the rest of Europe. That is the ruling from large megabank UBS and credit rating agency Moody's.
And UBS predicts more bank failures this year, writes Børsen. The housing and property bubble is more pronounced than in the rest of Europe - except in Ireland. While banks in the countries around us suffer from the same difficult problems in providing liquidity, the Danish banks are hit doubly as the loan guarantees are eroding sharply.
Unlike elsewhere in Europe, where it is primarily a question of restoring confidence, there is real risk that the quality of Danish banks' assets will fall yet further due to falls in the collateral for the loans in the coming months.
"Danish house prices rose enormously until autumn 2006, when the housing starts also peaked. The build out was so large, it was obvious that prices would fall drastically, and this is what we see now. It is not only a question of raising capital, but that the quality of the underlying assets - namely the prices of the properties - is falling," Andreas Håkansson, who has covered the Danish banking for UBS for the last eight years, said to Børsen.
Chief analyst Janne Thomsen from Moody's in London points out that the collapse of Roskilde has created cracks in the paint and exacerbated the situation.
-Berlingske TideneDenmark will guarantee all bank deposits in a deal funded by the country's commercial lenders to bolster financial stability in the Nordic country.
Related posts
Danish banking crisis the worst in Europe
The Roskilde Bank problem
Bankrupt Danish Bank Roskilde sold
Denmark's house prices fall
Denmark: the latest victim of falling house prices
Sources
Denmark Guarantees Deposits in $6.4 Billion Pact - Bloomberg
Dansk bankkrise den værste i Europa - Berlingske Tidene
News Round-Up: 6 Oct 2008
If you were away on Holiday this past week or just away from the hustle and bustle of civilisation this past weekend, you may have missed the firework in Europe. Basically, over the past week, what started as a US subprime crisis and then became a US banking crisis metastasized into a European banking crisis too. The link: money markets.
As inter-bank lending has slowed o a crawl and bank lending rates to each other have gone through the roof, the European banking system has come under attack. Because banks lend to customers for long periods (as much as 30 years), but fund operations through shorter-term borrowings, liquidity in the inter-bank market is very important. As that liquidity is gone, many banks, irrespective of nationality, have fallen victim.
Be prepared for more volatility in banking until a political fix to the money market problem is found.
Below is a bevy of links from Bloomberg and one or two others.
Europe
Hypo Real Gets EU50 Billion Government-Led Bailout - Bloomberg
Dollar Reaches 13-Month High as Credit Crisis Spreads to Europe - Bloomberg
BNP Paribas to Purchase Fortis's Units in Belgium, Luxembourg - Bloomberg
Germany Guarantees Private Deposits in Bid to Calm Bank `Panic' - Bloomberg
Iceland moves to shore up economy - BBC News
Americas
Chavez's Cheap Oil Gives Him Sway Over U.S. Allies, Aid Funds - Bloomberg
Deflation May Be Next Threat as Commodities, Asset Markets Sink - Bloomberg
Wachovia Deal With Wells Fargo May Be Valid, U.S. Judge Says - Bloomberg
Simmons Says $300 Oil in Five Years - Beyond Fossil Fuel
Sunday, October 05, 2008
BNP takes over Dutch-Belgian bank Fortis
Fortis, the nationalised Belgo-Dutch bank and largest private employer in Belgium. This is a good thing as I have a distinct preference for mergers over bankruptcy or long-term nationalisation as a way to hep consolidate and rationalize the global financial services industry. Let's hope that the new BNP Paribas, an amalgamation of Banque Nationale de Paris, Paribas and now Fortis, is a strong institution.BNP Paribas, the French bank, will take control of the remaining assets of Fortis after the Belgian government was forced to find a buyer following the shock Dutch nationalisation of its part of the troubled banking and insurance group.
The all-share deal, announced on Sunday night by the Belgian government, is set to make BNP the biggest bank in the eurozone by deposits and will over time make Belgium and Luxembourg shareholders in the French bank.
There was no immediate word on how much BNP will pay for Fortis Bank in Belgium, Luxembourg, the Belgian insurance operations and its Turkish banking unit.
The Belgian government is to keep a blocking minority of 25 per cent in Fortis Bank and its subprime and related assets will be moved into a special vehicle, according to Belgian media.
There had been fears that the Dutch nationalisation would cause a fresh rout in shareholder confidence unless a solution was found by the opening of trading on Monday.
