Wall Street privatises US government: be very afraid
Wall Street privatises US government: be very afraid
By Charles Dumas
Last Updated: 2:03am BST 14/09/2008
The US low-tax zealot, Grover Norquist, is famous for wanting to "shrink government down to the size where we can drown it in the bathtub". Still alive, he is not turning in his grave, but his idea has been well and truly buried - and not by the Democrats he hates; they have been tongue-tied on the credit crisis.
It is Wall Street, the paradigm of "red in tooth and claw" capitalism, that has turned to government subsidy on an unprecedented scale.
Low, ideally non-existent, taxes may be very desirable, but when free-market principles came into conflict with the survival of business as we know it, priorities were clear. The US Federal government's full faith and credit - in other words, the resources of American taxpayers - should be urgently deployed to preserve as much as possible of the financial industry.
Luckily for Wall Street, government was still too big to fit in that bathtub - and proved only too willing to take up the challenge.
The scale of the operation has been huge. The Bear Stearns' takeover last March by JP Morgan was helped down by a spoonful of sugar in the form of $29bn of quasi-equity investment by the Federal Reserve Board that can only go down in value, never appreciate. Nice money if you can get it - well done JPM! (I must declare an interest: I am a future pensioner of JP Morgan, so I like to see its fortunes improved.)
By March the Fed might have been forgiven for hardly noticing a mere $29bn: it had provided more than $250bn in liquidity assistance to the money markets, accepting dodgy mortgage paper as collateral. Lucky old Wall Street - though, to be fair, this liquidity was the only justifiable aspect of the Fed's conduct in the 15 months of credit crunch.
The "Bear" was only the hors d'oeuvre, as anyone could see. After a mid-summer Act of Congress promising major help to the mortgage market, the full scope of potential largesse from Washington was more thoroughly exploited last weekend when the two giant "government sponsored enterprises", nicknamed Fannie M ae and Freddie Mac - here collectively "Frannie" for convenience - were formally extended a Federal government guarantee by Treasury Secretary Paulson.
Frannie is emphatically, in fact by definition, not part of the sub-prime crisis. Out of the country's total home mortgages of $10.5 trillion the lowest tier, sub-prime, is (or was) about $1.5 trillion, with another dubious category called "Alt-A" (also not "prime"), of another $0.5 trillion.
Within sub-prime, came the so-called "Ninja" mortgages: qualifications required being No Income, No Job or Assets, and in the bulk of cases no documentation either. Wall Street's enthusiasm for this kind of paper led to the losses even at 15 per cent higher, house prices a year ago, requiring the hors d'oeuvre described above.
With house prices now nearly 20 per cent down from their peak, the story has moved on from sub-prime to prime. Frannie is the main course. The definition of a prime loan is one that can be taken onto the Frannie balance sheet, or placed with investors under a Frannie guarantee. With about $8.5 trillion of prime loans out there in total, Frannie is on the hook, in one form or another, for more than half, some $4.5 trillion.
Back in the sound-money days of more than a half-century ago, Senator Everett Dirksen came up with the classic thought about the US Federal government: "A billion here, a billion there…20pretty soon you're talking about real money". How quaint that sounds. In these go-go days for fiscal "conservatives", it is more like "a trillion here, a trillion there…".
The Frannie deal is big even by today's standards. It single-handedly vaults the US from a public debt ratio in the sound-money range into the company of fiscal basket-cases like Italy and Belgium, and that long-standing economic invalid, Japan.
The chart shows how the net US government sector debt pre-Frannie was about the same size relative to the economy as Germany, though worse than other G7 peers such as Canada, Britain and France. Now with one bound, the addition of $4.5 trillion puts it up there with Italy and Japan.
http://www.telegraph.co.uk/money/gra...dumasstory.jpg
Fed closes the door on hands-off economics. Source: Lombard Street Research
For connoisseurs, the post-Frannie endorsement of the rating agency, Standard & Poor's, may raise an eyebrow: the triple-A rating of the US government is unaffected, we were told after last weekend's events. Many a nasty, even catastrophic, deterioration of credit has started with such a reassurance.
