Hedge Funds in deep trouble

Hedge funds are sitting on a record amount of cash, estimated at about $400 billion, money that eventually could make its way into the market. Other managers are hoping that investors have second thoughts and don’t go through with the withdrawals, or are telling their investors that they will sell securities over time rather than dump them as the market falls. But either way, the wave of requests is keeping money out of the market as hedge funds figure out their next moves.

Hedge funds are selling billions of dollars of securities to meet demands for cash from their investors and their lenders, contributing to the stock market’s nearly 10% drop over the past two days.

The Dow Jones Industrial Average fell 443.48 points on Thursday, bringing its two-day drop to 929.49 points, its biggest two-day decline since Oct. 20, 1987. Coming amid steep drops in the retail and auto sectors, the decline wiped out a strong rally that ended on Election Day, and now the market is only 6% away from its lowest close of the year.

One of the biggest hedge funds, $16 billion Citadel Investment Group, is being asked by several major banks to post additional collateral to cover big losses on its investments, according to people familiar with the situation.

Citadel executives say the calls for more cash are a normal part of business when securities they hold fall in value, and they emphasize they have significant amounts of cash to satisfy their lenders. They say they have met all the demands for collateral. Rumors that the firm was having problems led it to hold a conference call two weeks ago in which it said it was holding 30% of its capital in cash and Treasurys and had $8 billion in credit lines it has yet to tap. The firm also said some of its businesses are doing well this year, that it has reduced risk and its use of borrowed money, and that performance has improved recently.

SIZE: $16 billion

CEO: Ken Griffin, 40

YTD RETURNS: Biggest funds down about 39% through last Friday

HISTORICAL RETURNS: 18%-20% a year

NUMBER OF EMPLOYEES: More than 1,200

HISTORY: Mr. Griffin founded the Chicago-based firm in 1990 with $4.6 million, one year after graduating from Harvard University. The fund is known for buying assets of other investment firms in distress.

Lenders are hoping regulators would orchestrate a settlement among the companies involved in Citadel’s loans if necessary, according to a person familiar with the situation. “Citadel is a valued client, and we continue to do business with them as usual,” said Ed Canaday, a Goldman spokesman.

Deutsche Bank spokesman Ted Meyer said, “Citadel is a valued customer and our relationship is business as usual.”

Hedge funds have emerged as the latest serious problem in the global financial system. As their losses mount, they’re selling off securities to meet demands for cash from lenders and investors.

Porsche is raking in money through a form of options that helped it build up a huge stake in VW since 2005, while keeping other market participants in the dark. The strategy led late last month to a soaring price for VW shares after a Porsche disclosure showed the company, had, in effect, cornered the market on most VW shares.

That put investors who had bet against VW stock in the classic bind called a short squeeze. This one was acute: VW’s stock spiked so high that VW briefly was the most valuable public corporation in the world.

Hedge funds that had shorted VW shares — borrowing them and selling them, hoping to replace them later with cheaper shares — lost billions over a few frantic hours last week as they wrestled each other to buy the few remaining shares available and unwind their bets. Funds affected, according to people familiar with them, include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital.

Blame the Hedge Funds

 

There is an international move afoot to blame hedge fund selling for the market drop. While some people should never be let near anyones money the hedge fund blame game has an interesting twist.

All commentary focuses on redemptions as the driver of selling. If it’s the customers driving the selling how exactly is it the hedge funds decision to sell? They merely have a choice in what they sell but no control over the need to sell.

This is not intended as a hedge fund love story. These funds aren’t hedging anything as is demonstrated by the returns this year. They are mostly “buy and hope” investors and wouldn’t know a hedge if it bit them.

104-Class Email 36: Exam Info / News on Unemployment and Hedge Funds

Exam II is almost upon us (Monday, November 24th).  Because Thanksgiving follows by just a few days, you are sure to be busy in the next two weeks.  For that reason, I want to start the exam preparation process early by giving you some information about logistics, format and content.

Second, this exam will have more objective questions (i.e., fewer essay questions/problems) than last exam.  I have not written it yet, but as soon as I do, I will tell you exactly how many of each type of question will appear (as well as the split among Mankiw/lecture, WSJ articles, and Shlaes material).

Third, I will not be in town on Monday November 24th.  To make up for the 1.5 hours of missed office hours, I will hold office hours from 10 am - noon and 1 to 6 pm on Thursday, November 20th.  I will also phone the TAs proctoring the exam during the exam to answer any student questions that come up.

Finally, I post a new reading list to make clear exactly what will be on the exam no later than Monday.

We will talk about the unemployment rate on Monday.  Fortuitously, the Bureau of Labor Statistics released the October civilian unemployment rate today.  That rate jumped 0.4 percentage points from September to 6.5% - 14-year high.  Here is a link to a WSJ article on the jump: Economy Sheds 240,000 Jobs.

Today’s WSJ also had an article on hedge funds.  It seems they are selling securities by the truckload to raise cash - and driving the market down in the process.  Here is the link: Hedge Fund Selling Puts New Stress on Market.

As always articles from the business press mentioned/linked in “Class Emails” (rather than “WSJ Emails”) are for your enrichment but are not required reading.

Have a great weekend!

Brazil Hedge Funds See Record Outflows Even as They Beat Market

Alexander Ragir-Bloomberg, 11/06/2008

Brazilian hedge funds saw a record 14.3 billion reais ($6.7 billion) in withdrawals last month after returns trailed a fixed-income benchmark even while defying a 25 percent plunge in the Bovespa stock index.

The redemptions brought total outflows this year to 48.9 billion reais, shrinking the industry by 16 percent, according to data released by the National Association of Investment Banks yesterday. The rate of withdrawals is similar to hedge funds globally, even though the worst-performing Brazil funds lost a third as much on average as their overseas rivals.

Brazilian managers avoided declines even as the Bovespa plunged 41 percent this year. Investors withdrew money because they compare performance against fixed-income indexes, said Luiz Felipe Andrade, a director at the association known as Anbid. Bond yields in Brazil are among the highest in the world.

Read more…

Guide to Hedge Funds

This 160 page PDF is a good primer to hedge funds. Written by AIMA (alternative investment management association).  The pdf goes over the following topics:

Here’s the link: Roadmap to Hedge Funds

Will hiring hold up as hedge funds slash IT budgets?

Earlier in the year, hedge funds were providing an oasis of hiring activity for techies with financial services experience. But recent pressure on the industry has meant that they are likely to spend 40% less on IT in 2009 than they did in the previous year. Not surprisingly, recruitment has slowed.

New research from the Tabb Group suggests that shrinking assets under management and more hedge funds falling by the wayside means that the pot for technology next year is likely to shrink to $882m.

This means a change of focus on where the budget is going to be spent, with the majority of hedge funds refusing to compromise on front-office areas like electronic trading, specifically the ability to trade multiple asset classes electronically. Investment in back-office functions is more likely to suffer.

Cheyenne Morgan, research analyst and author of the report, says: “Any software or service that directly supports the investment process stands a far better chance against this inevitable tide of cost cutting.”

Hedge funds’ appetite for taking on techies has diminished in recent months, says Darren Pearce, sales director at hedge fund IT recruiter Options Technology.

“Some of the bigger funds have either made redundancies or released contractors, which have been a luxury over the last 18 months and are a quick way to cut costs,” he says. “However, technology remains a key area of focus and there are still more opportunities than in other areas of finance.”

Stephen Feline, manager at financial technology recruiters the Kaizen Partnership, tells us: “A number of the major funds have put hiring freezes on, but we are still seeing exceptional hires going through. As cost savings have become paramount, these tend to be focused on the junior level, or in areas like support, RAD [Rapid Application Development] and implementation.”

Pearce says that competition for places is heating up, due to the glut of talent available from areas like investment banking. Some are keen to take i-banking techies on, he says.

“It’s the bigger multi-billion dollar funds that these individuals would look to move into – the smaller funds would be less likely to consider them,” he says.

Market update - a strange thing about Goldman Hedge Funds - data about the CDS market

Excerpt:

http://www.cnbc.com/id/27530827

Excerpt:

http://www.bloomberg.com/apps/news?pid=20601087&sid=awdIS.zeotuY&refer=home

A Goldman Sachs hedge fund that launched in January with over $6 billion under management lost close to $1 billion by September, according to the Financial Times.

Nov. 4 (Bloomberg) — The Depository Trust & Clearing Corp. will publish details of the top 1,000 credit-default swaps today, bowing to regulatory pressure for more transparency in the $47 trillion market.

The data from the DTCC, which operates a central registry, will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world’s companies and governments.

The industry has stepped up efforts to counter critics among U.S. lawmakers and regulators who say the lack of transparency in the market exacerbated the financial turmoil. The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many contracts were outstanding on the securities firm, or who had held them. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.

DTCC is controlled by a board of members, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other dealers that created and control trading in the credit-default swap market. Trading exploded during the past decade as the market went from being largely a tool for banks to hedge loans to a place where hedge funds, insurance companies and asset managers could speculate on the creditworthiness of companies, governments and other borrowers, including homeowners.

08.10.17 FT - Hedge Funds Poised for Harsh Phase of Evolution

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Hedge funds hit and run by Porsche

This was a great story from last week: http://flipchartfairytales.wordpress.com/2008/10/29/hedge-fund-managers-run-over-by-porsche/ also covered at the BBC

Those so-hated hedge funds have had their comeuppance in a brilliant move by Porsche. In their takeover attempt of Volkswagen they ended up controlling so many of the VW shares that the hedge funds that had gone short on VW shares ended up losing huge sums of money.

What seems to have happened is that many hedge funds borrowed shares from Porsche to sell on the market and sold those shares to Porsche. When the time came to close out their position they are then forced to buy back these same shares from Porsche at a huge loss. Brilliant.

It doesn’t put the German market in a particularly good light - but you’ve got to admire the chutzpah of a company fighting back against the hedgies.

GOLD UNEXPECTEDLY NOT SHINING AS AN INVESTMENT - Hedge funds dumping mineral to raise cash is keeping the price down

Updated 5:26 p.m. ET Nov. 3, 2008

For many investors, that grim scenario is in full swing, except for one thing: After briefly hitting $1,000 an ounce for the first time in March, gold has fallen into a rut and shows no sign of budging anytime soon.

Gold’s failure to flourish despite broad financial carnage has disappointed many of the metal’s champions. Others say it’s simply in a lull and is ripe for another big surge. But most gold buyers agree that the metal’s lackluster performance lately has been surprising.

“It’s been a puzzle for most of us,” said Geoff Farnham of Venice, Calif. who inherited some gold holdings and recently began buying gold coins as “insurance.”

“In hard times, gold is a good thing to have,” the retired software developer said. “Knowing that there aren’t a lot of gold coins out there to buy, seeing the price continue to drop has been curious.”

It’s also been punishing for investment portfolios. Since soaring to an all-time high of $1,033.39 an ounce on March 17, gold has plummeted 30 percent. Gold for December delivery on Monday rose $8.60 to settle at $726.80 — roughly the same level where it traded a year ago.

So what happened? As the financial crisis pummels financial markets around the globe, hedge funds and other large investors who drove gold to dizzying heights earlier this year are now racing to unwind those positions to raise cash and cover huge losses. The massive deleveraging has pounded other commodities from crude oil to corn to copper.

