The Startling Link Between Globalisation and Bank Fraud

Wednesday, March 10th, 2010

This article is a guest contribution by J.S. Kim, SmartKnowledgeU, via ZeroHedge.com.

“We apologize for the inconveniences, but this is a revolution.” – Subcomandate Marcos, January 1, 1994

As a history buff, I recently started to re-read a book of essays from Zapatista leader Subcomandante Marcos that I read more than 8 years ago. I was struck by the prescience of Subcomandante’s essays. Even when he seemed to offer no predictions for the future, more than a decade later, many of his arguments, though he offered them with Mexico in mind, remain remarkably applicable to the state of the Western financial world today. His following essay, “The Fourth World War Has Begun” originally appeared in Le Monde Diplomatique in September of 1997. It is a critically important essay because 12 years later, the intimate link that Marcos speaks of between globalization and the fraud of our global banking system has now in 2010, washed upon our shores. It is further an important essay because the citizens of many Western nations may soon be engaging in the same morality battles against the financial oligarchs that Marcos has engaged in on behalf of the citizens of his country.

When Portuguese novelist and Nobel Prize winner Jose Saramago visited Chiapas, Mexico to meet with Subcomandante Marcos, he stated: “The issue that is being fought out in the mountains of Chiapas extends beyond the frontiers of Mexico. It touches the hearts of all those who have not abandoned their simple demand for equal justice for all.”

Here are excerpts from this important but forgotten essay below.

The struggle over [new markets] is leading to a New World War – the Fourth. Like all major conflicts, this war is forcing national states to redefine their identity. The world order seems to have reverted to the earlier epochs of the conquests of America, Africa and Oceania – a strange modernity. The twilight years of the twentieth century bear more of a resemblance to the previous centuries of the barbarism than to the rational futures described in science fiction novels.

Vast territories, wealth and, above all, a huge and available workforce lie waiting for the world’s new master but, while there is only one position as master on offer, there are many aspiring candidates. And that explains the new war between those who see themselves as part of the “empire of good”.

Unlike the third world war, in which the conflict between capitalism and socialism took place over a variety of terrains and with varying degrees of intensity, the fourth world war is being conducted between major financial centres in theatres of war that are global in scale and with a level of intensity that is fierce and constant…

Are megalopolises replacing nations? No, or rather not merely that. They are assigning them new functions, new limits and new perspectives. Entire countries are becoming departments of the neoliberal mega-enterprise. Neoliberalism thus produces, on the one hand, destruction and depopulation, and, on the other, the reconstruction and reorganisation of regions and nations.

Unlike nuclear bombs, which had a dissuasive, intimidating and coercive character in the third world war, the financial hyperbombs of the fourth world war are different in nature. They serve to attack territories (national states) by the destruction of the material bases of their sovereignty and by producing a qualitative depopulation of those territories. This depopulation involves the exclusion of all persons who are of no use to the new economy (indigenous peoples, for instance). But at the same time the financial centres are working on a reconstruction of nation states and are reorganising them within a new logic: the economic has the upper hand over the social…

In this new war, politics, as the organiser of the nation state, no longer exists. Now politics serves solely in order to manage the economy, and politicians are now merely company managers. (emphasis mine)

The world’s new masters have no need to govern directly. National governments take on the role of running things on their behalf. This is what the new order means - unification of the world into one single market. States are simply enterprises with managers in the guise of governments, and the new regional alliances bear more of a resemblance to shopping malls than political federations. The unification produced by neoliberalism is economic: in the giant planetary hypermarket it is only commodities that circulate freely, not people.

Injustice and inequality are the distinguishing traits of today’s world. The earth has five billion human inhabitants: of these, only 500 million live comfortably; the remaining 4.5 billion endure lives of poverty. The rich make up for their numerical minority by their ownership of billions of dollars. The total wealth owned by the 358 richest people in the world, the dollar billionaires, is greater than the annual income of almost half the world’s poorest inhabitants, in other words about 2.6 billion people. (My comment: This inequality has only become more magnified since 1997. This CBPP study illustrates that the top 1% of all Americans captured 67% of the increases in income in the US between 2002 and 2007 and the richest 0.01% of American households captured 12.3% of the entire US income during this same time period.)

The progress of the major transnational companies does not necessarily involve the advance of the countries of the developed world. On the contrary, the richer these giant companies become, the more poverty there is in the so-called “wealthy” countries. The gap between rich and poor is enormous: far from decreasing, social inequalities are growing…

One of the lies of neoliberalism is that the economic growth of companies produces employment and a better distribution of wealth. This is untrue. In the same way that the increasing power of a king does not lead to an increase in the power of his subjects (far from it), the absolutism of finance capital does not improve the distribution of wealth, and does not create jobs. In fact its structural consequences are poverty, unemployment and precariousness.

In the 1960s and 1970s, the number of poor people in the world (defined by the World Bank as having an income of less than one dollar per day) rose to some 200 million. By the start of the 1990s, their numbers stood at two billion…

The unemployment and precarious labour of millions of workers throughout the world is a reality which does not look set to disappear. In the countries of the Organisation for Economic Cooperation and Development (OECD), unemployment went from 3.8 % in 1966 to 6.3 % in 1990; in Europe it went from 2.2 % to 6.4 %. The globalised market is destroying small and medium- sized companies. With the disappearance of local and regional markets, small and medium producers have no protection and are unable to compete with the giant transnationals. Millions of workers thus find themselves unemployed. One of the absurdities of neoliberalism is that far from creating jobs, the growth of production actually destroys them. The UN speaks of “growth without jobs”. (My comment: in 1997, Marcos foresaw how “the absolutism of finance capital” would create the very “jobless recoveries” that politicians incessantly speak of today.)

But the nightmare does not end there. Workers are also being forced to accept precarious conditions. Less job security, longer working hours and lower wages: these are the consequences of globalisation in general and the explosion in the service sector in particular.

All this combines to create a specific surplus: an excess of human beings who are useless in terms of the new world order because they do not produce, do not consume, and do not borrow from banks. In short, human beings who are disposable. Each day the big finance centres impose their laws on countries and groups of countries all around the world. They re-arrange and re-order the inhabitants of those countries. And at the end of the operation they find there is still an “excess” of people.

The nightmare of emigration, whatever its cause, continues to grow. The number of those coming within the ambit of the United Nations High Commission for Refugees has grown disproportionately from 2 million in 1975 to more than 27 million in 1995.

The objective of neoliberalism’s migration policy is more to destabilise the world labour market than to put a brake on immigration. The fourth world war - with its mechanisms of destruction/depopulation and reconstruction/reorganisation - involves the displacement of millions of people (My comment: This essay should be a must read for UNHCR goodwill ambassador Angelina Jolie.) Their destiny is to wander the world, carrying the burden of their nightmare with them, so as to constitute a threat to workers who have a job, a scapegoat designed to make people forget their bosses, and to provide a basis for the racism that neoliberalism provokes…

If you think that the world of crime has to be shady and underhand, you are wrong. In the period of the so-called cold war, organised crime acquired a more respectable image. Not only did it begin to function in the same way as any other modern enterprise, but it also penetrated deeply into the political and economic systems of nation states.

With the beginning of the fourth world war, organised crime has globalised its activities. The criminal organisations of five continents have taken on board the “spirit of world cooperation” and have joined together in order to participate in the conquest of new markets. They are investing in legal businesses, not only in order to launder dirty money, but in order to acquire capital for illegal operations. Their preferred activities are luxury property investment, the leisure industry, the media - and banking. (My comment: Read this article for a view into the enormity of money laundering activities by banks.)

Ali Baba and the Forty Bankers? Worse than that. Commercial banks are using the dirty money of organised crime for their legal activities. According to a UN report, the involvement of crime syndicates has been facilitated by the programmes of structural adjustment which debtor countries have been forced to accept in order to gain access to International Monetary Fund loans.