I have myself dealt with bankruptcy of a company that was actually "in the can" less than a year after it was triple-A rated. But triple-A rated mortgage securities trading at 50 cents in the dollar are bad enough. A bank whose credit-worthiness requires public defence has generally lost it. A government has greater resources, but questions are bound to be asked.
Nor is the monetary policy of the Federal Reserve designed to give comfort. Last autumn and winter, only too clearly panicked by Wall Street's fear of meltdown, the Fed made huge cuts in interest rates, as well as advancing (much more reasonably) over a quarter trillion dollars to the money market. The sense of panic told global investors all they needed to know.
China's accumulation of reserves, running at $500bn a year, had to be kept in dollars to support its (unwise) policy of controlling the yuan/dollar exchange rate. But the funds all got shifted to government or Frannie paper - no doubt a major force behind the US government's backing of Frannie: sudden withdrawal of China's dollar support genuinely might lead to financial Armageddon, in contrast with a few badly needed Wall Street failures.
Others flew the dollar - to anything they could think of. The euro, the yen, but notably to oil and other commodity derivatives. Commodity derivatives held off the public exchanges, "over the counter" (OTC), grew six-fold in three years, from $1.5 trillion at the end of 2004 to20$9 trillion at the end of 2007 (and no doubt more since, though the data have yet to be published).
This is eight times the size of public-exchange commodity derivatives about which information is more detailed. Nobody knows the form of these OTC positions. But oil prices doubled from $70 a barrel just before the credit crisis to over $140 at the peak in July this year - and have since seen one of the fastest commodity price collapses ever, to little over $100. Those positions contained huge speculative accounts.
Who pays for dearer oil? Chiefly, the US consumer. So the rescue of Wall Street has panicked the Fed into a policy that has hammered American taxpayers, just as they have been called upon to finance the bailout of Wall Street.
The Fed's goals, as specified by Act of Congress, are to sustain good growth and keep inflation low (in that order). By its subjection to Wall Street priorities, it has both stimulated price inflation - the CPI was up 5.6 per cent over the latest 12 months - and thereby cut the real value o f US incomes, and with them US growth.
It has thus failed in both its mandated goals. With one bullet - panicky interest rate cuts that have little relationship to saving Wall Street in any case - it has shot itself in both feet.
The irony is - I hesitate to say "joke", though black joke it is - that Wall Street did not need it, and will not (of course) be grateful. Sometime over this weekend, probably - or maybe a little later - Lehman Brothers is expected to endure a similar fate to Bear Stearns six months ago.
Perhaps "Hank the hunk" Paulson, former head of the leading Wall Street firm, Goldman Sachs, will play his usual highly visible part in devoting US taxpayers' resources to the cause. And will the world come to an end? Just as was feared at Y2K, or the CERN experiment last week? Well, actually, no.
And Wall Street realised this on Thursday when, after several days' worry over Lehman's fate, the stock market managed to go down sharply at the opening and then realise that it did/does not matter so much after all, ending up sharply instead. Neither would it have mattered much last March, had Bear Stearns simply been let go. Finally light has dawned.
In the meantime, the world has been changed. Free markets have been abandoned in America at the crucial hour by their chief exemplars, the financial masters of the univ erse. Let us hope that the convictions of the British financial and political community, though less confidently flaunted, will prove more durable.
Firms that fail after doing stupid things - or sometimes firms that are just plain unlucky - should go to the wall. Opinions may differ as to which category Northern Rock (our own particular policy disgrace) falls into.
The economy will recover sooner if banks that have made stupid mortgage loans suffer, and house prices fall more rapidly to levels at which affordability is obvious and buyers come forward. Society will also be more just. We should be grateful the Bank of England has an inflation target, not a confusing mishmash like the Fed. And that Mervyn King sticks to it.
It seems that President Bush and the Republicans are not just well to the left of Grover Norquist. They leave clear blue water on the left of Gordon Brown, much to the envy of Euro-lefties no doubt, who would love to ditch what they call "neo-liberalism", and what we call free markets, as easily as the American right wing.