“Gold is being pulled down by indiscriminate selling of virtually every asset,” said Jeffrey Nichols, managing director at New York-based American Precious Metals Advisors. “You could call it collateral damage.”

Instead of gold, investors are pouring money into the newest safe-haven asset: cash. That has pushed the dollar to multiyear highs against the euro and the pound, hurting demand for gold among investors who buy the metal as a safe-haven against inflation.

With economists now warning that a world economic slowdown could bring about deflation, or a sustained period of falling prices, gold analysts say it’s unclear how the metal will respond.

“Gold hasn’t been tested in a true deflationary crisis so we don’t what will happen to prices,” said Jon Nadler, precious metals analyst with Kitco Bullion Dealers Montreal.

Another question is whether demand for gold jewelry and luxury items will pick back up, which could boost prices. The holiday season is traditionally the busiest season for gold buying in the U.S., Asia and elsewhere, but analysts expect the global economic slowdown to hurt sales.

“It doesn’t look like it will be a good Christmas for jewelers,” Nadler said. “When you don’t have a job and bonuses and Christmas parties are being canceled, the mindset is toward frugality and gold takes a hit from that.”

Still, not everyone is selling gold.

Mark Albarian, CEO of Goldline International, Inc., a Santa Monica, Calif.-based gold dealer, said sales at his firm tripled in October compared to August — a sign that individual investors aren’t joining hedge funds in the rush to sell gold.

“Our clients overall seem to be very happy with their gold,” Albarian said, noting that gold is still outperforming most assets. “Gold may be back down to where it was last year. But our houses have dropped 10 to 30 percent during that time and stocks are way down. So gold has held up rather well.”

Looking ahead, some gold watchers are betting for another big climb. They argue the dollar’s recent rally can’t last as long as the government has to pay for a string of mammoth financial bailouts by either printing money or raising taxes — both inflationary weights that should weigh on the greenback and be bullish for gold.

“Fundamentals will re-establish themselves as the driver of the gold market, and we believe we’ll see $1,250 gold during this period,” Donald Doyle, chairman and CEO of New Orleans-based precious metals dealer Blanchard and Co., said in statement Monday.

In the meantime, Farnham said he’s hanging on to his gold. He said he’s hopeful the economy will improve and he won’t need to cash in his insurance, but with all the uncertainty, he’s not ruling out that he might have to.

“I think a lot of it will depend on world events,” he said, citing conflicts in the Middle East and threats to world resources like oil. “There’s potential for a lot of crisis out there, and crisis drives up gold.”

At least, that’s the theory.

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘MSNBC’

Offshore Company to Offshore Hedge Fund Guidance

Offshore Company (offshorecompany.com), in what is either the clearest sign yet that either:

the hedge fund bubble is readying to implode, or
the free press release bubble is getting ready to lose its effectiveness

announced that is is throwing its hat into the hedge fund creation and advice business.  Offshore Company claims in their release that they have been advising on offshore company formation and offshore incorporation since 1977.

Offshore companies new program will help hedgies with:

For years, hedge funds grew in popularity and assets under direct management, but i remains to be seen what happens to the mighty hedgies in the face of a global liquidity slowdown.  Some of the more standard plays are not viable when liquidity has been taken down to more sustainable levels and there have been a series of high profile implosions in the face of greater volatility this year.

Goldman Hedge Fund Crushed

What’s $1 billion between friends?

FT: One of Goldman Sachs‘s flagship hedge funds, run by two of the Wall Street bank’s most talented traders, has lost close to $1bn since its launch in January in further evidence of the crisis facing the industry.

Goldman Sachs Investment Partners, which was hailed in January as one of the biggest hedge fund launches, raising more than $6bn, has told investors that it had lost $989m by September. It said the fund was down about 13 per cent in the third quarter. Year-to-date performance fell about 15.5 per cent in the year to September.

And, no, you can’t have the rest of your money back:

GS Investment Partners, which imposed a two-year lock-in at launch and has a strong bias towards equities, is managed by Raanan Agus and Kenneth Eberts, former heads of proprietary trading desks at Goldman.

The fund was launched after a poor year for the bank’s quantitative, or computer-driven, hedge funds which were hit hard in August 2007 forcing the bank to inject $3bn to rescue its Global Equity Opportunities fund.

More than half of GS Investment Partners’ losses in the third quarter was from its investments in commodities, basic materials, metals, mining, energy and agriculture. But like many multi-strategy funds diversified across equity, credit markets and convertible bonds, GS Investment Partners was hit hard by losses on convertible bonds – debt instruments that can convert into equity. It said returns from the convertible asset class had been “abysmal”.

 

Postado no blog Clusterstock

08.10.17 FT - The Short View (Hedge Fund Behavior)

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Porsche - The Hedge Fund?

I heard about this through Bloomberg and the New York Times wrote an excellent article explaining the finer points of a “corner”.  Very strange behavior out of a car maker at best.  If you have some time, give it a read.

That is some crazy stuff … “a profit is a profit”

Their press releases have always been colored with an amazing fear of takeover. Such an interesting strategy to just take over one of the big guys.

Here is another article from the Economist with an absolutely staggering graph.

http://www.economist.com/finance/displaystory.cfm?story_id=12523898

It appears they came out on the good side of this “corner” but wow, it could have broken bad.

My favorite periodical just published a fairly detailed article on what exactly went down.

The Hedge Fund Manager With a 1000% Return

The Hedge Fund Manager With a 1000% Return

Lahde’s still very bearish on both housing (he has a new fund to short commercial real estate) and on the economy more generally (he’s predicting a deep recession). But it seems he thinks the bloodletting in residential real-estate might be over: he’s returning money to his investors, telling them “the risk/return characteristics are far less attractive than in the past”.

In a way, given the sheer number of hedge funds out there, and the increasing amounts of leverage they employ, it’s a little surprising there aren’t more funds which return 1000% in a year – and it’s actually quite reassuring that such things are still rare. To have one enormously successful year, like Lahde or Paulson, can make a man dynastically wealthy. But it doesn’t make him an investing great like Buffett or Swensen or Lynch.

Remember that during the housing bubble, people were regularly making 1000% returns on their own money by buying and flipping condos with little or no money down. In a way it’s only just that now a few hedge fund managers are making equally large returns by making bets in the opposite direction.

Source : http://seekingalpha.com/article/55343-andrew-lahde-the-hedge-fund-manager-with-a-1000-return?source=feed

Hedge Fund Fight Nite Weigh in and Match Ups

The matches are set for this great charity event! Watch Tim Murphy from IP Global, Andrew Wong Kee from JAB Gym and the fighters themselves discuss the upcoming brawl on 30 October. www.so-u.tv

IP Global的Tim Murphy及JAB Gym 的Andrew Wong Kee 會介紹十月三十日舉行的慈善盛事:對沖基金搏擊之夜.另外,最終的決戰名單已經公布,每位選手均曾接受專業訓練及嚴厲的淘汰,留下來的,實力不容忽視,戰況勢必激烈,請到www.SO-U.TV收看吧!

Hedge Fund reactions

“I cannot find words to describe our disappointment, embarrassment and shock over the above results,” Ainslie wrote.

Congratulations to Maverick Capital for having the cojones to say this.

“Be careful buying ANYTHING today,” Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.

HEDGE FUND MARKET ABUSE CONTROLS RAISE CONCERN-FSA (UK)

October 31, 2008 - Reuters

Hedge funds are relying too heavily on their open-plan office arrangements to overhear and prevent illegal trading activities, Britain’s financial watchdog has warned.

Following its latest programme of visits to assess UK-based hedge funds’ controls for monitoring staff trading activity and preventing market abuse, the Financial Services Authority said there is “scope for improvement”.

In its Market Watch newsletter for October, the regulator said: “Of particular concern was an over reliance on an open-plan office setting for overhearing suspicious activity and a reliance on counterparties or other staff to detect irregular trading behaviour.”

“There was little monitoring of potential manipulation around valuation dates, and insufficient review of ‘day trades’ around announcements, with management concentrating on monitoring end of day positions,” it added.

Hedge funds are regarded with suspicion in some quarters due to the opacity of their trading strategies. Some have blamed the industry for exacerbating the market volatility during the credit crisis as hedge funds sought to make a profit while stocks fell.

SHORTING BAN

In March this year they were accused of spreading rumours about HBOS in order to profit from short-selling shares in the mortgage lender. As similar rumours surfaced again last month, the FSA led a global move to ban short-selling on financial companies.

In its newsletter, published late Thursday, the regulator also raised concern that the use of long-term remuneration structures has led to an “overly sanguine” attitude towards market abuse risk among hedge funds.

Firms believe that by rewarding managers for long-term performance they remove the incentive to engage in market abuse in order to pursue short-term gains.

However, the regulator said that although this can mitigate the risk, managers concerned about losing their job due to underperformance would still have an incentive to focus on short-term returns.

The regulator said the use of “reason for trading” records was a good initiative especially as the size of many hedge funds argues against sophisticated detection systems and places greater reliance on management information and compliance overview.

The FSA said its observations will inform future risk assessments as it continues to monitor the issue.

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘FINANCIAL MIRROR’

Another Bank Run: Now the Hedge Funds

Mon Nov 3, 2008 7:48pm

 

BOSTON (Reuters) - Alternatives investment firm Blue Mountain Capital Management LLC has frozen its largest hedge fund after clients asked to withdraw a significant sum, Bloomberg News reported on Monday.

Withdrawals from the $3.1 billion Blue Mountain Credit Alternatives Fund were suspended to prevent the fund from being forced to sell assets in falling markets, the news agency reported, quoting a letter sent to the fund’s clients.

http://www.reuters.com/article/innovationNews/idUSTRE4A306420081104

American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate. AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company. Taxpayers will take on the extra risk to give Chief Executive Officer Edward Liddy more time to salvage AIG. The insurer needed U.S. help to escape bankruptcy in September after at least $40 billion in quarterly losses tied to home mortgages. Liddy

American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate.

AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company.

Taxpayers will take on the extra risk to give Chief Executive Officer Edward Liddy more time to salvage AIG. The insurer needed U.S. help to escape bankruptcy in September after at least $40 billion in quarterly losses tied to home mortgages. Liddy’s plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

“This gives AIG much more breathing room,” said Robert Haines, an analyst at CreditSights Inc. “Now they have the time and flexibility to sell assets for closer to their intrinsic value rather than fire-sale prices.” The news is a “big positive” for bondholders, he said.

AIG advanced 63 cents, or 30 percent, to $2.74 at 9:31 a.m. in New York Stock Exchange composite trading.

The first rescue plan wasn’t sustainable, Liddy said during a conference call today. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

Affordable Terms

To make the bailout affordable, the U.S. will reduce the $85 billion loan that saved AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today in a separate statement.

The move extends the government’s reach into the financial system amid the worst economic crisis in 75 years. The U.S. seized control of Fannie Mae and Freddie Mac, lenders that guarantee or own about 40 percent of the $12 trillion in U.S. mortgages, in September. The next month, Treasury Secretary Henry Paulson unveiled a $250 billion program to recapitalize U.S. banks — at least $163.5 billion of which has already been committed to lenders.