Organised crime also relies on the existence of tax havens: there are some 55 of these. One of them, the Cayman Islands, ranks fifth in the world as a banking centre, and has more banks and registered companies than inhabitants. As well as laundering money, these tax paradises make it possible to escape taxation. They are places for contact between governments, businessmen and Mafia bosses…

The world-wide power of the financial markets is such that they are not concerned about the political complexion of the leaders of individual countries: what counts in their eyes is a country’s respect for the economic programme. Financial disciplines are imposed on all alike. These masters of the world can even tolerate the existence of left-wing governments, on condition that they adopt no measure likely to harm the interests of the market. However, they will never accept policies that tend to break with the dominant model. (My comment: This is precisely the reason why fiscal policy under Bush Sr., Clinton, Bush Jr. and Obama never changes and remains remarkably consistent despite the enormous professed differences among these Presidents.)

In the eyes of mega-politics, national politics are conducted by dwarfs who are expected to comply with the dictates of the financial giant. And this is the way it will always be - until the dwarfs revolt…The third world war showed the benefits of “total war” for its victor, which was capitalism. In the post-cold war period we see the emergence of a new planetary scenario in which the principal conflictual elements are the growing importance of no-man’s-lands (arising out of the collapse of the Eastern bloc countries), the expansion of a number of major powers (the United States, the European Union and Japan), a world economic crisis and a new technical revolution based on information technology.

Thanks to computers and the technological revolution, the financial markets, operating from their offices and answerable to nobody but themselves, have been imposing their laws and world-view on the planet as a whole. (My comment: Consider how western stock markets have been repeatedly gamed for the past year by the computerized high frequency trading programs of Goldman Sachs, JP Morgan, et al.) Globalisation is merely the totalitarian extension of the logic of the finance markets to all aspects of life. Where they were once in command of their economies, the nation states (and their governments) are commanded - or rather telecommanded - by the same basic logic of financial power, commercial free trade. And in addition, this logic has profited from a new permeability created by the development of telecommunications to appropriate all aspects of social activity. At last, a world war which is totally total!

One of its first victims has been the national market. Rather like a bullet fired inside a concrete room, the war unleashed by neoliberalism ricochets and ends by wounding the person who fired it. One of the fundamental bases of the power of the modern capitalist state, the national market, is wiped out by the heavy artillery of the global finance economy. The new international capitalism renders national capitalism obsolete and effectively starves their public powers into extinction. The blow has been so brutal that sovereign states have lost the strength to defend their citizens’ interests.

The fine showcase inherited from the ending of the cold war - the new world order - has shattered into fragments as a result of the neoliberal explosion. It takes no more than a few minutes for companies and states to be sunk - but they are sunk not by winds of proletarian revolution, but by the violence of the hurricanes of world finance. (My comment: Iceland and now perhaps, Greece, are fine examples of this. On the horizon, Ireland, Japan, Italy, etc.?)

The son (neoliberalism) is devouring the father (national capital) and, in the process, is destroying the lies of capitalist ideology: in the new world order there is neither democracy nor freedom, neither equality nor fraternity. The planetary stage is transformed into a new battlefield, in which chaos reigns.

Towards the end of the cold war, capitalism created a new military horror: the neutron bomb, a weapon which destroys life while sparing buildings. But a new wonder has been discovered as the fourth world war unfolds: the finance bomb. Unlike the bombs at Hiroshima and Nagasaki, this new bomb does not simply destroy the polis (in this case, the nation) and bring death, terror and misery to those who live there; it also transforms its target into a piece in the jigsaw puzzle of the process of economic globalisation. The result of the explosion is not a pile of smoking ruins, or thousands of dead bodies, but a neighbourhood added to one of the commercial megalopolis of the new planetary hypermarket, and a labour force which is reshaped to fit in with the new planetary job market.

This article is a guest contribution from J.S. Kim, SmartKnowledgeU, via ZeroHedge.com.

The European Union is a result of this fourth world war. In Europe globalisation has succeeded in eliminating the frontiers between rival states that had been enemies for centuries, and has forced them to converge towards political union. On the way from the nation state to the European Federation the road will be paved with destruction and ruin, and one of these ruins will be that of European civilisation.

Given the similar nature of Marcos’s numerous essays prior to the one he wrote above, it is no wonder that a Chase Manhattan (now part of JP Morgan Chase) analyst publicly called for the “elimination” of Subcomandante Marcos in a January 1995 memo. When the Chase memo was leaked to the public, many argued, including present day US Representative Marcy Kaptur, that the Chase Manhattan memo was a thinly veiled call for the murder of innocent people: “Suggesting the killing of innocent people, throwing elections—none of this seems to bother Chase… anyone who honestly believed that Wall Street’s hands weren’t all over … [U.S. policy towards Mexico] should take a good hard look at this memo.” You can access the referenced Chase Manhattan memo here.

Marcos’s deep understanding of the complexity of globalization issues and its intimate ties to the global banking syndicate (the BIS, the IMF, the World Bank, Central Banks and CHIPs) is well formulated in his above essay and proves him to be a peer of men like Gerald Celente and Nassim Nicholas Taleb. In fact, within the bigger and more layered context of globalization, Marcos has few peers in explaining the links of globalization and financial fraud.

About the author: JS Kim is the Managing Director of SmartKnowledgeU, a niche wealth consultancy firm that tirelessly analyzes the institutionalized fraud of our financial system to consistently identify assets that have the best long-term lowest-risk, highest-reward potential.

Source: ZeroHedge.com, March 10, 2010

Tags: Bank Fraud, Banking System, Chiapas Mexico, Equal Justice, Frontiers, Global Banking, Globalisation, History Buff, Inconveniences, Intimate Link, Jose Saramago, Mexico In Mind, Modernity, National States, Nobel Prize Winner, Oligarchs, Portuguese Novelist, Prescience, Subcomandante Marcos, Twilight Years, World Today
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Canada Moral Hazard Corporation?

Monday, February 15th, 2010

As the world’s spotlight turns to the Vancouver Olympics, all eyes will be on Canada. Our nation suffered comparatively less than other G7 economies during the last recession, and our banking system has received praises for being good and boring (read the Sceptical Market Observer’s comment on this).

To be sure, our economy is adding jobs, our stock market has rallied sharply, our currency is close to reaching parity with the USD, commodity exports are up, everything looks great. A buddy of mine even told me that our currency is being bought by central banks around the world. Canada seems to be on a tear.

But things are far from perfect. For one, there is a housing bubble in the making that could last a lot longer than people think. Stephen Jarislowsky, one of Canada’s best known investors, says he believes government measures aimed at juicing the housing market has put the sector in a bubble:

“I am convinced there is a housing bubble in Canada,” Mr. Jarislowsky told Bloomberg News. “… I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be.”

Mr. Jarislowsky is not alone. Other economists have also fretted about a bubble given the stunning rebound in real estate after the slump, and projections for record sales and prices this year. Ottawa is now considering tightening some rules. Said Mr. Jarislowsky: “They have basically encouraged people to buy houses based on cheap mortgages. That has created the opposite effect of what was desirable.”

Then, there is what Peter Foster of the National Post calls the Canada Moral Hazard Corporation:

There has been much official chest swelling over Canada’s relatively strong performance during the financial crisis, but perhaps Canadians shouldn’t — if you’ll excuse the mixing of metaphors — be counting their chickens until they are sure that there are no black swans present. And in fact there does seem to be one dark, plump, bird looming around the back of economic barnyard: the Canada Mortgage and Housing Corporation. Or is that a turkey that should be renamed the Canada Moral Hazard Corporation?

The CMHC was never given a cutesy acronym like its U.S. equivalents, Fannie Mae and Freddie Mac. But why not “Morrie Haz,” acknowledging that it has always been an instrument of moral hazard, the situation where insurance makes the insured-against event more likely?