Small wonder Barack Obama is having trouble establishing a distinct political identity - not to mention a feasible economic policy. And where subsidy is concerned, whoever may lead, can Detroit be far behind?
We read of a request for $25bn of Federal help to the car industry - both Messrs McCain and Obama think th e amount should be twice that. Pigs to the trough - with or without your lipstick!
Charles Dumas is director of Lombard Street Research
http://www.telegraph.co.uk/money/main.j ... mas114.xml
Last Gasp of a Doomed Currency
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Last Gasp of a Doomed Currency
by Peter Schiff, Euro Pacific Capital | September 12, 2008
In the latest example of financial market madness, the recent government “bailoutâ€
Hank Paulson begs banks to rescue Lehman Brothers
Hank Paulson begs banks to rescue Lehman Brothers
Mark Kleinman in London, and James Quinn in New York
Last Updated: 2:15am BST 14/09/2008
Barclays was last night considering a direct plea from Hank Paulson, the US Treasury Secretary, to assemble a cut-price rescue bid for Lehman Brothers, the investment bank which has become the latest victim of the global financial crisis.
Paulson, the former head of Goldman Sachs, has urged Barclays and a number of other large financial institutions to intervene in the Lehman crisis, which is threatening the future of one of Wall Street's most venerated businesses. US officials are concerned that the collapse of Lehman will prompt a fresh contagion among investors worried about the security of institutions such as Merrill Lynch and AIG, the insurance group.
Last night, a team of senior Barclays executives, including Bob Diamond and Jerry del Missier, the chief executive and co-president of Barclays Capital respectively, were locked in talks aimed at finding an appropriate structure for a takeover of Lehman.
However, people close to the British bank were uncertain last night whether a deal would be achievable, particularly at such short notice. Barclays executives are keen that they have access to financial assistance from the US government which would allow Lehman's non-performing assets to be held in a so-called 'bad bank' vehicle with no risk to Barclays shareholders.
Paulson's public insistence that taxpayer funds will not be used to bail out Lehman, as they were earlier this year to facilitate the bailout of Bear Stearns by JP Morgan Chase, makes such help unlikely.
- Analysis: Lehman Brothers fights for survival
- Comment: Barclays should beware the gorilla in its midst
- More on banking
"We have been asked [by Paulson] to look at this, and it would be remiss of us not to, but looking is not the same as doing," a person close to Barclays said last night.
Barclays is facing competition to buy Lehman from Bank of America, and it remains possible that another bidder will emerge today, with Nomura, the Japanese brokerage, Goldman or others named as potential buyers.
Lehman would be valuable to both Barclays and its US rival, either strengthening the British bank's standing on Wall Street or giving Bank of America an enhanced presence in Europe and Asia, regions where its investment banking business is weak.
At an emergency meeting at the New York Federal Reserve on Friday night, Lehman was told by some of those present that it needed to find a solution to its capital crisis before Asian stock markets open tomorrow morning, about midnight tonight in Britain.
The summit was attended by Wall Street bosses including John Mack, chief executive of Morgan Stanley, John Thain, his counterpart at Merrill Lynch, Jamie Dimon, head of JP Morgan Chase, and Lloyd Blankfein, chief executive of Goldman Sachs. Representatives from Royal Bank of Scotland, which has a large US banking business, and US government officials, including Paulson, and Tim Geithner, head of the New York Federal Reserve, were also there. It is not clear whether anyone from Barclays attended.
A further meeting was held yesterday and another is expected to be staged today in an effort to secure a deal that will salvage Lehman's future. The Fed meetings have revived memories of the crisis which engulfed Long Term Capital Management, the hedge fund, in 1998, when Wall Street firms were asked to make contributions to save it from collapse.
Lehman's situation is different, in that the US authorities do not generally view its collapse as an event which would pose a broader systemic risk. Efforts to secure capital infusions are now more complicated because of the deep scars on the balance sheets of many investment banks.