The new AIG package includes a freeze on the bonus pool for 70 top executives and imposed limits on severance benefits, the Treasury said in its statement. Lawmakers had said failing companies getting taxpayer bailouts shouldn’t be using the money for multimillion-dollar pay packages.

Securities Lending

The original rescue was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. was allowed to collapse. The U.S. reversed its opposition to a bailout when the Federal Reserve concluded that ripple effects from the insurer’s failure could bring down more financial companies. The U.S. then provided two more credit lines, worth a combined $58.7 billion, before restructuring the package.

The revised rescue may fix two AIG operations that are draining cash because of the collapse of subprime mortgage markets. In the first, the U.S. will provide as much as $30 billion to help buy the underlying assets of credit-default swaps that AIG sold to investors, including banks. AIG will contribute $5 billion and bear the risk of the first $5 billion in losses, the Fed said.

The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in writedowns during the quarter on the value of the swaps.

New York Fed

The New York Fed also will lend as much as $22.5 billion to a new limited-liability company to fund the purchase of residential mortgage-backed securities from AIG’s U.S. securities-lending collateral portfolio. AIG will make a $1 billion subordinated loan to the new entity and bear the risk for the first $1 billion of any losses, the Fed said. The securities lending operation and the previous $37.8 billion credit line from the Fed will be shut down, AIG said.

Securities lending accounted for $11.7 billion, or about two-thirds, of the $18.3 billion in impaired investments in the third quarter, AIG said.

The interest rate on the $60 billion credit line will be reduced to the three-month London interbank offered rate plus 3 percentage points, from a previous spread of 8.5 percentage points in the original rescue plan, the Federal Reserve said. AIG’s assets continue to secure the loan.

Preferred Shares

The Treasury will buy the newly issued preferred shares from the insurer using the agency’s $700 billion Troubled Asset Relief Program, a financial rescue package that Congress passed in early October. The company agreed to turn over a 79.9 percent stake to the U.S. in exchange for the initial loan in September.

“This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future,” Liddy said in a statement. “These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects.”

The biggest insurers in North America posted more than $120 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing about half that total. The company has units that insure, originate and invest in home loans.

“AIG keeps getting hit square between the eyes by the housing-finance meltdown,” said Bill Bergman, an analyst at Morningstar Inc. in Chicago, before the results were announced. “Risk controls at the company were clearly inadequate.”

AIG’s property-casualty operations reported an operating loss of $899 million, compared with a profit of $2.51 billion in the same period a year earlier, on $1.39 billion in catastrophe claims and a loss at its mortgage insurance unit.

Mortgage Insurance

The mortgage insurer, United Guaranty Corp., had an underwriting loss of $1.16 billion, a fourfold increase from a year earlier.

AIG lost $993 million on private-equity and hedge-fund holdings in the quarter, compared with a profit of $575 million a year earlier. AIG had $28.4 billion in the so-called “alternative” holdings as of Sept. 30. Hedge funds lost $921 million, while private equity resulted in a $72 million loss.

Operating income at the insurer’s aircraft leasing unit, International Lease Finance Corp., rose 14 percent to $306 million as the company charged more to rent planes.

Book value per share, a measure of assets minus liabilities, fell 35 percent from a year earlier to $26.46.

AIG Prospects

Liddy, 62, plans to sell life insurance operations in the U.S., Europe and Japan, along with the firm’s reinsurer, airplane lessor, consumer finance unit and asset manager. The former CEO of Allstate Corp., was appointed by the U.S. as a condition of AIG’s bailout.

AIG renewed doubt about its prospects today by saying in a federal filing that it might not survive. Liddy said in a statement that “our goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders.”

PXP Vietnam to Start Hedge Fund, Bets on Stock Market Recovery

Nov. 10 (Bloomberg) — PXP Vietnam Asset Management, which oversees $225 million, plans to start a hedge fund by early next year as it seeks bargains in Asia’s second-worst-performing stock market, said co-founder Kevin Snowball.

The PXP Vietnam Value Fund will raise as much as $200 million to invest in undervalued stocks, Snowball said today.

PXP, the initials of Phan Xi Pang, Vietnam’s highest mountain, is betting that the stock market will recover as inflation eases and the nation’s trade deficit widens at a slower pace. The benchmark VN Index may double to 750 by the end of 2009, Snowball said.

“In the long term, the story’s intact,” Snowball, 47, said in an interview in Ho Chi Minh City. “As long as the government handles the development of the economy and the market correctly - - so far they’re doing a very good job — then I think we’re fine.”

The index of 163 companies traded on the Ho Chi Minh Stock Exchange has lost about 60 percent this year, the biggest decline in Asia after China. It is set to rise to 500 by the end of the year “given continued diminishing volatility globally and macroeconomic stability,” Snowball said. The index rose 1.5 percent to 371.61 as of 9:30 a.m. in Ho Chi Minh City.

The Vietnam Value Fund will be PXP’s first open-ended fund, allowing investors to withdraw their money after a one-year lock- in, with restrictions on what can be redeemed at once.

The fund will have the “flexibility to use hedging when and where available, and if the manager feels it appropriate taking pricing and market conditions into account,” Snowball said.

Starting Small

PXP will initially raise as much as $20 million from “friends and family,” those that had earlier invested in its older funds and the firm’s own money, Snowball said.

“It will start small and then build its performance record before a full launch by early 2009,” he said.

The Blackhorse Enhanced Vietnam Inc., an open-ended Vietnam- focused hedge fund managed by Singapore-based Blackhorse Asset Management Pte., declined 51 percent through September this year, according to data compiled by Bloomberg.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profit from speculation on whether the price of assets will rise or fall.

PXP, set up six years ago by Snowball and Jonathon Waugh, currently manages three closed-end funds listed in Ireland that invest in publicly traded Vietnamese companies and those preparing to list on the stock exchange.

Right Timing

The PXP Vietnam Fund gained 38 percent in 2007, the best- performing Vietnamese equities portfolio, according to LCF Rothschild Emerging Market Funds Research. The fund outperformed the 23 percent gain in the benchmark stock index last year.

The funds have been hit by the stock market’s retreat this year. The PXP Vietnam Fund declined 67 percent, the Vietnam Emerging Equity Fund fell 67 percent and the Vietnam Lotus Fund lost 56 percent through October, Snowball said.

Vietnam-focused funds tend to have a “long-biased strategy,” said Kostas Iordanidis, head of hedge funds at Unigestion Holding SA, which invests $3.5 billion in hedge funds worldwide. The firm doesn’t have any investment in Vietnam funds.

“If you like Vietnam, it’s a great product, if you don’t like Vietnam, it’s a horrible product,” said Iordanidis, who is based in Geneva. “It will outperform on the way up and underperform on the way down, so it’s market timing.”

Interest-rate increases earlier this year and a subsequent slowing in inflation helped ease investor concerns in the second quarter that Vietnam was heading into a currency crisis.

Cheap Stocks

The central bank has cut interest rates twice, each by a percentage point, since Oct. 20, as the world tips toward a recession following the global financial turmoil. The benchmark stock index has risen 13 percent since hitting a two-and-half- year low on Oct. 28.

PXP’s funds sold some of their holdings during the third- quarter rally to raise cash. PXP started buying shares again during the market’s recent decline and is now fully invested, Snowball said.

“There are some very cheap stocks here; there are also some extremely badly run companies,” he said. “We’re at the beginning of the rally so that almost everything is going up; as we go higher there’ll be more discrimination.”

The Vietnam Value Fund will buy the shares of as many as 20 of the country’s biggest companies where it can find “value and growth,” Snowball said.

Hedge funds aggravated the sell-off in Vietnam this year as they dumped stocks to meet investor redemptions, Snowball said.

“We felt there was too much attention being given to what foreigners were doing in this market, but it seems to be hedge funds selling,” he said. “That’s not people taking a view on Vietnam particularly.”

Snowball moved to Vietnam in 2001, a year after the nation opened its stock market. He previously worked at investment banks for 17 years, including stints at ABN Amro Holding NV and Deutsche Morgan Grenfell.

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

Porsche - The Hedge Fund?

I heard about this through Bloomberg and the New York Times wrote an excellent article explaining the finer points of a “corner”.  Very strange behavior out of a car maker at best.  If you have some time, give it a read.

That is some crazy stuff … “a profit is a profit”

Their press releases have always been colored with an amazing fear of takeover. Such an interesting strategy to just take over one of the big guys.

Here is another article from the Economist with an absolutely staggering graph.

http://www.economist.com/finance/displaystory.cfm?story_id=12523898

It appears they came out on the good side of this “corner” but wow, it could have broken bad.

My favorite periodical just published a fairly detailed article on what exactly went down.

Hedge Fund reactions

“I cannot find words to describe our disappointment, embarrassment and shock over the above results,” Ainslie wrote.

Congratulations to Maverick Capital for having the cojones to say this.

“Be careful buying ANYTHING today,” Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.

ELYAC Realty- What Crisis? Some Hedge Funds Gain

ELYAC Realty- What Crisis? Some Hedge Funds Gain

By ELYACRealty

Bernard V. Drury is a rarity on Wall Street: a hedge fund manager who is making money rather than losing it.

While most hedge funds are sinking into red this year and unsettling the markets in the process, a handful of them are posting spectacular gains. Mr. Drury’s fund, for instance, is up 60 percent since Jan. 1.

How did he do it? Mr. Drury, a former grain trader, is not giving away his secrets. He relies on proprietary computer models to chart tides in the markets and to ride the prevailing currents.

But however smart or lucky the moneymakers have been, a few bad trades can end any hot streak. Despite Wall Street’s reputation as a place of big money and bigger egos, many of the winners are reluctant to boast, particularly given the gaping losses threatening some rivals.

“There’s going to be, naturally, a lot of forms of disillusionment with hedge funds,” said Mr. Drury, who opened his fund, Drury Capital, in 1992.

Indeed, gloomy talk of an industry shakeout is getting louder as returns at most funds sink lower. Over the last few months, some funds have been forced to dump stocks and bonds because their investors want their money back. Wall Street traders worry that another big wave of withdrawals in mid-November could further unsettle the markets.

All of which makes the big winners stand out even more. Hedge fund returns, on average, are down 20 percent. But one in every 50 funds is up more than 30 percent - an astonishing performance, considering the broad stock market is down even more than that.

Winners include trend-followers like Mr. Drury; market-spanning macro funds, which dart in and out of an array of markets and bet on everything from Apple Inc. to zinc; and niche players that are buying insurance policies or making loans to small companies.

Some of this year’s stars are familiar names on Wall Street. For instance, a fund managed by John Paulson, who reportedly was paid $3.7 billion in 2007 after betting against the subprime mortgage market, has gained nearly 30 percent this year in his largest fund, investors say.

But some of the other moneymakers are not well known, and could benefit as competitors close and investors look for new places to park their money. Hedge-fund traders who make a killing are often lionized within the industry. One good year can vault a small player to the big leagues.

But with so many funds down - only one in three has made any money this year - the price of admission to the winner’s circle has fallen. A showing that would have been considered dismal only a year ago is now viewed as a standout success. Traders even joke that down 10 percent is the new break-even. Actually making money is all the more rare.