As we know, Fannie and Freddie — which were privately-owned but “government-sponsored,” which meant they inevitably got bailed out — were front and centre in the U.S. housing market meltdown, which in turn precipitated the global financial crisis.

There are increasing concerns that the Canadian housing market is headed the same way as that of the U.S., stoked by the same factors: artificially low central bank interest rates, and the government insurance/promotion of risky mortgages.

This policy double whammy explains the growing calls for somebody — banks? CMHC? Carney? Flaherty? Anybody else? — to tighten mortgage regulations. These requests appear puzzling until we realize the role of the CMHC in encouraging perverse behaviour.

In a free market, if banks felt a housing bubble building, they would simply tighten standards themselves, either by demanding higher credit qualifications, hoisting rates, or shortening amortization periods. Hoisting rates is out of the question, since rock bottom mortgage rates are now considered by the Bank of Canada to be essential to national economic recovery and protection of our export industries. That leaves Morrie Haz waiting there to insure mortgages, and gives the banks every incentive to hand out any loan that can get insurance. However, they obviously grasp that such cosmic policy fecklessness will ultimately come back to haunt them.

A couple of weeks ago, Peter Routledge of credit analyst Moody’s pointed out that the overheating of the housing market was goosing an unsustainable increase in household borrowing more generally. “As witnessed in the United States,” he wrote, “this movie does not end well.” Specifically, once the punchbowl of low interest rates disappears, households find themselves in trouble, and so do their bankers.

Mr. Routledge noted that Canadian banks likely wouldn’t wind up in the same depths as their U.S. counterparts, but that is only because their riskiest mortgages are backstopped by CMHC. But this makes the systemic threat to the Canadian economy greater.

The U.S. crisis was massive but did not fall entirely on Fannie and Freddie. It was shared with other financial institutions. Nevertheless Fannie and Freddie both failed and had to be taken into government “conservatorship.” Mr. Routledge suggests that the situation is more “secure” in Canada, but as a recent report from the Fraser Institute points out, what this really means that the Canadian system features “massive taxpayer exposure.”

Mr. Routledge suggested that CMHC should tighten its insurance criteria, and this week he was seconded by former Governor of the Bank of Canada David Dodge.

The Fraser study, by Neil Mohindra, confirms that the taxpayer risk from a housing collapse is greater in Canada than elsewhere. He notes that a stunning 90% of all insured residential mortgages in Canada are covered by the CMHC. This amounts to an estimated $480-billion for which Canadian taxpayers would be on the hook if the housing market tanked (although any loss would obviously only be a fraction of this amount).

The study suggests that the CMHC’s activities should be privatized, but that possibility appears a long way down the road, both for practical and political reasons. The biggest problem is that nobody is going to want to privatize a property which harbours a potential time bomb.

The whole thrust of CMHC insurance is to encourage banks to make riskier loans. Normal insurance provisions are based on actuarial principles. CMHC insurance is based — like the activities of Fannie and Freddie — on promoting home ownership. Mixing social and economic objectives usually ends in taxpayer tears.

There is no indication that the Canadian mortgage market has been subject to the lunacies of the U.S., where — for a while — anybody with a pulse could get a home loan. Still, high ratio mortgages — that is, ones with down payments as low as 5% — inevitably carry a hefty risk of default when a bubble bursts. That default then becomes the CMHC’s problem.

As such, notes Mr. Mohindra, Canada is not a model for anybody. Morrie Haz has always been an accident waiting to happen.

According to Moody’s Mr. Routledge, “If policymakers deploy the appropriate tools early rather than late in this period of household credit expansion, perhaps the Canadian movie will end differently.”

But Finance Minister Jim Flaherty knows that ending the party is not going to be popular, which is where inevitable political self-interest compounds those practical problems. Meanwhile CMHC isn’t just a provider of potentially reckless insurance and the depository of last resort for mortgage assets the banks don’t want. Yesterday a representative of Diane Finley, Minister of Human Resources and Skills Development, who is also responsible for CMHC (go figure), was in Montreal handing out stimulus slush under Canada’s Economic Action Plan.

Mr. Flaherty doesn’t want to see a bubble, much less a bomb. But when it comes to which movie we’re coming to the end of, maybe he should check out The Hurt Locker. Just in case.

Of course, lenders like ING, oppose any clampdown to rein in mortgage borrowing. Sound familiar? I agree with Stephen Jarislowsky and I also fear that this movie isn’t going to end well. Enjoy the Vancouver games, because I feel a post-Olympics winter chill headed our way.

Tags: Banking System, Black Swans, Canada, Central Banks, Cheap Mortgages, Chickens, Commodity Exports, Financial Crisis, Government Measures, Housing Bubble, Housing Market, Jarislowsky, Metaphors, Moral Hazard, Parity, Praises, Recession, Record Sales, Slump, Swans, World Canada
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BlackRock’s Crystal Ball into 2010 and the Next Decade

Friday, January 8th, 2010

BlackRock, Inc. (BLK) Vice Chairman Bob Doll has been putting out annual predictions for 15 years.  Doll, who helps oversee about $3.2 trillion at BlackRock, the world’s biggest asset manager, just released his ten predictions for 2010 and for the next ten year.  Eleven of the twelve predictions he made for 2009 were right.  Below are Highlights of his latest market forecasts.

In general, Doll believes U.S. stocks will outperform cash, Treasuries and other developed economies with S&P 500 rallying another 12% this year reaching 1250 from their Jan. 4 open of 1116.56.

The U.S. is on its way to recovery, but the economy will grow slower than that of a typical recovery mainly due to heavy debt load.  Inflation will be a “non-issue” in the U.S., Europe and Japan this year even with rising prices of gold and oil.  Dollar will likely remain weak in broad trading range with Euro and Yen.

Doll also noted structural issues in the economy would continue to present problems. Chief among them are

“ongoing consumer deleveraging; a banking system facing deteriorating loan quality and an increasing yet uncertain regulatory environment; securitizations markets still largely shuttered, and a real estate market that may still be healing for several years.”

Emerging-market stocks and economies will outperform the developed world this year.  His ”favorite secular story in the emerging markets remains Brazil.”  (Note: Barclays Capital recently warned of a possible Bovespa (BVSP) correction in Q1 or Q2 this year based on technical chart analysis).

Furthermore, he advised investors should prepare for rising taxes following healthcare reform and protectionist government policies if the unemployment rate remains high.

Doll favors healthcare (especially managed care and healthcare services), information technology and telecommunications sectors. However, he advised underweight on financials as they are likely to continue to underperform.

Note:  Doll’s predictions differ from that of Blackstone Group LP’s Byron Wien’s. Wien’s ten predictions for the new year call for the S&P 500 to finish year 2010 flat, U.S. GDP to expand about 5% and financials to outperform the market.

Doll’s Predictions for 2010

1. U.S. economy grows above 3% outpacing the developed world
2. Unemployment to remain high, but with positive job growth
3. Earnings rise significantly - 20-30% on cost & productivity advantage particularly from a weak dollar.
4. Inflation a non-issue for the developed countries, but oil and gold will still go up
5. Interest rate rises on treasury curve - 10-year treasury targets 4.5%
6. Stock outperform cash and treasury - S&P 500 should rally another 12%
7. Emerging markets outperform
8. Health care, IT & Telecom outperform
9. More M&As
10. Dems stay in control of the Congress

Doll’s predictions for the next 10 years:

1. US equities experience high single digit percentage total returns, in the range of 6% to 8% annually, after the worst decade since the 1930s.
2. Recessions occur more frequently during this decade, rather than only once a decade as occurred in the last 20 years.
3. Healthcare, information technology, and energy alternatives are leading growth areas for the United States.
4. The US dollar continues to become less dominant as the decade progresses.
5. Interest rates move irregularly higher in the developed world.
6. Country self-interest leads to more trade and political conflicts.
7. An aging and declining population gives Europe some of Japan’s problems.
8. World growth is led by emerging market consumers.
9. Emerging markets weighting in global indices rises by 10 percentage points.
10. China’s economic and political ascent continues.