In a second weekend of tumult for Belgian banks, Dexia, which was bailed out by France, Belgium and Luxembourg last week, was forced to state that its credit links to Hypo Real Estate, the crisis-hit German company, would have ”a very limited impact” on the group’s solvency.
Belgium’s race to sell Fortis followed the controversial decision on Friday by the Dutch government to take full control of all of Fortis’s operations on its side of the border for €16.8bn ($23.2bn, £13bn), including the parts of ABN Amro bought by Fortis last year.
That left in tatters an agreement drawn up the previous weekend that had been heralded as an example of harmonious co-operation by the Dutch, Belgian and Luxembourg governments.
Under the initial deal, each country was to take a 49 per cent stake in the respective country banks of Fortis, leaving the healthy insurance operations fully owned by shareholders.
But the Dutch government managed to renegotiate on Thursday and Friday as, unlike Belgium and Luxembourg, it had not yet paid the €4bn for its share.
Source
BNP to take control of Fortis - FT
The Europeanisation of the Credit Crisis
I have been a bit on edge of late because of the credit crisis that is making headlines. Recently, a lot of people have been duped into believing that the economic crisis we are experiencing is not critical and have their eyes focused elsewhere. However, this event is potentially the most critical event in world history since World War II. Guarantee bank deposits. To halt the decline, The US and European governments should follow Ireland, Greece and Germany and make an explicit guarantee of deposits to end potential distrust among depositors. I believe political will for this already exists and Europe will certainly do it, will the US? Guarantee interbank lending. Governments need to bite the bullet and temporarily guarantee interbank loans taken at Libor (the London interbank offered rate). This would unfreeze the inter-bank market, which is creating liquidity problems in the financial sector. Liquidate insolvent financial institutions. But, as guarantees increase moral hazard, governments must require national regulators to quickly determine which banks are insolvent. The government can then decide on whether to liquidate these insolvent banks or sell their assets to other financial institutions. Re-capitalize the banking system. The private sector should be used to re-capitalize the remaining solvent banks. Many investors are ready to contribute capital under the right circumstances. However, if necessary, the government should contribute through preferred shares or warrants. Regulators might also look to separate "good" assets from "bad" assets in the solvent banks to further bolster interbank confidence. Instead of buying assets up at inflated prices, as treasury secretary Hank Paulson has suggested the US government do, they should stick bad assets into a separate "bad bank" controlled by the regulators at market prices.
It is not just a US or UK problem -- this problem has truly global dimensions. Europe has recently moved center stage in the credit crisis. Consider this turn of events the Europeanisation of the credit crisis.
Belgium, France, the UK, and the Netherlands all have nationalised large domestic banks. Ireland, Greece and now Germany have guaranteed bank deposits. And a Lehman-style bankruptcy in the form of Hypo Real Estate (HRE) is threatening Germany as we speak.
I had hoped we could get out of this with a minimum of fuss, but this thing is metastasizing in unimaginable ways. The major economic powers need to understand that now is not the time for political posturing and sticking your head in the sand. This crisis is reaching dangerous territory where debt deflation and untold economic pain could result. We are truly at a crossroads where economic depression is a very real possibility.
The crux of the matter is that a general crisis of confidence has hit the banking system because too much debt and too many complicated financial products have caused some banks to become effectively insolvent. But, which ones? No one knows and that has caused lending to grind to a halt as everyone is afraid of lending to a bankrupt borrower.
The Paulson Plan is not going to solve this problem by a long shot. And, until a few days ago, the Europeans were acting like this was an Anglo-American problem. It is not. Recently, I wrote a piece in the Guardian where I outlined what needs to be done in the US and Europe. It comes down to four things:
I am not the only one thinking along these lines. Just today Willem Buiter, a former Bank of England MPC member made comments along the same lines. These fixes are extremely urgent because confidence in the banking systems worldwide are declining. Governments need to act now.
Related posts
The Germans guarantee all savings deposits
Crisis in Europe: an article I wrote in today's Guardian
The Swedish banking crisis response - a model for the future?
Europe is next
Related article
Getting the interbank market going again: the central bank as counterparty of last resort - Mavercon Blog, FT
The Germans guarantee all savings deposits
Facing a potential breakdown in its banking system, the German government has decided to offer a blanket guarantee to private savings deposits (see comments below from German blogger egghat about this distinction), much as Ireland and Greece have done. As much as I praise this move on the part of the Germans to restore confidence, it still leaves Hypo Real Estate (HRE) dangling on the verge of collapse and does little to improve liquidity considerations in the inter-bank market. The basic problem here and now is that banks borrow short and lend long.