Last week, as its share price continued to slide despite the government rescue of Fannie Mae and Freddie Mac, the US mortgage giants, Lehman unveiled plans to separate its core investment bank from the 'toxic' real estate assets which have triggered concerns for its financial health.
The slump in Lehman's share price last week - the bank has lost more than 90 per cent of its market value this year - was mirrored by sharp declines at Merrill and AIG.
AIG had been planning to update the market about its strategy towards the end of the month, but is now likely to do so as early as tomorrow, potentially raising billions of dollars through a stock issue and asset sales.
Lehman had been hoping to secure a capital injection of about $6bn (£3.6bn) from Korea Development Bank, a state-backed lender in South Korea. Talks with KDB ended unsuccessfully last week with Dick Fuld, Lehman's chief executive, holding out for a price higher than the Koreans were prepared to offer. Other discussions with potential investors, including sovereign funds in the Middle East, and Citic Securities of China, have also stalled.
Fuld was this weekend seeking offers for Neuberger Berman, Lehman's asset management arm, which is valued at up to $8bn but may fetch considerably less because the bank is seen as a forced seller. Lehman and Barclays both declined to comment.
http://www.telegraph.co.uk/money/main.j ... man114.xml
Jobless top two million: UK economy heads for meltdown
Jobless set to top two million as the UK economy heads for meltdown
As one company after another lays off its workers, Tim Webb, Heather Stewart and Nick Mathiason report on the crisis faced by struggling British households
Tim Webb, Heather Stewart and Nick Mathiason The Observer, Sunday September 14 2008
The true scale of the jobs disaster facing Britain is revealed today as experts issue dire warnings that up to half a million workers will lose their jobs over the next two years, as companies cut costs and scale back investment plans to survive the economic downturn.
Official figures are widely expected to reveal this week that the number of people out of work and claiming benefits increased for a seventh successive month in August.
Finance companies based in London's Square Mile have already laid off thousands of workers since the US mortgage crisis unleashed chaos in the world's markets last summer; and the 5,000 UK-based staff at crisis-hit investment bank Lehman Brothers are awaiting news this weekend about how many of them will be made redundant.
The constant drip of job losses is spreading beyond the City. Karen Ward, chief UK economist at HSBC, calculates that almost a quarter of the workforce - seven million - are employed in the vulnerable retail and leisure industries. Thousands of shopworkers have already lost their jobs this year, as a succession of retail companies have gone into administration. Car manufacturers are also scaling back their production after the latest registration figures showed that last month was the worst August for new car sales since 1966.
Trade unions at Ford's Transit van plant in Southampton will hold talks with executives tomorrow in the hope of averting layoffs. Roger Madison, national automotive officer for the Unite union, said: 'There is just no confidence at the moment. All the companies are struggling - everyone is in the same boat.' There are fears that the Southampton plant, employing 1,100 workers, will be closed if Ford decides to build a new model of the van at its low-cost sites in Turkey or Romania. A decision on where to build the new model is due soon.
Tomorrow union leaders will also meet executives from General Motors over its plans for a 'down day' on 26 September when its Vauxhall Vivaro van plant in Luton will cease production.
Last month it emerged that Toyota was cutting production at its Derbyshire plant because of a fall in demand for cars. Unite also reports that Jaguar Land Rover - owned by the Indian firm Tata - is scaling back operations.
Several housebuilders have announced big job losses as they struggle to sell new properties in the tough housing market. Barratt announced that it would cut a quarter of its workforce, and Persimmon said it would lay off 2,000 staff. In total, up to 50,000 construction workers have lost their jobs. On the broader measure favoured by the government, unemployment had already risen by 60,000 between March and June to 1.7 million. Michael Saunders, chief UK economist at Citigroup, believes the figure will continue rising for another two years, as the economy slides into recession, peaking by late 2010 at 2.25 million.
'The only parts of the economy that have created many jobs over the past few years have been banking, finance and business services, and the public sector, and both of those look like they're going to get much weaker,' he said.