Doll’s Advise to Investors

• Look for quality in all styles and caps.
• Focus on better-positioned sectors - IT, healthcare and telecommunications are his favorite sectors.
• Think about geography - Emerging markets, Brazil, in particular.
• Gains will be harder to come by - Ongoing volatility and selectivity will be critical.

Here is the video where Doll appeared at CNBC on Jan. 6 discussing his latest predictions.  His full commentary is available at BlackRock web site here.

Video Source:  CNBC
Economic Forecasts & Opinions

Tags: Asset Manager, Banking System, Barclays, Barclays Capital, Blackrock Inc, Bob Doll, Bovespa, Chairman Bob, China, Crystal Ball, Debt Load, Emerging Market Stocks, Emerging Markets, Gold, Government Policies, Healthcare Reform, Healthcare Services, Market Forecasts, oil, Regulatory Environment, Services Information Technology, Treasuries, Typical Recovery, Unemployment Rate
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Financial Services: Prospects for Your Future

Tuesday, September 29th, 2009

In a lively discussion with Simon Johnson (MIT Prof, former Chief Economist, IMF), Lawrence Fish (former Chairman and CEO, Citizens Financial) deconstructs the near collapse of the banking system and points out the multiple factors that have contributed to the financial crisis.

Topics in the discussion include the banks that did not fail, how Canadian and other countries’ banking systems also did not fail, the political landscape of banking regulation, ethics, bonuses in the banking industry and the ethics oath signed by 50% of the students at the Harvard Business School.

This is a must-view video clip, but be warned that it runs for 53 minutes.

Source: MIT World, September 24, 2009 (hat tip: Infectious Greed).

Tags: Banking Industry, Banking Regulation, Banking System, Banking Systems, Canada, Ceo, Chief Economist, Citizens, Collapse, Ethics, Financial Crisis, Financial Services, Harvard Business School, Hat Tip, Imf, Infectious Greed, Lawrence Fish, Political Landscape, Prospects, Simon Johnson, Video Clip
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Mortgage Resets: Have We Been in The Eye of the Hurricane?

Monday, September 28th, 2009

We originally published the main body of this story in mid-June this year, and are reprising it now as the chart below from Credit Suisse’s chart is making the rounds again, given there is talk that the monetary authorities are considering halting quantitative easing operations (i.e. printing money). We may have gotten through the last 6 months, thanks largely to the Fed’s QE induced liquidity, which fuelled a very strong rally off the March lows. The question is, “Has it worked?”

The equity market seems to indicate “yes,” and now it remains to be seen in the next two quarters if it has indeed worked.

The passing of a hurricane is quite an event, and a strong one can wreak havoc. In the eye of a hurricane, there is an eerie calm, and quiet, and the sun often shines brightly. The bigger the hurricane, the bigger the eye. This is then usually followed by a secondary lashing as the back end of the hurricane passes. Is this what’s in store for the mortgage and credit market over the next 2 years as the banking system faces its next round of resets?

Have the banks hoarded cash for this reason? Is it enough?

According to statistics provided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one produced by CS. In a nutshell, banks (and the credit market) have gotten a much needed break from the enormous pressure of having to ensure that the liquid assets are available for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mortgages) portion of the scheduled resets, there is much cause for concern, especially for the banking sector, and the credit market in general. This picture of the mortgage reset histogram is reminiscent of the passing of a hurricane. The tail end of the hurricane this time includes not only the Option ARMs but also the Alt-A (better than subprime) mortgages.

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here’s a widely circulated Credit Suisse histogram of resets to which I’ve added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, liquidity, Lows, Market Rally, Monetary Authorities, Mortgage Paper, Mortgage Resets, Option Arms, P500, Printing Money, Qe, Stress Test, Strong One, Subprime Mortgages
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Canada: There’s no place like home

Thursday, September 10th, 2009

Scotia Capital has published a research report discussing “reasons to own” Canada. Canadians have never really had to think about this one. Now Canadians should prepare for the onslaught of capital that will come from global investors who agree, by positioning ahead of it. Let the record show that PetroChina’s largest North American investment to date, made in Canada just a few weeks ago, is early evidence of this.

When RSP (for non-Canadians, the near-cousin of the 401K) rules mandated it, we invested at home, now and then discovering ways to circumvent the rules with a clone fund or some other RSP strategy. We didn’t like having Canada rammed down our throats, so we, and this country’s best domestic equity fund managers, became really good at stockpicking in Canada.

When the RSP rules were loosened so that there were no longer restrictions, it came at a time when we were complacent, enjoying the benefits derived from investing in Income Trusts and the boom that ensued, and we didn’t care about the repealed mandate. Then one Halloween, the axe fell, when Jim Flaherty killed income trusts, and gave us reasons to look at the global alternatives.

Finally, Canada, has universal appeal. Canada really may finally be the best, safest place in the world, for us to invest.

A strong, and perhaps the healthiest, banking system in the world, a massive natural resources and commodities-based economy, and a sound fiscal disposition, irrespective of the US- and UK-centric credit  and economic crisis.

“Canada’s main attributes are emerging market exposure with lower volatility, cheaper valuations relative to MSCI World, stronger domestic fundamentals, Canadian dollar strength relative to the U.S. dollar and British pound, proximity to the U.S. economy and above average market capitalization in financials, materials, technology and Industrials,” portfolio strategist Vincent Delisle wrote.

…

Mr. Delisle said the country’s “superior” risk-reward profile makes it a compelling destination for investors. In the last 10 years, the compounded annual growth rate for Canadian stocks outpaced the MSCI world index by 8.5 per cent.

…

“Hence, Canada offers the stability of a developed economy with an exposure to growth in developing nations through its commodity sensitivity,” he wrote. “Admittedly, Canada’s marginal size doesn’t initially attract attention and puts it alongside other mid-tier specialized markets such as Australia, Sweden or Norway.”

…

“In our opinion, Canadian assets (bonds and equities) punch well above their weight and, as we believe Canadian equities remain underweight in global portfolios, global investors should heighten their focus north of the U.S. border,” he said. “We would also point out that Canadian domestic investors should temper their international endeavours and stick to a higher domestic bias in their portfolios.”

Also, Macleans Magazine features “Our Big Chance,” an excellent article about our chance as a country to shine, to pull away from the rest of the western world. We have what the fastest growing countries of the world need. In fact, for this last reason, we do, perhaps, need to realize as a nation of investors, that we need to protect our greatest assets by funding them and owning them ourselves. I’m not suggesting for one second that we adopt a protectionist stance, but lets stop giving away our best businesses and resources to dragons in return for funding, and start supporting and sponsoring them ourselves. Let’s lead, not follow, foreigners into our markets.

Our big chance, Macleans Magazine, August 27, 2009

For Canada, a country that has spent the better part of 20 years nervously wringing its hands over its perceived inadequacies, the dramatic reversal over the past year has been striking. Our banks were once seen as lacking innovation; now world leaders hail the boring Big Five as being among some of the safest and most profitable banks in the world. We fretted that our economy was overly reliant on commodities; now our rocks, oil and gas are seen as a natural hedge against havoc in the manufacturing sector. We worried that Canada’s strict mortgage rules were a drag on our housing market; now we can brag that we don’t put people into homes they can’t afford. Almost any way you look at it, Canada is uniquely positioned. So as other developed nations struggle, the question is: will we squander this once-in-a-generation opportunity or take advantage of our good fortune to punch above our weight?”