“This year, anything north of 10 percent is spectacular,” said Pierre Villeneuve, managing director of the Mapleridge Capital Corporation, a $750 million hedge fund in Canada that is up 18 percent.

Other funds with big winnings include R. G. Niederhoffer Capital Management; Conquest Capital Group; MKP Capital Management; the Tulip Trend Fund, run by Progressive Capital; and funds run by John W. Henry & Company.

Never before have so many funds been down. In 5 of the last 10 years, fewer than 15 percent of hedge funds lost money. Even in the worst year, 2002, 31 percent finished down, according to estimates from HedgeFund.net, a unit of Channel Capital Group. This year, some 70 percent of hedge funds had lost money from Jan. 1 through the end of September.

To a degree, hedge funds are hostage to their stated investment strategies, and investors judge them accordingly. Funds that specialize in convertible bonds and stocks, for example, are among the worst performers this year because those markets have been hard hit in the financial crisis.

Losers include well-known traders like Kenneth C. Griffin, who runs the Citadel Investment Group; Lee S. Ainslie, head of Maverick Capital; and David Einhorn, the head of Greenlight Capital, who called attention to the troubles at Lehman Brothers before many others.

Still, funds that specialize in investment strategies that have suffered could come out looking good if they manage to post even modest gains. For instance, Exis Capital, a $150 million fund that trades stocks, is up 9 percent this year, even after the fund’s manager took their 50 percent fee, according to investors. The average stock fund, by comparison, is down 22 percent, according to estimates from Hedge Fund Research. In commodities trading, Touradji Capital Management is up 11 percent even as its competitor, Ospraie Management, was forced to liquidate a large fund.

At some hedge fund companies, this year’s performance is mixed. Trafalgar, a hedge fund in London, manages 10 funds. Three are down, but two - a volatility fund, and “special situations” fund - are up more than 20 percent, according to an investor.

Trafalgar declined to say what special situations it had pounced on. Volatility funds, a category that is broadly doing well, focus on trading options and try to profit when the markets swing wildly as they have lately.

Lee Robinson, co-founder of Trafalgar Asset Managers, said his firm’s success set it apart from competitors.

“Every investor is going to say, ‘What did you do in September ‘08, what did you do in October ‘08?’ and if you were down significantly, you’re going to have trouble raising money,” Mr. Robinson said. “The most important question is not, ‘How much money am I getting back?’ it’s ‘Do I get my money back?’ “

Several managers who are doing well did not want to brag at a time when so many of their industry colleagues were struggling.

“You don’t do victory laps,” said Adam Stern, a partner at AM Investment Partners, whose volatility fund is up 6.75 percent this year. “It’s a very sad time for a lot of people. People worked very hard, and they’re losing a lot of money and net worth.”

Marek Fludzinski, one of this year’s winners, remembers what it was like to be a loser. Mr. Fludzinski, the chief executive of Thales Fund Management, was among the computer-loving quantitative fund managers who suffered in 2007, when his fund lost 8 percent. Investors immediately began asking for their money back, so Mr. Fludzinski shut the $1.6 billion fund and started anew.

Now his computer-driven fund, created in May, has grown to $350 million from $80 million in assets and is up 14 percent.

Mr. Fludzinski said the important factor in running a hedge fund these days was simply surviving.

“Don’t do something that will kill you,” said Mr. Fludzinski, who uses a database with 14 years of prices on thousands of stocks to try to spot patterns like the forced selling of stocks.

Marc H. Malek, a former UBS trader who manages $611 million, is up 44 percent in his macro fund. But even as new investors approach his company, Conquest Capital, the firm is also receiving redemption requests from investors who want their money back, Mr. Malek said. Investors are pulling cash from wherever they can.

A growing number of troubled hedge funds are temporarily refusing to give investors their money back by freezing their funds, in industry parlance. But others are profiting from the waves of panic that have convulsed the markets this year.

Roy Niederhoffer, founder of R. G. Niederhoffer Capital Management, whose more famous brother, Victor, made and then lost a fortune trading, is up more than 50 percent. To predict how investors will behave, Roy Niederhoffer, who majored in neuroscience at Harvard, delves into psychological research.

But Mr. Niederhoffer does not need much research to tell him that some investors chase winners. With his fund soaring, investors are piling on. His assets under management have climbed to $2 billion, from $700 million earlier this year.

Still, Mr. Niederhoffer is not planning any celebrations.

“The greatest danger at a time like this is hubris,” he said. He has banned fist-pumping victory poses on his trading floor.

Circuit City Files for Bankruptcy - Mergers, Acquisitions, Venture Capital, Hedge Funds

via Circuit City Files for Bankruptcy - Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

Circuit City Stores, the struggling electronics retailer, filed for bankruptcy protection on Monday, becoming one of the biggest, best-known corporate names to collapse amid the faltering economy.

Circuit City filed for Chapter 11 bankruptcy protection in United States Bankruptcy Court for the Eastern District of Virginia, where the Richmond, Va., company is based. The company has 712 stores and 9 outlet stores, according to a court filing.

The company has long been an also-ran in the consumer electronics sector, consistently trailing its larger rival, Best Buy. Circuit City has faced several challenges this year, including a proxy contest mounted by an activist investor and a shakeup in its management this summer.

Retailers have been especially hard hit by the slowdown in consumer spending and the clampdown in the credit markets. Circuit City announced last week that it was closing 155 stores and laying off 17 percent of its work force, or about 1,300 employees.

Hedge fund managers run over by Porsche

It’s not often that you read the funniest story of the day on the front page of the FT. Forget Brand and Ross; this is much better.

There the hedge fund managers were, happily short-selling Volkswagen shares when, suddenly, Porsche announced that it had built up a 74.1% stake in VW and was planning a takeover. Immediately, VW shares shot up making it briefly the world’s largest company. Short-sellers who had bet on the falling price were left facing losses of €30bn.

There is, of course, a serious side to this story. The FT is right to criticise Germany’s opaque stock market in its editorial. Most countries have rules to prevent stealth takeovers. In the UK, once a company acquires more than thirty percent of another company, it must launch a formal takeover bid. There are similar rules in Germany, except that, unlike in the UK, the acquirer doesn’t have to declare derivatives. It can therefore wait to cash in its options, then suddenly reveal that it has effectively taken a company over. Such a system clearly doesn’t prevent creeping takeovers and German newspapers are already calling for a change in the law, fearing that Germany’s reputation as a financial centre may be damaged.

But that said, you have to admit that the story has a funny side. An old fashioned company that actually makes things has shafted the wheeler-dealers in the hedge funds. One London auto industry analyst told the FT:

I have hedge fund managers literally in tears on the phone.

It couldn’t happen to a nicer bunch of people could it?

Porsche has since released some of its stock, making life slightly easier for the beleaguered hedgies but many firms still face heavy losses. As a broker quoted in the Telegraph said:

This is without question the biggest single loss on a single stock in the history of hedge funds. It’s a bloodbath.

I know it sounds churlish but I bet I wasn’t the only person chuckling into my newspaper this morning.

Fannie Mae May Need More Than Billion From U.S. - Mergers, Acquisitions, Venture Capital, Hedge Funds

Fannie Mae said Monday that it might need more than the $100 billion that the Treasury said it was willing to invest in the giant mortgage company to help it stay in business.

“If we continue to experience substantial losses in future periods or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,” Fannie Mae said in a filing with the Securities and Exchange Commission.

Fannie Mae reported earlier Monday that it lost $29 billion in the third quarter. It said the number of loans in its portfolio that were in foreclosure or delinquent by more than three months had jumped to 1.72 percent in September.

via Fannie Mae May Need More Than Billion From U.S. - Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

PXP Vietnam to start hedge fund next year

Washington (VNA) - PXP Vietnam Asset Management, which oversees 225 million USD, plans to start a hedge fund by early next year, said co-founder Kevin Snowball.

The PXP Vietnam Value Fund will raise as much as 200 million USD to invest in undervalued stocks. PXP, the initials of the highest mountain Phan Xi Pang in Vietnam, is betting that the stock market will recover as inflation eases and the nation’s trade deficit widens at a slower pace.

The benchmark Vietnam Index may double to 750 by the end of 2009, Snowball said.

“In the long term, the story’s intact,’” Snowball said in an interview in Ho Chi Minh City. “As long as the government handles the development of the economy and the market correctly - so far they’re doing a very good job — then I think we’re fine.”

According to the Bloomberg biz news, the index of 163 companies traded on the Ho Chi Minh Stock Exchange has lost about 60 percent this year, the biggest decline in Asia after China. It is set to rise to 500 by the end of the year “given continued diminishing volatility globally and macroeconomic stability,” he added.

The Vietnam Value Fund will be PXP’s first open-ended fund, allowing investors to withdraw their money after a one-year lock- in, with restrictions on what can be redeemed at once. The fund will have the flexibility to use hedging when and where available, and if the manager feels it appropriate taking pricing and market conditions into account, Snowball said, adding that PXP will start small and then build its performance record before a full launch by early 2009.

PXP, set up six years ago by Snowball and Jonathon Waugh, currently manages three closed-end funds listed in Ireland that invest in publicly traded Vietnamese companies and those preparing to list on the stock exchange.-

November 12 - Escaping of Hedge Funds

Well, half way though November, some goods and bads for my prediction so far.  However see if the bottoms of DOW and HSI will be around 8200 and 12800 this week.  I know pound should be weak… but much weaker than I expected… 1.4928 right now… ouch!

Okay, back to the topic I want to talk about, Hedge Funds….  What will you do if you are a Hedge Fund manager, and you know your hedge fund is about to be busted at the end of the year.  Oh well, flip the coin and make the decision…   Some reports said there’ll be over than 35% hedge fund to go busted by the end of this year.  Well, the reports were released earlier when the stock markets were even at a higher level (like when dow was at 9000) you can imagine if the failure rate will be still the same right now at 35%… not a chance.  In order to survive, the only way they can do is to start buying at relatively low level (but can’t be too low, otherwise the market will collapse and they and will be vanished in no time) and keep buying until the whole world believes the market is okay then they will survive.

I think 8200 the bottom for DOW in November will be appropriate as stated in my last post.

I expect a relatively bigger rally coming up

DOW target @ 9700 in early December, HSI target @ 16500

hedge fund manager bill ackman breaks it down

charlie rose continues to tackle the credit crisis on his show…came across this clip on ‘the big picture’ blog. big take away is that the credit rating agencies that gave Fannie/Freddie/AIG AAA rating we’re one of the central causes of collapse.

George Soros: The Bad News About Hedge Funds

Do you know who George Soros is? Don’t feel bad if you don’t. The Hungarian-born investor periodically makes headlines in the financial press and was quite outspoken in the late 1980s and early 1990s, after the fall of the Iron Curtain. But he is hardly a household name.

Today, the financier, who was born Aug. 12, 1930, was on Capitol Hill testifying about hedge funds. Here’s the natal chart of Soros from something called the Magi Society and an interesting article about how he got clobbered during a Saturn transit. It was actually in April 2000, when Jupiter was making a conjunction with Saturn in Taurus, squaring Soros’ natal Leo Sun.