But economists believe it will take until at least the end of next year before a sense of optimism begins to return. In the meantime Britain's consumers are expected to tighten their belts as the value of their homes declines and their spending power is eroded by rising food and fuel bills. That's bad for business on the high street and across service industries, and is expected to fuel unemployment. After the travel firm XL collapsed last week, British Airways boss Willie Walsh predicted that up to 30 small airlines could go out of business.
Estate agents, too, have been hit hard. In a survey by the Royal Institution of Chartered Surveyors, some agents said they were selling just one property a week: hardly enough to justify employing a large staff. Halifax has announced that it is closing 53 branches, with the loss of up to 100 jobs. Analysts at Merrill Lynch have suggested that a third of all estate agents' branches could close.
Hugo Sellert, head of research at online recruitment firm Monster, has noticed a decline in the number of new jobs being advertised. 'This month what emerged most clearly was that employers seemed to be scaling back on casual and temporary recruitment,' he said. He said the most noticeable weakening of the job market had been in East Anglia, the Midlands and London. 'Unemployment typically lags other indicators of the health of the economy, and we're looking at the early stages of the downturn,' he said, adding that the UK is six to nine months behind the US, where unemployment has risen sharply to 6.1 per cent, the highest rate in five years.
Driving unemployment to a historic low was one of the proudest boasts of Gordon Brown's decade-long chancellorship and a key element of restoring Labour's record for economic competence.
During the 1979 election campaign, Conservative campaign posters bearing the slogan 'Labour Isn't Working,' helped to dislodge the Callaghan government. But over the next four years Margaret Thatcher oversaw more than a doubling in unemployment, which shot up above three million in 1983. It hit three million again a decade later, during the painful recession of the early 1990s.
Lai Wah Co, head of economic analysis at the the Confederation of British Industry (CBI), which represents businesses, said it should also help that UK plc is now leaner than it was at the outset of the last recession. 'Because of globalisation, companies have outsourced most offshore functions. There is not much scope for cutting back jobs. We don't think job losses will total those of the early Nineties.'
The recent influx of migrant workers to the UK - many of whom are now going home - should also cushion the impact of falling employment. Since 2004, when eight eastern European countries joined the EU, about 845,000 migrant workers were attracted to the UK by the thriving job market. Approximately half have returned and more are following.
However, because the days of mass unemployment are a distant memory to much of today's workforce, many employees have built up little in the way of a financial safety net, leaving them extremely vulnerable if they do lose their job. 'Over the past 10 years, people have never had this feeling of fear,' said a spokeswoman for Citizens' Advice, which says unemployment is one of the major causes of financial distress. The spokeswoman said: 'It [unemployment] doesn't hit for a while; they often borrow more to pay for basic things, so they get themselves deeper into debt.'
As part of the government's housing package this month, Alistair Darling, the Chancellor, announced that people who lost their jobs would be able to claim financial support to help with mortgage interest payments after 13 weeks, instead of 39 weeks as at present. The Treasury is keen to prevent job losses leading to a wave of repossessions and forced sales in the housing market, driving prices lower in a vicious circle.
Professor David Blanchflower, the US-based economist who sits on the Bank of England's interest rate-setting committee, told MPs last week he thought two million people could already be out of work by Christmas. He has repeatedly voted for further cuts in interest rates to prevent the downturn from spiralling out of control; but has been outgunned by the majority on the committee, which has left rates on hold since April.
Case study
For Gary, 40, losing his IT job at a leading bank in the City four months ago could not have come at a worse time. 'I was made redundant a week before my baby was born,' he said. 'I'd just moved into a new department and then the funding was withdrawn. I was escorted off the premises. It wasn't pleasant.' While he has enjoyed being around to help look after his first child, he is concerned about getting a new job. 'I don't think it's going to be easy. My concern is how long it's going to take.' His situation is more urgent because with his wife on maternity leave, the money coming into the home has fallen sharply. 'I have been in banking for 13 years and this is the biggest downturn. The question is how long will it take to recover?'
http://www.guardian.co.uk/business/2008 ... redundancy