H/T: G&M Market Blog, , Steve Ladurantaye, September 8, 2009

Reasons to Own Canada, PDF, Scotia Capital, September 9, 2009

Tags: 401k Rules, American Investment, Banking System, Canada, Canadian Dollar, Commodities, Delisle, Dollar Strength, Domestic Equity, Economic Crisis, Emerging Market, Emerging Markets, Equity Fund, Fund Managers, Global Investors, Income Trusts, Industrials, Jim Flaherty, Market Capitalization, Market Exposure, Materials Technology, oil, Petrochina, Portfolio Strategist, Risk Reward, Rsp, Scotia Capital, Universal Appeal, Valuations, Volatility
Posted in Emerging Markets, Markets | 4 Comments »

Puru Saxena: Transfer of wealth

Thursday, June 25th, 2009

This post is a guest contribution by Puru Saxena*, founder of Hong Kong-based Puru Saxena Wealth Management.

After decades of excess credit and over-consumption, the developed world is finally being forced to deal with private-sector deleveraging. However, the governments seem to have other plans and they’ve decided to fight these deflationary forces tooth and nail. Their solution - even more credit and consumption!

Rather than accept a painful adjustment period, policymakers are desperately trying to revive the party. And in the process, they are making the situation much worse. All over the world, governments are spending trillions of dollars in order to clean up the mess. Unfortunately, the stark reality is that these governments have no money. So, in most instances, these glorious state-sponsored spending programs are being financed by borrowing and money printing.

Most people seem to forget that these fiscal spending programs aren’t creating any real wealth and are simply transferring wealth from the savers to the debtors. Essentially, governments are taking money from the solvent and re-distributing these funds amongst the insolvent.

Needless to say, by bailing out the incompetent and buying their toxic assets, the governments are cleaning up the private-sector balance sheets but at a huge cost. In the process of saving a few ‘too big to fail’ corporations and their bondholders, policymakers are greatly increasing the risk of sovereign defaults. In a nutshell, policymakers are erroneously transferring private-sector risk to the state.

So far in the ongoing credit crisis, we haven’t really seen many sovereign bankruptcies but I suspect they will follow. And you can bet your bottom dollar that policymakers will not hesitate to use the printing presses if it results in escaping sovereign default. As a result of the world’s banking system being a multiple of world GDP, the sad truth is that politicians don’t have very many options.

What we’ve witnessed over the past few months is that governments around the world have decided to maintain the stability of their banking systems in order to preserve the trust of their populace. Basically, policymakers have opted to save the banks even if it means putting entire nations at a great risk. And the most likely outcome is that the politicians will continue on this inflationary road to nowhere.

In my opinion, as the private sector continues to pay back debt, the use of the printing press won’t result in immediate inflation. However, over the medium-term, all these needless bailouts are going to create a massive inflation problem.

Amidst all this economic uncertainty and rampant money printing, confidence in governments will plummet and people will turn to ‘old fashioned’ stores of value - those assets which represented money long before pieces of paper backed by empty promises became fashionable. Indeed, the investment community has already begun moving towards precious metals and I expect this trend to continue.

It is interesting to note that only 160,000 tons of gold has ever been mined from the face of this planet and at US$950 per ounce, it is worth US$4.9 trillion. Now, consider that the total amount of paper money in circulation (currencies, savings, deposits, money-markets and CDs) is worth US$60 trillion or approximately twelve times the value of the gold in existence. Now, there is no doubt in my mind that as world governments debase their currencies, many people will begin to question the viability of paper money as a store of value and they will turn to gold, silver and platinum. Even if a small fraction of paper money rushes towards the small gold and silver markets, what do you think will happen to their prices? No question, precious metals’ prices will explode!

Accordingly,I sincerely recommend that investors allocate at least 10% of their wealth to physical bullion. Over the next few days, it is likely that precious metals will correct and this may be the final opportunity to buy gold and silver at these levels. Those looking for extra leverage should invest money in the precious metals mining stocks. So far in the precious metals bull market, we’ve had massive rallies every two years. If this trend remains intact, after the usual summer correction, we should see an explosive move until spring next year.

Source: The Daily Reckoning, June 24, 2009.

* Puru Saxena is the founder of Puru Saxena Wealth Management. He is a registered investment advisor and money manager with the SFC of Hong Kong. Saxena conducts in-depth macro-economic research, formulates his firm’s investment strategy and manages discretionary investment portfolios. He is also the editor and publisher of Money Matters - a monthly economic report he has been writing since 2000.

Tags: Adjustment Period, Balance Sheets, Banking System, Bondholders, Bottom Dollar, Credit Crisis, Debtors, Deflationary Forces, Excess Credit, Glorious State, Money Printing, Policymakers, Printing Presses, Sad Truth, Sector Risk, Stark Reality, Trillions, Wealth Management, World Gdp, World Governments
Posted in Gold, Markets | No Comments »

Mortgage Resets: The Eye of the Hurricane?

Friday, June 19th, 2009

The passing of a hurricane is quite an event, and a strong one can wreak havoc. In the eye of a hurricane, there is an eerie calm, and quiet, and the sun often shines brightly. The bigger the hurricane, the bigger the eye. This is then usually followed by a secondary lashing as the back end of the hurricane passes. Is this what’s in store for the mortgage and credit market over the next 2 years as the banking system faces its next round of resets?

Have the banks hoarded cash for this reason? Is it enough?

According to statistics provided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one produced by CS. In a nutshell, banks (and the credit market) have gotten a much needed break from the enormous pressure of having to ensure that the liquid assets are available for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mortgages) portion of the scheduled resets, there is much cause for concern, especially for the banking sector, and the credit market in general. This picture of the mortgage reset histogram is reminiscent of the passing of a hurricane. The tail end of the hurricane this time includes not only the Option ARMs but also the Alt-A (better than subprime) mortgages.

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here’s a widely circulated Credit Suisse histogram of resets to which I’ve added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, Market Rally, Mortgage Paper, Option Arms, P500, Presen, Stress Test, Strong One, Subprime Mortgages
Posted in Markets | 1 Comment »

MarketWatch: “Goldman Conspiracy” - Bogle’s “pathological mutation?”

Monday, May 11th, 2009

Marketwatch.com’s Paul Farrell contributes the following commentary on John Bogle’s (retired Founder, CEO, Vanguard) description that today’s Wall Street is the ‘Happy Conspiracy,’ and Hank Paulson, the ‘Dillinger’ of the era leading the conspiracy to rob 300-million Americans, all in his new book, The Battle for the Soul of Capitalism.

“No, it’ll be a blockbuster because we get a chance to cheer for a new dark antihero, the infamous Depression era gangster, machine-gun-toting John Dillinger: Cheer because this new Dillinger is doing what we all secretly want to do - rip off our corrupt banking system, turn the tables on the guys who have been ripping us off for too long.

“Dillinger must be the guy former SEC Chairman Arthur Levitt had in mind when he told Fortune: ‘America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask.’ That was the last recession. Today, it’s a heck of a lot worse in the ‘Great Recession’: Bad banks, financial weapons of mass destruction, AK-47 derivatives.

“Yes, this time the banks are the gangsters. They’re robbing Main Street’s Treasury. And it’s an inside job. Hank Paulson, the ‘Goldman Conspiracy’s’ Trojan Horse, plays a ‘Dillinger’, leading a much bigger conspiracy, the ‘Happy Conspiracy’, that robbed America’s 300 million citizens and taxpayers. They made off with trillions, while our ‘guards’, a clueless Congress, laid down their guns and surrendered the keys to the vault.

“The ‘Happy Conspiracy?’ Yes, that’s what Vanguard founder Jack Bogle calls Wall Street in his bestseller, ‘The Battle for the Soul of Capitalism’. He sees Wall Street as a ‘pathological mutation’ of capitalism. Adam Smith’s ‘invisible hand’ no longer drives ‘capitalism in a healthy, positive direction’. Instead, Bogle sees the invisible hands of this elite ‘Happy Conspiracy’ running capitalism to serve its own selfish, greedy agenda.