I’m wondering whether last night’s full Moon at 21 degrees of Taurus, which also squared the legendary investor’s Sun, is the reason why he was ordered to appear in front of Congress.

He told legislators that hedge funds, which are investment vehicles that are essentially free of government regulation and place bets in both directions (long and short) on equities and commodities, will be “decimated” by the current financial crisis. A story from the Times of London appears here about Soros’ day on the Hill.

Like Warren Buffett, another billionaire, Soros has a Jupiter/Pluto conjunction in Cancer that ties in heavily with the U.S. chart.

Soros, Falcone Defend Hedge Funds at House Hearing (Update1)

George Soros and Philip Falcone, in a rare appearance by hedge-fund managers before Congress, defended their industry’s practices and profits while splitting over whether more government regulation is needed.

“This is not a case where management takes huge bonuses or stock options while the company is failing,” Falcone, senior managing director of New York-based Harbinger Capital Partners, said in written testimony to the House Committee on Oversight and Government Reform.

Falcone urged Congress to oversee the industry and require more disclosure of investments, while Soros, founder of Soros Fund Management LLC in New York, cautioned Congress against “ill-considered” regulations because the managers are reeling from market losses and client defections.

Soros, Falcone, Paulson & Co.’s John Paulson, James Simons of Renaissance Technologies LLC and Kenneth Griffin of Citadel Investment Group LLC, who are among the world’s richest hedge- fund managers, were called to testify today as part of a congressional investigation into the credit crunch that has slowed the global economy.

Committee Chairman Henry Waxman began questioning the men today about their bets against subprime mortgages and whether their industry is a risk to the financial system. Waxman’s hearing is one of many Democrats are convening to explore the causes of the global financial crisis. They are examining issues such as regulation, disclosure and compensation.

`Unimaginable Success’

Hedge-fund managers have had “unimaginable success” and, while being “virtually unregulated,” many enjoy special tax breaks, Waxman said. Today’s witnesses, he said, earned on average more than $1 billion last year, profits they were able in many cases to treat as capital gains rather than as ordinary income, which is taxed at a higher rate.

“That means at least some portions of their earnings could be taxed at rates as low as 15 percent,” Waxman said. “That’s a lower tax rate than many school teachers, firefighters, or plumbers pay.”

Waxman and Representative Thomas Davis of Virginia, the panel’s top Republican, suggested the need for more oversight of the industry.

“Greater standardization, registration, disclosure and some regulatory limitations could help the industry mature and survive,” Davis said.

Main Street Impact

He said there are as many as 8,000 funds managing as much as $1.5 trillion and could account for up to 30 percent of trading volume in U.S. stocks.

“This isn’t just about sophisticated, high-stakes investors anymore,” Davis said. “Institutional funds and public pensions now have a huge stake in hedge funds’ promises of steady, above-market returns. That means public employees and middle-income senior citizens, not just Tom Wolfe’s Masters of the Universe, lose money when hedge funds decline or collapse.”

Falcone said he supported more public disclosure and transparency. Investors “have a right to know what assets companies have an interest in — whether on or off their balance sheets — and what those assets are really worth,” he said.

Soros, in written testimony, warned the committee against “going overboard with regulation.”

“Excessive deregulation has inflicted enormous losses on the general public and there is a real danger that the pendulum will swing too far the other way,” especially while the sector is in decline, Soros said.

“The bubble has now burst and hedge funds will be decimated. I would guess that the amount of money they manage will shrink by between 50 and 75 percent. It would be a grave mistake to add to the forced liquidation currently dislocating markets by ill-considered or punitive regulations,” Soros said.

Earning Salaries

In their written statements delivered to the committee, the hedge-fund managers also defended their multimillion-dollar salaries, saying they earned money only when their investors did.

“In our business, one of the most fundamental principles is alignment of our interests with those of our clients,” Paulson said. His fund shares profits with its investors, taking 20 percent. “All of our funds have a ‘high-water mark’, which means that if we lose money for our investors, we have to earn it back before we share in future profits.”

Waxman, who last month grilled Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., about the bank’s demise, doesn’t have jurisdiction over securities- industry legislation. Even so, his interest suggests the $1.7 trillion industry faces increased scrutiny and regulation next year after President-elect Barack Obama takes office.

Regulator Actions

“In an attempt to respond to public outcry and political demand, the industry expects lawmakers to implement new rules that will limit leverage, restrict the ability to short securities and increase taxes on the wealthy,” said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP, which represents hedge funds.

Regulators have already taken some steps. In September, the U.S. Securities and Exchange Commission temporarily banned the short sale of some stocks. The agency now requires funds to disclose the shares they are wagering will tumble, though those reports won’t be made public. In a short sale, a trader borrows shares and then sells them immediately in the hopes they can be bought back later at a cheaper price.

The witnesses, all longtime fund managers, earned more than $1 billion last year according to a list compiled by Institutional Investor’s Alpha Magazine.

Waxman asked the managers to provide documents, including e-mails, that discussed the likelihood that their own, or other, hedge funds would collapse and the risk to the financial system if they did.

Borrowing

He also asked for their levels of borrowing and their investments in mortgage-backed securities, collateralized debt obligations and credit-default swaps going back to the beginning of 2005. Some managers used these securities to wager on subprime mortgages and on the credit-worthiness of investment banks.

Soros, 78, is the chairman of $19 billion Soros Fund Management. He has called credit-default swaps the next crisis area because the market is unregulated, and he has recommended the creation of an exchange where these contracts could be traded.

Paulson, 52, runs a New York-based fund that manages about $36 billion. His Credit Opportunities Fund soared almost sixfold in 2007, primarily on wagers that subprime mortgages would tumble. Paulson’s Advantage Plus fund has climbed 29 percent this year through October while many managers are enduring the worst year of their careers.

Griffin Struggles

Hedge funds lost an average of 15.5 percent this year through Oct. 31, according to data compiled by Chicago-based Hedge Fund Research Inc.

Falcone, 46, also profited from a drop in subprime mortgages last year, when his fund, now about $20 billion, doubled. This year the fund was up 42 percent at the end of June and has since tumbled to a loss of about 13 percent.

Simons, 70, runs his $29 billion fund out of East Setauket, New York. The former academic makes money by using computer models to trade. His Medallion Fund, made up of his own money and that of his employees, is up more than 50 percent this year.

Griffin, 40, runs the $16 billion Citadel Investment Group LLC in Chicago, and has faced the toughest year out of the five billionaire managers. His funds dropped 38 percent this year through Nov. 4.

Hedge Funds will be Regulated or Not!

Read here.

Hedge Funds Lightly Regulated Today

“Currently, hedge funds are virtually unregulated,” said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. “They are not required to report information on their holdings, their leverage, or their strategies. Regulators aren’t even certain how many hedge funds exist or how much money they control.”

Don’t Over-regulate Hedge Funds

Listen to George Soros, a current supporter of President-Elect Obama.

Soros, like the other hedge fund managers, agreed that increased regulation could be beneficial, but he warned against “going overboard with regulation.”

Andy Lo, an eminent Financial Economist at MIT suggests:

that regulators foster increased transparency within the financial industry and create a special public relations team to convey financial information to the general population.

“To the average American, the current financial crisis is a mystery, and concepts like subprime mortgages, CDOs, CDSs and the seizing up of credit markets only creates more confusion and fear,” said Lo.

Or in other words, have transparency and allow the market to sort the rest.

The Curious Capitalist - TIME.com

The signature moment of today's long House committee hearing on hedge funds came deep in the Q&A. Massachusetts Democrat John Tierney looked at hedge fund manager John Paulson, who earlier had offered some pointed suggestions on how Treasury Secretary Hank Paulson ought to be using the $700 billion Troubled Asset Relief Program, and said, "I'm thinking we've probably got the wrong Paulson handing out the TARP money here."

So much for the Waxman Witch Trial, as Dealbreaker had billed it. This was more like a love-in. Some members of the House Committee on Oversight and Government Reform did razz the five multi-billionaire hedge fund managers assembled before them about the taxation of carried interest (performance fees that are taxed at capital gains rates). But two of the five--George Soros and Renaissance Technologies' Jim Simons--agreed that carried interest should be taxed as ordinary income. Paulson didn't, Philip Falcone of Harbinger Capital and Ken Griffin of Citadel were opposed with some caveats. But that discussion remained civil.

The most heated moment of the whole hours-long hearing came when Indiana Republican Mark Souder gave Soros hell for about 20 seconds for supporting marijuana legalization. But then he switched to a question about whether hedge funds helped bring markets toward equilibrium, and all was friendly again.

If the hedge fund industry is worried about becoming the scapegoat for the current financial crisis, there was no sign of that happening in the Rayburn House Office Building today. Committee Chairman Henry Waxman, citing the testimony of an earlier panel of professors, said he worried about the systemic risks posed by hedge funds. But most of the committee members, both Republicans and Democrats, seemed to buy the hedgies' argument that those systemic risks paled beside the ones posed by banks, investment banks, insurance companies and other more traditional financial firms. They mainly wanted to ask the hedge fund guys for advice.

What kind of advice did they get? Well, Soros wants tighter regulation of new financial products, and regulatory efforts to control asset bubbles by tightening margin requirements and raising bank capital standards when markets are booming.

Simons thinks Calpers, PIMCO, TIAA-CREF and other big investors should get together and start a new non-profit rating agency focused on derivative securities.

All the hedgies said they were okay with disclosing more about their positions to regulators, as long as the information stays with the regulators. "It shouldn't be reported in The New York Times," Simons said. They also all seemed to be for more transparency and standardization in derivatives markets.

And then there was Paulson, who went from little-known to legendary last year by pocketing a reported $3.7 billion betting against the subprime mortgage market. He seemed to expect a tough audience: His opening statement (all the statements are available here) was a somewhat defensive explanation of what he did for a living. But as soon as he realized that committee members weren't going to rake him over the coals for profiting from the pain of American homeowners, he loosened up.

He waxed ominous about the dangers of leverage (his fund uses very little), saying that maybe what was needed were higher margin requirements on lots of different asset classes. He said Treasury should demand higher interest rates and bigger equity stakes when it injected capital into banks, and should also require that banks that get its money stop paying cash dividends and cap cash compensation for executives (they could pay all they want in common stock).

Paulson did get chided repeatedly for failing to turn on his microphone when he started answering a question, but he was clearly the star of the day. After Tierney's comment, Tennessee Democrat Jim Cooper quipped, "The headline of this hearing is definitely Paulson vs. Paulson."

That was actually too much for John Paulson. "I in no way want to be critical of Secretary Paulson," he said. "He's done a great deal for this country. He's willing to change his positions when the circumstances change."

Update: Sean DeCoursey forgot his password--who has his own blog now--wonders in the comments if the Curious Capitalist has taken a stand on carried interest taxation. Yup, it did again and again back in those innocent summer days of 2007. Carried interest should be taxed as ordinary income.

Swedish hedge fund to invest in Bangladesh

http://www.thefinancialexpress-bd.info/search_index.php?page=detail_news&news_id=50697

Swedish hedge fund to invest in Bangladesh

FE Report

Brummer & Partners, a Swedish hedge fund manager, has chosen Bangladesh as a safer place for investment in the prevailing global financial downturn as it expects the region to ride out the global economic recession.