Bloomberg supplies the following report of the German government move:
The German government offered to fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation's banking system amid the global credit crunch.
``Finance Minister Peer Steinbrueck said today that people in Germany will not lose a single euro of their savings because of this crisis, and that statement applies as of today,'' said his chief spokesman, Torsten Albig, in a telephone interview from Berlin.
Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account's balance to a maximum of 20,000 euros ($27,500), the group said.
The announcement of the guarantee comes as Germany's government is today trying to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG after the ailing property lender said commercial banks withdrew their support for the program.
-Bloomberg
This move by the German government is much needed to restore confidence to the banking system. Germans had begun to think the Euro was weak due to 'contagion' from the pejoratively named PIGS (Portugal, Italy, Greece and Spain) of southern Europe. Widespread reports of Germans rejecting Euro notes printed in those countries have been making the rounds in the German press. With the HRE crisis, Germans have become fearful about the security of their money on deposit.
However, the guarantee only covers savings deposits so it is a partial solution. Moreover, what about HRE? Its problem is clearly a liquidity constraint as it cannot roll over funding needs due to the shutdown in credit markets worldwide. To address the credit crisis, interbank counterparty risk must be addressed as well.
I will be reporting more on this story in future posts as information becomes available.
Related posts
Crisis in Europe: an article I wrote in today's Guardian
Source
German Government to Fully Guarantee Private Accounts - Bloomberg
UK: House prices are going to rise substantially
If you want a good laugh, take a look at what Graham Norwood reports in today's Guardian. House prices in Britain are going to rise -- a lot! Apparently, he forgot that house prices are falling at double digit rates and we are in the worst banking crisis since the Great Depression. The last tme I checked, housing busts took a decade to work through.
Obviously, someone has been smoking something mighty powerful, and it's not Lucky Strikes either.House prices are going to rise again. That may seem a scenario far removed from today's headlines about falling prices and haemorrhaging values. But, according to an influential economics consultancy, prices have to go up for one simple reason - government targets for the minimum number of new homes are just not being met.
A year ago, 'targets' were the order of the day. Gordon Brown announced that in England alone there should be between 240,000 and 297,700 homes built annually until 2016, and that, in total, between 2.9 million and 3.5 million new homes should be built by 2020. In 2007 - before the downturn hit the new-build market - some 174,900 homes were completed: still below target but on an upward path from previous years.
Yet at the start of autumn 2008, figures for housing starts suggest that this year's total will be only about 110,000, according to the House Builders Association. It predicts 2009 and 2010 figures may well fall to a dismal 55,000. The consequence is that the new-homes industry is imploding. The fewer homes built, the fewer people work in the industry, making the downturn even worse. Similar targets, and shortfalls, exist in Scotland, Wales and Northern Ireland.
Jim Ward of estate agency Savills predicts new-build levels in England will not have returned to 140,000 per year - scarcely half the government's target - even by 2013. He says: 'Once sites are mothballed, there's inertia in the system as it takes time to rebuild teams and return to the same master-planning position on more complex sites.'
Recent measures announced to kick-start elements of the housing market will do nothing to improve building rates. Stamp-duty changes may boost sales but not new building. Allowing housing associations to buy unsold houses and flats mops up stock but does not help overall supply meet demand.
The slump in building will not just affect the private sector. Many of the affordable homes made available to key workers and the low-paid are built as a result of so-called 'section 106' deals - that is, arrangements by which developers have to build a number of affordable homes to get an agreement to build private-sector properties. With private sales at a standstill, developers have downed tools on residential property across the UK, so section 106 properties are not being built either, creating a shortage of properties exactly where demand for affordable homes is strongest.
That fundamental mismatch of supply and demand, of course, will fuel a new housing boom if the Centre for Economic and Business Research's forecasts are correct. 'The sharp drop in completions will mean higher prices if and when credit markets sort themselves out,' says CEBR senior economist Ben Read. 'The government will be concerned that, with every year that passes, it gets further away from its targets. With developers unlikely to respond quickly when the market bottoms out, prices may recover more quickly than people imagine.'
That price rise may be every bit as large as the current price falls. A report published last month by the National Housing Federation suggests the average house price in England will rise 25 per cent by 2013. NHF chief executive David Orr says: 'House prices will increase substantially over the mid to long term. Demand is going up, while the supply of new homes is going down.'