“‘Over the past century, a gradual move from owners’ capitalism - providing the lion’s share of the rewards of investment to those who put up the money and risk their own capital - has culminated in an extreme version of managers’ capitalism - providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners.’

“Today, the ‘Goldman Conspiracy’ is the visible hand of Bogle’s invisible ‘Happy Conspiracy’ that’s ‘ripping us off as massively as a bank being held up by a guy with a gun and a mask’. Except today: No masks, no guns. Congress just writes blank checks.

“The plot’s so hot we read all 1,243 comments, emails and links to related Web sites, such as goldman666.com, that were posted on our earlier discussion of this topic.

“What emerged has the makings of what may be the next mega-successful long-running television series.”

Click here for the full article.

Source: Paul Farrell, MarketWatch, May 4, 2009 - Hat tip: Investment Postcards

Tags: 300 Million Americans, Antihero, Arthur Levitt, Banking System, Blockbuster, Chairman Arthur Levitt, Commentary On John, Hank Paulson, Invisible Hand, Invisible Hands, Jack Bogle, John Bogle, John Dillinger, Paul Farrell, Positive Direction, S 300, S Paul, Sec Chairman Arthur, Trojan Horse, Weapons Of Mass Destruction
Posted in Credit Markets, Gold, Markets | No Comments »

Bill Ackman, Joseph Stiglitz on Charlie Rose

Tuesday, April 28th, 2009

A fascinating, enlightening conversation and debate about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty.

Here is the complete transcript:

CHARLIE ROSE: The Obama administration today took the latest step in
its efforts to repair the nation’s banking system. The Federal Reserve
began releasing information about its stress test on major banks. The Fed
reported that while reserves had substantially reduced in some banks, most
had capital well in excess of government standards. The 19 banks examined
hold two-thirds of the assets and more than half the loans in the U.S.
banking system. The government privately told bank executives their test
results this afternoon. The Fed also released its methodology ahead of an
announcement of the results in two weeks.

We want to talk about the financial sector, the stress test, all of
this, with a very interesting group of people. Bill Ackman of Pershing
Square Capital management, a hedge fund here in New York. Joseph Stiglitz
of Columbia University, co-winner of the 2001 Nobel Prize in economics.
Andrew Ross Sorkin of “The New York Times,” a reporter and columnist. And
Kate Kelly of “The Wall Street Journal.” I am pleased to have all of them
here at this table.

I will begin with you. Tell me where we are in terms of — what do we
know about the stress test? What do we know about the results? What are
they telling us and who cares?

KATE KELLY: Well, there are precious few details that have been
released so far. We’re going to know more I think on May 4th. But what
happened is, the banks underwent these stress tests. They had certain
parameters they were supposed to run their models against, run their
portfolios against — assumptions about unemployment and how severe it
would get this year, for example; assumptions about losses on the value of
certain holdings that were approximately close to what you saw last year
with the Lehman Brothers failure. And the Fed met individually with the
bank management today. I think it was CEO, CFO, other senior people, risk
officers, to discuss where they stood, how strong they were — I think they
had three buckets from strong to weak — and whether they would need to
raise capital.

So what’s interesting is, there has been much back and forth about how
much to disclose, and I don’t think we fully know what they are going to
disclose yet. But what they do will have a major impact on public
perception. And even if they don’t give us all the details, based on who’s
raising capital, we’re going to be able to make some assumptions.

CHARLIE ROSE: Yes.

KATE KELLY: So the government is in a bit of a box.

CHARLIE ROSE: All right, Andrew, add to that.

ANDREW ROSS SORKIN: Well, so the issue this afternoon — I talked to
a number of the executives who have been briefed on their status, if you
will — and the question right now is what assumption the government used
for their revenue, right? They did all these other assumptions which they
used for everybody across the aboard, but what they didn’t do — they
actually for each bank individually said what is their revenue going to be
for the next two years. And that’s the most fungible, if you will, of all
of these, because every bank thinks they’re going to have higher revenue
than the government seems to think. And so what we’re going to be seeing
over the next week is a debate privately, that hopefully will come out in
public at some level, over what those revenue judgments are, and — and
that’s– that’s what we’re going to find out. And that to me will tell us
in the end who’s strong and who’s not, and who we can actually believe.

CHARLIE ROSE: OK, but it will tell us that, and then what will
happen?

WILLIAM ACKMAN: It depends.

(LAUGHTER)

WILLIAM ACKMAN: The answer is, the banks that need more capital,
where does the money come from?

CHARLIE ROSE: Exactly.

WILLIAM ACKMAN: And the last six months, the money has come from the
taxpayer, and the question is if that is going to continue. And there are
some alternatives in the taxpayer.

And this past weekend, Larry Summers was on “Meet the Press,” and he
talked about asset liability swaps as alternative means to raise capital
for banks. I translate asset liability swap for debt-for-equity swap,
junior debt-for-equity swap, preferred stock for equity swap.

Basically, what’s interesting is that the banks in this country have
all the capital they need. The problem is too much of that capital is in
the form of debt, not enough is in the form of equity. The way we solve
that problem typically in America is through a reorganization process,
where a judge adjudicates a bankruptcy or some other form of
conservatorship or reorganization. They figure out the value of the firm.
They figure out how much equity needs to be raised, and they compromise
with the bond holders until the bond holders end up owning the firm.

What you can do instead is Bill the bond holder has to convert $50
billion of his debt into equity, and that magically raises $100 billion of
capital, because for each dollar of debt that becomes equity, you’re
canceling a dollar of debt, you’re creating a dollar of equity. And the
system is really set up for this. This is a classic restructuring
approach.

CHARLIE ROSE: OK, why haven’t we tried this before? Is this — do
you think this idea has merit? This idea of Ackman and Larry Summers
talking about it publicly?

JOSEPH STIGLITZ: It’s what I said they should have been doing all
along.

CHARLIE ROSE: Oh, this was your idea?

JOSEPH STIGLITZ: No, what I’m saying is, it is what we have done. We
did it in Continental Illinois, we’ve done it in — what they’ve confused
is the notion of too big to fail with the notion of too big to be
financially reorganized. And this is just a simple process of financial
reorganization. We do it all the time.

The bond holders don’t like it, because they would prefer the
taxpayers giving them money. It’s perfectly understandable. And the bond
holders have been — their voice has been heard very clearly, but it’s not
in our national interest. The banks would be stronger after they do this
kind of financial reorganization. They don’t have to pay out every month
all the interest payments that they had to pay before. They now have all
the capital that — you know, the leverage right now is huge. So small
change in the value of the assets means that the capital is all wiped out.
So now you have more capital, less debt. They’re in a better position to
go forward. It’s basically the notion that we call a fresh start.

CHARLIE ROSE: Right, so what does Mr. Geithner think of this?

JOSEPH STIGLITZ: Well, they’ve been resisting this.

CHARLIE ROSE: Because?

JOSEPH STIGLITZ: Well, the only reason I think is because the — a
lot of influence from the bond holders, financial sector bond holders don’t
like it. You don’t have to be a genius to figure out why they don’t like
it.

CHARLIE ROSE: Exactly right. Andrew.

ANDREW ROSS SORKIN: Well, no, I mean, it’s funny, you said Bill the
bond holder. I should say Bill Gross the bond holder from Pimco, and he is
someone who has had a lot of influence, as have other bond holders, who
have suggested that the moment that you effectively force these bond
holders to take a haircut or to swap out into equity, you are going to
undermine the entire bond market and we’re going to see some kind of
cataclysmic disaster.

Now, I’m not sure that’s the case, and as you’ve seen in other
bankruptcies, we’ve gotten through that. So at the end of the day, yes,
this would instill more confidence, but there is other people on the other
side saying that it would kill confidence.