The largest Swedish hedge-fund manager, which manages about $6 billion money, set up the Frontier Fund in July to invest in Bangladesh stocks and private-equity investments, a New York-based online news service — Bloomberg.com — said Wednesday.

The company plans to grow the fund to about $500 million in the next five years, from $53 million, said the news service quoting Khalid Quadir, chief executive officer (CEO) of the firm’s Dhaka unit in Bangladesh.

“I never believed in decoupling. Asia will be affected by the global turmoil,” Patrik Brummer, founder of the Swedish firm, told the Bloomberg.com in an interview. “But when the dust settles at some stage, Asia will outperform the rest of the world in growing faster.”

Bangladesh may join the ranks of the fastest-growing economies in the region as it benefits from its geographical proximity to India and China. The nation of 150 million people, equivalent to about half of the population of the U.S., offers a “huge untapped cheap labour force,” Quadir said.

The labour cost in the South Asian nation is almost half of India’s and less than a third of China’s.

The firm also plans to start an Asia-focused long-short equity fund in the first half of next year once it finds the right team to manage it in Singapore, said Patrik Brummer as quoted by Bloomberg.com.

Long-short managers buy stocks they expect to raise and hedge those bets with short sales, or the selling of shares expected to drop. Such funds fell 22.8 per cent this year through October, according to Singapore-based data provider Eurekahedge.

“A lot of the hedge funds have a long-only bias, so they have difficulties in down markets,” Mr. Brummer said. “Historically, we were able to make money for clients even in downturns and we will try to do that in the future.”

Brummer & Partners Helios Fund, a portfolio of the firm’s hedge funds, gained 5.7 per cent this year through October. The Futuris Fund, a European long-short equity portfolio, rose 26.2 per cent, the Bloomberg.com reported.

Hedge funds fell by an average 5.4 per cent last month, pushing the year-to-date drop to 15.5 per cent, according to the HFRI Fund Weighted Composite Index compiled by Chicago-based Hedge Fund Research Inc.

Brummer & Partners also made money for investors when the dot-com bubble burst at the start of this decade, the company’s founder Mr. Brummer said.

The Stockholm-based fund manager, which set up Sweden’s first hedge fund in 1996, is hoping to replicate that “first-mover advantage” in Bangladesh as competition for investment deals remains low, he said.

Hedge Fund Titans Defend Industry

Interesting Current Affairs Tidbits from Around the Interweb

Five major hedge fund managers, including John Paulson, George Soros and Philip Falcone (of the wonderfully named Harbinger Capital Partners and famed for his short-selling on HBOS and other UK banks), issued written testimony to lawmakers in Washington today to defend the much-maligned industry.

I realise they make ridiculous sums of money and seems like the most evil trading folk on the planet, but hedge funds are part of the make-up of the modern market and will remain around, although likely in heavily consolidated form, for a long time to come.

The Hedge Fund Disconnect

As I watch and read about the Hedge Fund testimony currently going on, its obvious that the right question has not been asked.

1. Those who give money to hedge funds rarely if ever have a 1 year investment term. In fact, the contracts for investment do everything possible to lock up your money for as long as possible.

vs

Hedge Fund Managers pay themselves on an annual basis.

That is a huge disconnect and there in lies the rub. While it is true that the managers are paid on a performance basis (plus their 2pct of assets) and some even have clawback provisions, that is not enough. If a fund can get big enough, all they have to do is max out in a single year and the managers are set for life. They put hundreds of millions of dollars EACH in their pocket.

The investors on the other hand, can not max out returns in a single year. They are locked in. So there is a huge disconnect. Managers think short term, investors long term.  Managers should be paid on their performance over a much longer period.

If you made the minimum period for managers 36 months, you would see wholesale changes in how investments are made by Hedge Funds.

So, back to the Testimony today. The questions I would ask ?

How long does the average investor stay in your funds ? Why arent you paid based on the same term rather than annually ?

Listening to a Hedge Fund manager?

Yes, I am usually allergic to hedge fund managers (smile) but I just watched and learned something from Bill Ackman, Hedge Fund manager from Pershing Square, chatting with Charlie Rose. He made a few interesting points that are worth considering. Enjoy.

HT: Paul Kedrosky

Google hedge fund?

Google has announced it’s support in the fight against the flu. The premise is that it can use it’s database of user searches for “flu” or “flu symptoms” to predict outbreaks 7-10 days ahead of time, giving public health officials time to react.

However tracking the flu is just one of many valuable applications for Google’s rich databases. In fact Google provides a portal for users to download data on searched keywords through Google Trends. I recommend spending some time at this site. Here are two of many interesting graphs I found:

It’s interesting that Google has released this data, which likely has proprietary value. Rather than forecasting flu outbreaks or enabling my election analysis, Google could forecast consumer trends and trade stocks based on the findings, hoping to profit when the flu hits. Consider Google’s initiative to predict flu outbreaks 7-10 days ahead of time; what if Google kept their data secret and traded drug companies based on the findings. Before you shoot down this investment idea, consider that there are hundreds of similar ideas lurking in the Google data - some are certainly viable as investment theses.

Alternatively, if Google didn’t want to run a hedge fund, they could probably sell their search engine data to those who do. I’m guessing it’s worth a lot of money, even on the scale of their ~$5B in yearly earnings.

So why does Google give up this info for free? It may be because using it for proprietary profit would incite public outcry and contradict Google’s credo of free information. It also may be that Google does plan to use it - they’re just waiting for the right time. They control the terms on which they release the data and could control the most valuable and timely nuggets for themselves.

No matter the case, this is a gray frontier for Google between their fiduciary profit motive and their avowed sense of public good. Sound familiar?

BofA Names Top Banking Business Heads - Mergers, Acquisitions, Venture Capital, Hedge Funds

Bank of America announced the names of the senior business heads for its corporate, commercial and investment banking operations on Thursday in an internal memo, obtained by Reuters. The changes go into effect after the company completes its acquisition of Merrill Lynch, which goes to a vote among shareholders at both companies on Dec. 5.

Greg Fleming, Merrill’s president and chief operating officer, is expected to become the combined companies’ head of global corporate, commercial and investment banking.

Mr. Fleming will report to John Thain, Merrill’s current chief executive who last month accepted the position as the head of the combined companies’ global banking, securities and wealth management operations.

Under Mr. Fleming will be Brian Brille, from Bank of America, who will oversee corporate and investment banking in the Americas.

via BofA Names Top Banking Business Heads - Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

zyakaira notes:

It seems to be ill advised and a big mis-step given the record of failures of post merger integration. If the bank does have any strategy behind this seeming mish-mash attempt to cobble together two different pieces, the same should have been time-released to the market. Such arbitrary actions of appointment will only go on to add to an ugly year that was 2008. Mergers are sensitive to cultures and profit making structures already n place and these one-off actions are least likely to ensure any semblance of sanity on their strategy and operations.

Hedge Fund Managers Testify before Congress

Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros testified before Congress. The House was trying to  get a better idea of how they operate, their use of leverage and their overall take on the situation. There are a lot of controversial issues surrounding these hedge fund managers and calls for more regulation in this industry…

All-in-all, this issue is quite controversial as many feel that hedge funds are somewhat responsible for the situation we are in but many forget that they have been calling this crash for quite some time… at the end of the day, we feel that a lot of it is driven by a fundamental misunderstanding of the hedge fund world (which is by no means perfect but not responsible for the turn of events) and the search for guilty parties… and since these guys have made a lot of money in the markets, they are easy targets.

DealBook has a good write-up of the testimonies of each of the managers: here.

Enjoy!

Mergers, Acquisitions, Venture Capital, Hedge Funds

Shares of Hartford jumped 21 percent in late trading after the Hartford, Conn.-based company announced Friday afternoon that it would to buy Federal Trust Bank of Sanford, Fla., for $10 million and was asking the Office of Thrift Supervision to recognize it as a savings and loan holding company.

via Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

The negative Hedge Fund effect

G-20’s Financial-Market Regulation Proposals May Limit Profit

By Michael McKee and Simon Kennedy

Nov. 17 (Bloomberg) — Leaders of the world’s biggest developed and emerging nations put banks and investors on notice they will need to keep more capital and reveal more about their holdings, signaling the industry may emerge from the current crisis with less potential for profit.

President George W. Bush and his counterparts from the Group of 20 blamed a looming global recession on imprudent investors who “sought higher yields without an adequate appreciation of the risks.” Supervisors who failed to address the dangers building in markets were also at fault, the group said in its statement after meeting Nov. 15 in Washington.

The leaders are seeking to correct those failures with their new demands, particularly higher capital standards and stronger risk management at banks, hedge funds and credit-rating firms.

“What they’re looking to do is to erect a new global financial architecture through improved regulation,” said Peter Hahn, a fellow at London’s Cass Business School and a former managing director at Citigroup Inc. “Inevitably more regulation is going to make financial services less profitable and should rein in excessive risk.”

Writedowns and losses totaling $964.6 billion at financial institutions worldwide have triggered a surge in the cost of credit, cutting off access to capital for consumers and companies.

Chief among the changes sought by the G-20 are ways to increase international surveillance of the financial firms whose operations, and problems, cross national borders.

Hold More Funds

Banks that take on more risky structured credit, such as collateralized debt obligations, and securitize loans would need to increase their capital. That would likely limit the amount they can make selling such products.

“They want to enforce a smaller, more prudent banking system,” said Charles Goodhart, a former policy maker at the Bank of England. “If banks are required to hold more capital then clearly the rate of return on it will go down.”

Hedge Fund redemption request deadline over yesterday

Yesterday, i.e. 15th November, 2008 was the last day for thousands of hedge fund investors to intimate their respective hedge fund managers to redeem their investments in respective hedge funds.

Now, hedge funds typically require either a 3 months or 45 days notice from its investors who want to exit the investment pool. Now, there are hedge funds that allow investors to give even lesser notice before taking their money out. For hedge funds that required three months notice from investors who wanted to exit had a similar deadline on September 30. Yesterday was the deadline for hedge funds that require 45 days notice.

Since the last deadline i.e. 30th September, 2008 we saw the carnage that took place in markets worldwide. Agreed that there is no formal study to link the tremendous fall in equity indices and the pull - out from hedge funds. But considering the size of hedge fund industry, estimated to be around $ 17 trillion, they certainly do carry some clout. It will be interesting to see how things pan out in the following weeks. Larger than expected redemption requests could see another round of selling.

According to George Soros, hedge fund industry is expected to witness a shrinkage in its assets to the tune of 50 - 75%.

I had in one of my earlier posts talked about how some institutional investors have to meet asset allocation targets i.e. they specify a fixed % of their assets which is to be invested in stocks, bonds etc. Now, with the fall in equity prices the aforementioned asset allocation has gone for a toss. To readjust their portfolios they might want to buy more of equities and that is exactly how things seemed to have panned out with equity markets recovering in the first week of November on the back of buying by these institutional investors.

According to sources, some hedge funds are sitting on cash in anticipation of meeting investor redemption requests. But some other hedge funds have not planned as well may be forced sellers, putting more pressure on an beaten down market.

In light of the above one would do well to wait and watch. There is no need to be in a hurry. I feel markets are going to take their own time recover and bounce back.