Source
Believe it or not, house prices are going to soar - Guardian
Did JP Morgan cause Lehman's bankruptcy?
According to the Times of London, that's what Lehman's creditors seem to suggest in Lehman's bankruptcy filings. Apparently, JP Morgan cut Lehman off the night before it filed for bankruptcy and creditors are blaming this action for Lehman Brothers failure. JP Morgan has been accused by its Wall Street rivals of dealing the final hammer blow that forced Lehman Brothers into collapse in a sensational claim that threatens to spark a colossal legal battle. The giant American bank is alleged to have frozen $17 billion (£9.6 billion) of cash and securities belonging to Lehman on the Friday night before its failure. According to Lehman’s biggest creditors, this was what precipitated the liquidity crisis that embroiled the firm, forcing it into Chapter 11 bankruptcy protection on the morning of Monday, September 15. The allegations have been raised in a filing at the bankruptcy court in New York, lodged late last week. Lehman’s biggest creditors include almost every big firm on Wall Street, most of Europe’s heavyweight banks and insurance companies as well as a slew of Japanese and Chinese institutions that are owed several hundred billion dollars.
RUUUBBISH! I don't buy it one bit -- Lehman was bankrupt all on its own. But, as I have often said, "there are going to be a lot of lawsuits because of this financial mess." Stay tuned.
See my posts labeled "Law and jurisprudence" to follow some of the other legal wrangling.
Source
JP Morgan ‘brought down’ Lehman Brothers - Times Online
Saturday, October 04, 2008
Brian Williams: "I'm A Maverick, And I May Not Answer The Questions Tonight"
The NBC News anchor apparently has a sense of humor. I found this video on Brian Williams mimicking Sarah Palin via the Huffington Post. Maybe Brian was miffed because Palin decided to talk to Katie Couric and Charlie Gibson but left him twiddling his thumbs.
Regardless of the reason, it's pretty funny. The clip is just over 10 minutes long.
US: Democrats looking at a filibuster proof Senate majority
Politico is reporting that the Democrats are on track to potentially reach a super-majority of sixty seats in the US Senate. Sixty is a very important number in the Senate because it neuters any attempt by the opposing party to block legislation by eliminating the opportunity to filibuster.
If Barack Obama is elected President, such a super-majority would in both houses of Congress would give him the type of free reign that allowed Franklin Roosevelt to pass the New Deal during the Great Depression. The United States could be on the verge of a major change in electoral politics and political direction.
The House of Representatives is likely to have a huge Democratic majority come January. The question is the Senate. A few months ago, sixty was seen as an impossible stretch for Democrats. Now, it is ever more likely.
Sixty is the magic number to stop filibusters by the opposition party.The term first came into use in the United States Senate, where Senate rules permit a senator, or a series of senators, to speak for as long as they wish and on any topic they choose, unless a supermajority of three-fifths of the Senate (60 Senators, if all 100 seats are filled) brings debate to a close by invoking cloture.
-Wikipedia
The blogsite Five Thirty Eight is reporting that Democrats are now leading in a number of tight races where the Republicans had previously led.
The Democrats have gained ground in several races this week, including North Carolina, where for the first time we have Kay Hagan listed as a favorite to unseat Elizabeth Dole, New Hampshire, where Jeanne Shaheen appears to have bounced back after some tight polling in mid-September, and Mississippi, where Rasmussen shows the race closing to two points. In addition, polling in Georgia and Texas indicates that those races may be viable pickup opportunities in a wave election, and even Nebraska has tightened a bit, with that race retaining a fairly high percentage of undecideds.
-Five Thirty Eight
With seats like Elizabeth Dole's (R-NC) and Norm Coleman's (R-MN) now on the line, what is going to stop the Democrats from sweeping to New Deal-style power in November?
The possibility that Democrats will build a muscular, 60-seat Senate majority is looking increasing plausible, with new polls showing a powerful surge for the party’s candidates in Minnesota, Kentucky and other states.
A poll out Friday shows Sen. Norm Coleman could now easily lose his Minnesota seat to comedian-turned-candidate Al Franken. A Colorado race that initially looked like a nail-biter has now broken decisively for the Democrats. A top official in the McCain camp told us Sen. Elizabeth Dole is virtually certain to lose in conservative North Carolina.