WILLIAM ACKMAN: There is also a lot of misunderstandings. I mean, I
think that if the taxpayer really understood that their capital was going
in — if you think about a bank that took in $25 billion of TARP funds.
Let’s assume they have $400 billion of debt — that’s a round number for a
systemically important bank — $25 billion is enough to pay interest on
$400 billion of debt for a year. So banks won’t lend money because they
need that capital to pay interest on their debts.

I read a study by a guy by the name of Professor David Scharfstein of
Harvard Business School where he said of the $350 billion that was infused
into bank actually didn’t go into banks. Went into.

CHARLIE ROSE: This is the original TARP money?

WILLIAM ACKMAN: Right. It went into bank holding companies. Only
something like $17 billion went into the actual banks. And I know this is
a little technical perhaps for your audience, but I think it’s important.

The companies that trade on the stock exchange are called holding
companies, and they’re shells. They have debt. They have equity. And
they own the systemically important institutions. So the thing that we’re
worried about, that we want to protect, the deposit-taking institution, is
actually the subsidiary of the holding company. And that’s why these –
that’s why systemically important institutions are structured this way, so
that there’s the investor entity — I call it the holding company — can be
compromised. You know, the debt for equity then can be converted without
an impact at all on the subsidiaries. So the thing that guarantees
derivatives, the entity that lends money, you don’t want — when Lehman
failed, what happened was construction stopped, derivative counterparties
tore up contracts. If they had been a deposit-taking institution, there
would have been a risk.

The beauty here is you can simply just walk your way through the
capital structure of the holding company and create enormous amounts of
capital. Let me just follow it through for what it can do. Imagine if we
did this across the 19 — let’s not do it– you don’t convert all the debt
into equity. What you do is you set a standard. You say, look, we need
these banks to be extremely well capitalized, which means they need to have
a certain amount of capital. We now have all the data we collected from
the stress tests. So each bank needs to have — call it 10 percent common
equity to total assets, and we convert sufficient amount of debt — you
know, if JP Morgan has a better balance sheet, you convert some. Less for
JP Morgan, then you pick another institution and (INAUDIBLE) balance sheet.
It’s a very fair process.

Once you do that, if the banks are now overcapitalized and you
restrict dividends and you restrict stock buybacks, the only way the bank
can earn an adequate return on its capital is by increasing assets. And
what does that mean? It means making loans.

Now you’ve got 19 banks competing to make loans, and it has a huge
impact on the economy, because the average businessman says, I can’t spend
money today because I have a debt maturity and I can’t refinance. But if
he has three bankers knocking on the door, or 19 saying, “I’m going to lend
you money,” they can start spending again, and the economy can recover.

CHARLIE ROSE: Go ahead.

JOSEPH STIGLITZ: Exactly right. I mean, and in a way, it’s so
interesting, because we’ve been spending our money dealing with what
they’re now euphemistically call legacy assets. They used to first call
them toxic waste, toxic assets, then they called them troubled assets, and
now the official term is legacy assets. But that’s backward-looking. And
it hasn’t.

CHARLIE ROSE: Why is that backward-looking?

JOSEPH STIGLITZ: Because it’s looking at the loans that were made in
the past.

CHARLIE ROSE: As long as those loans are there, those assets are
there, those toxic assets are there, these banks have a very bad balance
sheet.

JOSEPH STIGLITZ: Yes, but there’s another way of dealing with that
problem.

CHARLIE ROSE: Which you can’t — you don’t quite know how to
evaluate.

JOSEPH STIGLITZ: Which is to convert the debt — convert the debt
into equity. No one knows how to value those risky assets. And what
they’re doing is very simple. They want to take all that trash and dump it
on the U.S. taxpayer. And it doesn’t make it disappear.

CHARLIE ROSE: The original idea, we buy all the toxic assets.

JOSEPH STIGLITZ: That’s right.

CHARLIE ROSE: Under the Paulson plan, the first Paulson plan.

JOSEPH STIGLITZ: Exactly. And then they went into buying it in bulk,
and then they — the current program is to use the private sector as the
garbage collector and dump it on our backs, but it’s all basically the same
idea.

CHARLIE ROSE: From the beginning, the toxic assets have been a huge
problem. So what should we do about them now?

KATE KELLY: I just think there’s a fundamental debate going on here
about valuation, and I’m not sure what the answer is. But there is
certainly a countervailing view to what you were saying, that indeed these
toxic assets can be marked, and they should be marked lower than where the
banks think they should be, and that’s why the banks don’t want to sell
them.

CHARLIE ROSE: But that raises the question, if they do that, what
will that mean to the balance sheets of the banks if they have to mark them
lower, and how many banks will we find are in fact at that evaluation
insolvent?

KATE KELLY: Probably quite a few, which is a scary prospect.

CHARLIE ROSE: And so what do you do then?

JOSEPH STIGLITZ: And that’s why you need to convert the debt into
equity. So that — it’s the only way you can do it. If it turns out then
that the banks are right and the toxic assets are worth a lot more, then
the equity of the banks will go up automatically, and they get fully
compensated. So the issue here is who’s going to bear the risk of the
uncertain valuation? And is it the people who gave the money to the bank
or is it the U.S. taxpayer? And it’s really simple as that.

CHARLIE ROSE: Andrew.

ANDREW ROSS SORKIN: This all points, though, to the issue of
confidence and what the goal of the stress test was supposed to do, which
was supposed to be to instill confidence. We were supposed to have this
stress test. We were supposed to get the results and we were supposed to
say, ah, this is all going to work out.

CHARLIE ROSE: Meaning they had enough capital to do what they need
(ph) to do.

ANDREW ROSS SORKIN: They had enough capital or we knew which ones
were in trouble and which ones weren’t, and we were all supposed to feel
very good about it. Instead, what I worry about now is that we’re going to
look at the results of the stress test, and it’s almost a lose-lose.
Either you are going to be very realistic, perhaps even too realistic for
many people, and you’re going to suggest that some of these banks really
are either insolvent or in so much trouble that they are going to need
either additional tax dollars, beyond by the way taking preferred shares
and swapping them for common, or you’re going to decide.

WILLIAM ACKMAN: How about bonds…

ANDREW ROSS SORKIN: Or bonds.

WILLIAM ACKMAN: … into equity.

ANDREW ROSS SORKIN: Or you’re going to decide that the entire process
is a whitewash and you’re going to have no confidence in the test to begin
with.

KATE KELLY: I think you’re right about that quandary, because
initially, I think people were excited about getting real results. Then
the word leaked out that nobody was going to fail the stress test.
Everybody was more or less in good shape.

(LAUGHTER)

(CROSSTALK)

KATE KELLY: Right. And then the public reaction was, well, are these
stress tests worth the paper they’re written on?

CHARLIE ROSE: And what is their methodology is another question about
it.

KATE KELLY: How can that be? How can — this is just going to hurt
confidence.

JOSEPH STIGLITZ: And you look at the numbers when they come out, and
they certainly are not the worst numbers that one could imagine. I mean,
they’re sort of median. But stress is stress. It’s not where the average
is. It’s what happens if.

ANDREW ROSS SORKIN: I mean, they’re thinking worst case is
unemployment at 10.3 percent. Housing prices are down.

CHARLIE ROSE: You mean.

ANDREW ROSS SORKIN: The government.

CHARLIE ROSE: The assumption.

ANDREW ROSS SORKIN: The assumptions built into the stress test assume
three major things. One, that unemployment is at 10.3 percent.
KATE KELLY: In the worst-case scenario.

ANDREW ROSS SORKIN: In the worst-case scenario.

(CROSSTALK)

KATE KELLY: 8.8 is (INAUDIBLE).

ANDREW ROSS SORKIN: So this is median already in some cases.
Unemployment — unemployment is at 10.3. We go to.