Will hedge funds stop selling on December 31st?

This morning I listened to Citadel Capital CEO Ahmed Heikal’s presentation to the Private Equity World MENA 2008 organized in Dubai by Terrapin. He suggested hedge funds would look at their year-end redemptions after the November 15th deadline and carry on selling until they could fulfill redemptions.

That makes good sense. Hedge funds have no choice but to sell down all their assets to repay their obligations to subscribers. If as Mr. Heikal suspects redemptions have been higher than expected then so will be the sell off.

But does that mean the selling will stop on December 31st? It could indeed mark a selling climax - the favored time for a stock market crash by Indian astrologers, although have we not already had one in October-November?

A gloomy delegate from Germany said he thought the bailout packages would string the slow meltdown of stock market values over the next couple of years, and the year-end climax would just be a part of that long process.

For the Record - Committee Holds Hearing on Hedge Funds and the Financial Market

Reference here.

The Committee held a hearing titled, “Hedge Funds and the Financial Market” on Thursday, November 13, 2008. The hearing examined systemic risks to the financial markets posed by hedge funds and proposals for regulatory and tax reforms. A preliminary hearing transcript is available for download.

The following witnesses testified:

Professor David Ruder, Northwestern University School of Law, Former Chairman, U.S. Securities and Exchange Commission

Professor Andrew Lo, Director, MIT Laboratory for Financial Engineering, Massachusetts Institute of Technology, Sloan School of Management

Professor Joseph Bankman, Stanford University Law School

Houman Shadab, Senior Research Fellow, Mercatus Center, George Mason University

John Alfred Paulson, President, Paulson & Co., Inc.

George Soros, Chairman, Soros Fund Management, LLC

James Simons, President, Renaissance Technologies, LLC

Philip A. Falcone, Senior Managing Partner, Harbinger Capital Partners

Kenneth C. Griffin, Chief Executive Officer and President, Citadel Investment Group, LLC

Antares on hedge funds: these guys treat rent like lunch money

The actual quote from Mr. Joe Beninati, principal of Antares was “rent is as insignificant to these guys as the lunch bill.” We’ve asked this before: what if there’s no one around to buy lunch? What if the number of hedge funds drops 40%?

Systemic Risk, Hedge Funds, and Financial Regulation

What happened to the global economy and what we can do about it

One of our readers recommended the Congressional testimony by Andrew Lo during last Thursday’s session on hedge funds. Lo is not only a professor at the MIT Sloan School of Management, but the Chief Scientific Officer of an asset management firm that manages, among other things, several hedge funds. He discusses a topic - systemic risk - that has been thrown around loosely by many people, including me, and tries to define it and suggest ways of measuring it. He recommends, among other things, that

Lo also has a talent for explaining seemingly arcane topics in language that should be accessible to the readers of this site. The testimony is over 30 pages long, but it’s a good read. Here are a couple of examples to whet your appetite.

On the incentives within an investment bank:

On the role of regulation in a free-market economy:

November 16, 2008 at 5:00 pm

Islamic hedge funds take another leap forward

At a press conference today fund arrangers Barclays Capital and Shariah Capital refused to give a target for how much the fund intends to raise when it goes public in December. However, the DMCC has now seeded four Islamic hedge funds with a total of $200 million and hopes for billions of dollars in subscriptions.

Shariah Capital’s Eric Meyer, the driving force behind the world’s first Islamic hedge funds, says this is a big day for his industry which fills a market niche for Shariah compliant investment. His company has developed tools for screening stocks to ensure they comply with Islamic principles such as low gearing, and a technique that allows shorting in compliance with Shariah.

The group also has its own in-house Islamic scholar to monitor movements within the portfolios on a daily basis to ensure nothing ‘haram’ creeps into the asset base. At the same time, each of the funds is run by a best-of-breed fund manager with huge experience in stock picking.

For example, John C. Hathaway of Tocqueville Asset Management manages the gold fund. He points to the 40-year low in gold stock prices as a buying opportunity, and says that massive money supply inflation means dollar weakness would resume very shortly.

This is indeed a bizarre time to launch a new hedge fund. But as Mr. Meyer argues these are not traditional hedge funds because they use zero leverage. Only in the facility to go long and short are they hedge funds in the strict sense.

But the timing might actually prove auspicious with stock prices around the world at such lows, and conservative stock-picking by expert fund managers looks a good strategy, particularly when focused on commodities which may recover rather quickly as multi-trillion dollar stimulus packages inflate the world economy.

Mergers, Acquisitions, Venture Capital, Hedge Funds

Yet another Wall Street analyst has joined the crowd forecasting that Goldman Sachs will have no choice next month but to report its first-ever quarterly loss.

Brad Hintz of Bernstein Research sent a research note to clients on Monday predicting that the investment bank-turned-bank holding company, would lose 54 cents a share for the three months ending in November, compared with earlier estimates that had Goldman making $2.12 a share.

Mr. Hintz joins a slew of analysts, including David Trone of Fix-Pitt Kelton, in forecasting a loss at Goldman Sachs. Like the other analysts, Mr. Hintz attributed the expected loss primarily to reduced sales and trading revenues in the fixed-income and stock markets, where conditions are difficult and volatile.

via Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

Hedge Fund Testimony

Five hedge fund managers were summoned by the House Government Reform and Oversight Committee on November 13. The full panel session is over 2 hours long but well worth listening to. The selection criterion was quite silly: only managers earning more than one billion were invited. In other terms, they invited managers who could either predict the bubble (Samuelson, Falcone, Soros) or would make the market more efficient by providing short-term liquidity and exploiting short-term mispricing (Griffin, Simons). Why not invite the 5 largest hedge fund managers (so GS and JP would have been there)? Or the most successful over the past 10 years (Paulson and Falcone would have been out)? My own personal view is that Simons was by far the most concrete and concise. And Griffin, although it’s hard to agree with him. But no “American Dream” bullshit (Falcone), no “job creation” bullshit (Paulson), and especially no armchair philosophy bullshit from the uber-rich windbag called Paul Soros.

Mergers, Acquisitions, Venture Capital, Hedge Funds

The $50 billion takeover of Bell Canada appears to be on track to close by Dec. 11 — easing investor fears that the largest leveraged buyout in history would become another victim of the global financial crisis.

Teachers Private Capital, Madison Dearborn Partners, Providence Equity Partners and Merrill Lynch Global Private Equity teamed up to buy Bell Canada’s parent, BCE, in June of last year, and investors have fretted ever since as they watched other large transactions struck during the buyout boom fall apart as banks and private equity firms backed away from their original deals.

via Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook - New York Times

Hedge Fund Managers Testify before Congress

Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros testified before Congress. The House was trying to  get a better idea of how they operate, their use of leverage and their overall take on the situation. There are a lot of controversial issues surrounding these hedge fund managers and calls for more regulation in this industry…

All-in-all, this issue is quite controversial as many feel that hedge funds are somewhat responsible for the situation we are in but many forget that they have been calling this crash for quite some time… at the end of the day, we feel that a lot of it is driven by a fundamental misunderstanding of the hedge fund world (which is by no means perfect but not responsible for the turn of events) and the search for guilty parties… and since these guys have made a lot of money in the markets, they are easy targets.

DealBook has a good write-up of the testimonies of each of the managers: here.

Enjoy!

HEDGE FUNDS SHRINK WORLDWIDE!..ZUT!

Hedge Fund Assets Shrank 9% as Investors Withdrew $40 Billion

Poor Hedge Fund Managers

M. Jodi and her tri-state buddies are asking for $48 million to retrain financial workers who have lost their jobs. Oh, the irony.

Each individual would get a $12,500 “training account” for 24 months to help pay for job searches and relocating, Connecticut Republican Gov Jodi Rell said in a statement.

OMG! Are they serious? They can’t be. We’re talking about some of the richest people in the country! I could use a training account! I was just perusing the Norwalk Community College brochure last night and was thinking about taking some classes, and hoping my company would pay for it, but maybe if I get a “training account” I could skip community college and get myself a Master’s Degree.

Let us think this through calmly, because my first reaction is to scream and throw things! So, a bunch of investment bankers and hedge fund managers who worked for companies who practiced bad–if not downright criminal–business, and who probably made a ton of money doing it, need job retraining? I guess I understand that if these people are no longer making enormous amounts of income, then their tax contributions go waaaaay down, but my guess is they had accountants to keep them from paying much in taxes in the first place. Also, I’ve lived in both CT and NJ while working in NY. I don’t know what happens in higher tax brackets but I paid my income taxes to NY, where I earned the money. Assuming most of these guys worked in NYC, I’m guessing that the majority of their income taxes go to NY State anyway. What may not go to NY State, are their campaign contributions.

Moving on. Are these guys not MBAs already? Do they not have more money in their savings accounts than I earn in two years? Did they not graduate from top-notch schools, in useless degree programs like Art History and Philosophy, before joining the corporate world and selling their souls for huge salaries and commissions? Can they not apply any of these skills elsewhere in the business world? Do we really need to spend millions of dollars helping them?

The tri-state area is expected to lose 160,000 workers by the end of this year and 82,000 financial sector jobs by the end of next year, Rell said.

Many of the employees are “not highly-paid securities traders, but administrative and computer support personnel,” she said.

Nice try, Jodi, but that makes no sense. If they’re “administrative and computer support personnel” then they can get a job…well…pretty much anywhere. As someone who quite often peruses the Want-Ads, I can tell you, administrative assistants make a lot of money, and every type of company needs one.

Here is the truly outrageous part, though. I was discussing this with the Asian Persuasion last night, and as she got even more worked up than me, she told me she was talking to a former Lehman Brothers worker who bailed years ago, and now works for some other banking institution. He told her all about how they snap up the folks losing their jobs, because they are obviously (to everyone but our governor) a fantastic pool of candidates for the jobs being created in non-floundering banks, by this financial mess we are in.

One last point of contention: What exactly would these people be trained to do? Be nurses, physical therapists, legal secretaries? What kind of jobs are actually in demand? Putting aside this issue of support personnel, because frankly, those are probably the only jobs in any type of abundance, what exactly do you retrain financial masters of the universe to do? Be brain surgeons? Corporate lawyers? Lay asphalt?

The whole thing sounds like a ridiculous idea. If you want to retrain workers why should it be limited to people who, clearly, already have marketable skills? Why wouldn’t you put money into getting people who don’t know how to do anything but stock shelves, or mow lawns some job training?

Will hedge funds stop selling on December 31st?

This morning I listened to Citadel Capital CEO Ahmed Heikal’s presentation to the Private Equity World MENA 2008 organized in Dubai by Terrapin. He suggested hedge funds would look at their year-end redemptions after the November 15th deadline and carry on selling until they could fulfill redemptions.

That makes good sense. Hedge funds have no choice but to sell down all their assets to repay their obligations to subscribers. If as Mr. Heikal suspects redemptions have been higher than expected then so will be the sell off.

But does that mean the selling will stop on December 31st? It could indeed mark a selling climax - the favored time for a stock market crash by Indian astrologers, although have we not already had one in October-November?

A gloomy delegate from Germany said he thought the bailout packages would string the slow meltdown of stock market values over the next couple of years, and the year-end climax would just be a part of that long process.