WILLIAM ACKMAN: House prices.

ANDREW ROSS SORKIN: . house prices at 22 percent. Thank you, I
apologize. And finally, the economy contracts by 3.3 percent. All of
those are right down the middle. Nobody would argue, I think, that that is
true stress, worst-case scenario.

CHARLIE ROSE: Right. What would true stress be?

ANDREW ROSS SORKIN: Probably 11 or 12 percent unemployment.
Absolutely.

WILLIAM ACKMAN: I think an analogy that I think will help understand
this. Think of a bridge that a truck had driven over. The bridge
collapses, the truck falls down, kills a thousand people who happen to be
walking under the bridge. When something like that happens, when they go
to rebuild the bridge, that bridge had a 10,000-pound capacity; the truck
weighed 9,800 pounds, but stress and otherwise, the bridge collapsed.

What you need to do is — we don’t need well-capitalized banks under a
historic definition. What we need is extraordinarily well-capitalized
banks. And you have to ask yourself, what is the downside if the U.S.
banking system was the best capitalized banking system in the world? So
imagine a world — and using this debt for equity — the beauty of
converting debt for equity is it’s not a taking from taxpayer and it’s not
a taking from the bond holder. The bond holder is getting exactly what
they own. Right? A bond holder is an owner of a company in the same way
an equity investor. The equity investor.

ANDREW ROSS SORKIN: Except that most bond holders don’t want to do
this.

(CROSSTALK)

ANDREW ROSS SORKIN: Most shareholders don’t want their stock to go
down.

Tags: 2001 Nobel Prize In Economics, Andrew Ross Sorkin, Bank Executives, Banking System, Bill Ackman, Charlie Rose, Columbia University Faculty, Financial Sector, Government Standards, Hedge Fund Manager, Joseph Stiglitz, Kate Kelly, Nobel Prize In Economics, Pershing Square, Pershing Square Capital, Pershing Square Capital Management, Pershing Square Capital Management Lp, Stress Test, Stress Tests, Wall Street Journal
Posted in Bonds, Markets | No Comments »

Rebecca Wilder: Of course bank lending is stalling

Thursday, April 23rd, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

The Wall Street Journal ran a story about reduced bank lending originating from those banks that received TARP monies. Frankly, I don’t know what kind of response the WSJ was going for, but I know what mine was: of course bank lending is stalling. Amid the precipitous economic decline, loan origination would likely be much worse had the banks not received capital injections. And in looking at the data, I noticed that another shoe might drop on consumer spending: home equity lines of credit are surging.

The credit crunch is now very evident in the data.

The chart above illustrates total commercial bank lending growth since 1950. Lending has stalled at a 2.2% annual growth rate in March 2009, falling 2.3% since its peak in October 2008. The unemployment rate is at 8.5% and expected to rise further, GDP is about to post its third consecutive decline, and the health of the banking system is still in question. It is very likely that annual lending growth would be negative by now and probably well below growth rates seen in previous credit crunch (circles in chart).

TARP monies and bank lending according to the WSJ:

“According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

“The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.

“The Journal’s analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline.”

The Treasury reports bank lending here (the WSJ’s reference above), saying this about residential real estate lending in February:

“Lending levels increased from January primarily in residential mortgage lending which was driven by attractive mortgage rates.”

The Treasury data is outdated. Since the shadow banking system is all but dead right now, any loan origination is likely going through the commercial banking system, which is reported by the Fed here through March. The Fed’s data tells a similar story as the Treasury report, that loan origination is down.

However, there is one exception: as of March, real estate lending is still rising slightly, but only because households are drawing on existing home equity lines of credit. I see this as another shoe to drop on consumer spending.

Credit crunch: firm lending is down.

The chart illustrates monthly commercial and industrial lending by the commercial banks. Loan origination has decreased, and the annual growth rate slowed, substantially.

Credit crunch: consumer lending - revolving and non revolving - is dropping.

The chart illustrates monthly consumer lending. Consumers are reducing debt load by paying off credit cards and new loan origination (auto, student) is falling.

Next shoe to drop: households are increasingly drawing on revolving home equity lines of credit.

The chart illustrates lending on revolving home equity lines of credit (HELOC). Lending (blue line) is still rising through March at a 20% annual rate. Households are using these lines of credit (presumably) to finance consumption needs, and a 20% annual growth rate is likely unsustainable.

Eventually, the lines of credit will run dry; and households will be forced to cut back on spending, taking another leg down. Not shown here is non-revolving real estate lending, which is down 1.3% in March since its peak in January 2008.

The credit crunch is in full swing, and the TARP monies no doubt kept lending in positive territory for a while. Amid surging unemployment, ongoing economic uncertainty, and a banking crisis that has yet to be resolved, the growth in bank lending is, in my opinion, rather remarkable.

Source: Rebecca Wilder, News N Economics, April 21, 2009

*Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Banking System, Capital Injections, Comparable Data, Consumer Spending, Credit Crunch, Economic Decline, Four Months, GDP, Home Equity Lines, Home Equity Lines Of Credit, Loan Origination, Monies, Severity, Snapshots, Tarp, Treasury Department, Unemployment Rate, Wall Street, Wall Street Journal, Wsj
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Tony Boeckh: Life After the G20 Meeting

Tuesday, April 14th, 2009

Tony Boeckh postulates on how the global economy is changing in the midst of the credit crisis, and following the outcome of last week’s G20 meeting in London.

Here is an excerpt from this informative and enlightening paper:

“The underlying cause of the credit meltdown and near-collapse of the global banking system was the deeply flawed international monetary system. This enabled the US to run large and persistent current account deficits since the mid-1980s (Chart 1). This in turn allowed credit at US financial institutions to expand at a pace which was not only unsustainable, but put many millions of families and firms in totally untenable debt servicing situations (Chart 2 - next page). They spent substantially beyond their means over many, many years, which is the counterpart of the collapse in US savings.”

This dynamic has left the US, as a country, massively over-indebted to foreigners who have acquired a huge net claim on the US, which represents the foreign financing of US overspendng.

So, we are left with US residents over-indebted to their financial institutions and the US, as a country, over-indebted to foreigners. While the former - US borrowers and lenders - are being bailed out on a grand scale, the debt to foreigners is another matter entirely. In particular, as Chart 1 also shows, the cumulative US current account deficit since the mid-1980’s, now totals $7.5 trillion and is climbing at the rate of $700 billion per year, down from $800 billion recently.

Without going into complications, there are a variety of capital flows into and out of…

Read this whole paper by Tony Boeckh, Boeckh Investments, HERE.

Boeckh is right at home in the global credit markets. From 1968 to 2002, he was chairman, chief executive and editor-in-chief of Montreal-based BCA Publications, publisher of, among others, the highly regarded Bank Credit Analyst, a monthly big-picture analysis of the U.S. economy and financial markets. BCA is now owned by Euromoney.

He was also chairman of Greydanus, Boeckh and Associates from 1985-99, a fixed-income investment firm which managed $2-billion in assets when it was sold to Toronto-Dominion Bank in December, 1999.

With a PhD in finance and economics from The Wharton School, University of Pennsylvania, Mr. Boeckh has taught economics at McGill University and is a founding trustee of the Fraser Institute. [Financial Post]

Tags: Account Deficits, Bank Credit Analyst, Banking System, Boeckh, Canada, Capital Flows, Counterpart, Credit Crisis, Credit Markets, Current Account Deficit, Financial Institutions, Financial Markets, Fixed Income Investment, Foreigners, Fraser Institute, Global Banking, Global Credit, Global Economy, International Monetary System, Investment Firm, Mcgill University, Meltdown, Mid 1980s, Phd In Finance, Postulates, Right At Home, Toronto Dominion Bank, Wharton School University Of Pennsylvania
Posted in Credit Markets, Markets | No Comments »