Press Release:Cairo, Egypt: November 19, 2008

Private Equity Leader Citadel Capital Urges Cautious Optimism for MENA Private EquityFirm’s founder tells PE World MENA conference that despite global economic pressure, there are opportunities to be found across the region

Ahmed Heikal, Chairman and Founder of leading Middle East and North Africa private equity firm Citadel Capital, delivered the opening keynote at Dubai’s PE World MENA conference on Tuesday.

The primary question, Heikal said, is how much growth will slow in 2009 compared to this year. Although they are forecasting that the MENA region will grow two to three times as fast as the global average next year, both the World Bank and the International Monetary Fund have recently downgraded their outlooks for global growth.

Against that background, Heikal urged regional private equity players to exercise caution in the coming 18 months. The still unfolding global financial crisis and economic slowdown have left credit markets frozen and dampened public market valuations. Difficult fundraising conditions will further constrain private equity activity.

“In the next two to three years the global economic head winds will slow the region’s private equity deal pace. There will be fewer deals, and they will be of a smaller size,” Heikal said. “Citadel Capital’s platform companies, which span 14 industries — from cement to retail, agriculture and food products to the complete oil and gas value chain — are well positioned to weather the coming storm. Our emphasis in the coming months will be to help them meet their business goals in this challenging climate.”

Heikal laid out a cautiously optimistic case for regional private equity, pointing to rising intra-regional investment, rising private-sector participation in GDP and investment and diversification away from oil.

“There was 18 billion dollars in intra-regional investment in 2006, more than 70% of it from the Gulf into non-oil countries such as Egypt,” Heikal said. “From here, we all know the story: Billions of dollars in FDI have flowed into the region, and governments and the private sector alike have worked hard to improve competitiveness.”

MENA equities markets have boomed, adding 550 billion dollars in new value — even after factoring in the market slump. At 315 million inhabitants, the Middle East and North Africa (MENA) have the third-largest population on the planet. With over 1.4 trillion dollars in aggregate GDP, the region is the world’s tenth-largest economic bloc, and continues to grow.

Citadel Capital, the leading private equity firm in the Middle East and North Africa, also participated in the PE World MENA conference’s private equity leaders’ roundtable: How are regional private equity funds influencing global investing?

—Ends— Citadel Capital is a Cairo-based private equity firm focused on acquisitions, turnarounds and greenfields in the Middle East and North Africa. Established in 2004, Citadel now controls investments worth more than US$ 8.3 billion in industries including mining, oil and gas, cement, transportation and food. For more information contact:Ghada HammoudaHead of Corporate Communicationsghammouda@citadelcapital.com Or May Ezz El DinMobile: 002-010-0707-121

Comment by peterjcooper — November 19, 2008 @ 3:28 pm

Islamic hedge funds take another leap forward

At a press conference today fund arrangers Barclays Capital and Shariah Capital refused to give a target for how much the fund intends to raise when it goes public in December. However, the DMCC has now seeded four Islamic hedge funds with a total of $200 million and hopes for billions of dollars in subscriptions.

Shariah Capital’s Eric Meyer, the driving force behind the world’s first Islamic hedge funds, says this is a big day for his industry which fills a market niche for Shariah compliant investment. His company has developed tools for screening stocks to ensure they comply with Islamic principles such as low gearing, and a technique that allows shorting in compliance with Shariah.

The group also has its own in-house Islamic scholar to monitor movements within the portfolios on a daily basis to ensure nothing ‘haram’ creeps into the asset base. At the same time, each of the funds is run by a best-of-breed fund manager with huge experience in stock picking.

For example, John C. Hathaway of Tocqueville Asset Management manages the gold fund. He points to the 40-year low in gold stock prices as a buying opportunity, and says that massive money supply inflation means dollar weakness would resume very shortly.

This is indeed a bizarre time to launch a new hedge fund. But as Mr. Meyer argues these are not traditional hedge funds because they use zero leverage. Only in the facility to go long and short are they hedge funds in the strict sense.

But the timing might actually prove auspicious with stock prices around the world at such lows, and conservative stock-picking by expert fund managers looks a good strategy, particularly when focused on commodities which may recover rather quickly as multi-trillion dollar stimulus packages inflate the world economy.

No comments yet.

Meltdown takes weed-whacker to hedge funds

More contraction for hedge funds appears to be more or less permanent.

The Shrinking Hedge Fund Industry: From $2 Trillion to $1 Trillion By 2009?

Between 1990 and last year the industry’s assets under management grew almost 50-fold, to nearly $2 trillion. Now industry executives predict that assets could fall by 30-40%, as clients stampede for the exit. The number of funds, which climbed to over 7,000 as a generation of financiers headed for the gold-paved streets of Mayfair in London and Greenwich, Connecticut, could fall by half. Nov 20 Hedge Fund Research (via FinWeek): Hedge fund assets worldwide shrank by 9 percent to $1.56 trillion in October, the lowest level in two years, after investors withdrew cash and stock markets declined.

# Investors pulled $40 billion from hedge funds in October, according to Chicago-based Hedge Fund Research Inc., while market losses cut industry values by $115 billion. Investors withdrew $22 billion from funds of funds, which pool money to invest in hedge funds.

# About 350 hedge funds shut down in the first half of 2008, up 16 percent from 303 a year earlier, according to data compiled by Chicago-based Hedge Fund Research Inc.

# Hedge funds fell by an average 6 percent last month, pushing the year-to-date decline through October to 16 percent (S&P decreased 17 percent last month, and 34 percent this year through October.)

# Levkovich (Citigroup): “‘It is possible hedge fund assets will drop 40%-50% from their peak by mid-09’ given 20%-like losses in existing funds this year, and another 20% of redemptions.

# On the positive side, the industry’s estimated 40% cash positions should accommodate a smooth deleveraging

# Also wouldn’t rule out a late-year hedge fund driven rally, as most likely will try to participate to limit annual losses beyond which, a humbler, smaller industry should evolve, with longer investment time horizons.

08.11.24 BW - Another Blowup for Hedge Funds

081124-bw-another-blowup-for-hedge-funds

A Mirror Reflects: Larry Summers advised Hedge Fund which He Now Seeks to Regulate

Read here.

Very interesting! No comment.

In 2006, Lawrence Summers resigned as president of Harvard University and took a position as a part-time managing director with D.E. Shaw Group, a New York hedge fund with a reputation as one of the most secretive trading outfits in the world.

D.E. Shaw is known for using sophisticated computer-based quantitative strategies to make money on fleeting movements in the stock and bond markets. The fund has been a top performer, returning 15% to 20% a year over the long term, and in two decades has grown into a global powerhouse. But like many funds, it has taken hits in the credit crisis.

Seeking introductions to specific New York hedge fund Venture Partners

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Hedge funds lose $156 billion in October

Hedge funds lose $156 billion in October

By Christine Williamson

Total hedge fund industry assets dropped by a net $156 billion in October — $115 billion from performance-related losses and $41 billion from net redemptions, according to data from Hedge Fund Research.

Assets under management in hedge funds dropped to $1.6 trillion as of Oct. 31, a decline of 9% for the month, and 16% less than year-end 2007. HFR analysts noted in a report that the Oct. 31 asset figure is the lowest since Dec. 31, 2006.

The HFRI Fund Weighted Composite index returned -6% in October, -12% since Sept. 1 and -16% year-to-date Oct. 31, according to HFR data.

Hedge funds of funds were hit hardest by redemptions in October, with investors withdrawing a net $22 billion. HFR analysts attributed the outflows to investor dissatisfaction with underperformance: The HFRI Fund of Funds index year-to-date Oct. 31 returned -18.5%, 250 basis points lower than HFR’s hedge fund index for the same period

JOBFINDING: Somerset County NJ hedge fund client is looking to hire

My Somerset County NJ hedge fund client is looking to hire a FULL TIME EMPLOYEE. There is as yet no spec but he is looking for someone with CURRENT/VERY RECENT FOREIGN EXCHANGE applications either as an Applications Development Manager or as a Project Manager. MUST COME FROM A .NET ENVIRONMENT. An appropriate comp package will be offered to the right candidate.

Sorry but they will not consider candidates without strong F/X and .NET background.

Jack M Schwartz

# # # # #

For the Record: November 25, 2008 - Ty Klotz, Monette Klotz - Michigan-Based Aurifex Commodities Research Co. Ordered to Pay a Total of $150,000 in Restitution and Civil Monetary Penalties to Resolve CFTC Charges of “Private Hedge Fund” Fraud - Defendants Charged with Fraud and Operating a Ponzi Scheme

Release here.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that it obtained a judgment against Aurifex Commodities Research Company of Mason, Michigan, requiring the company to pay $30,000 in restitution and a $120,000 civil monetary penalty to resolve CFTC charges of hedge fund fraud (see CFTC Press Release 5169-06, March 17, 2006).

The consent order of permanent injunction, entered on November 24, 2008, by the Honorable Judge Robert Holmes Bell of the U.S. District Court for the Western District of Michigan, ends all litigation against the named defendants in the CFTC action CFTC v. Aurifex Commodities Research Co., et al., NO. 06-CV-0166 (W.D. Mich.).

Defendants Charged with Fraud and Operating a Ponzi Scheme

On March 7, 2006, the CFTC charged Ty and Monette Klotz and their two companies, Aurifex Commodities Research Company and Aurifex Research L.L.C., with fraud in operating a Ponzi-like scheme while operating and soliciting participants for what they called a “private hedge fund.” On February 1, 2008, Judge Bell ordered Ty and Monette Klotz to pay more than $3.1 million in sanctions for their fraudulent conduct, which injured approximately 352 individuals who invested at least $2.2 million (see CFTC News Release 5451-08, February 8, 2008).

Shortly thereafter, on February 15, 2008, Judge Bell entered a default judgment against Aurifex Research L.L.C., one of the companies utilized by the Klotzes to perpetuate their fraudulent investment scheme. In resolving the CFTC’s claims against this company, the court held that the company: misappropriated investor funds; made material misrepresentations to the hedge fund participants; and was responsible for Ty Klotz’s issuance of fraudulent statements to investors reporting false profits. Aurifex Research L.L.C. was ordered to pay $1,826,708.16 in restitution, the amount owed to the 353 defrauded investors, and an additional $960,000 in penalties for its role in the fraud.

The following CFTC staff members are responsible for this case: Susan Padove, Merle K. Hampton, Thomas J. Koprowski, Venice Bickham, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

What is a Hedge Fund?

A hedge fund basically looks for mispricing of securities, arbitrage opportunities or quick trading profits from either going long or short of a stock or commodity.  Unlike conventional managed funds they are not automatically long and hence their performance does not match an index.  They are known as absolute return funds which means they are supposed to achieve positive returns.  In a world of fairly perfect information the model of the hedge fund can only work for a few, small nimble players, otherwise you have too many funds chasing the same opportunities.

The big boom in Hedge funds came in the mid 2000’s.  Long only managed funds performed very badly in the Tech wreck from 2000 to 2003 losing around 45% of their value at their worst.  Hedge funds in contrast lost only about 2%.  Investors were looking for a product that appeared to have little downside.  The sales pitch was that the performance of Hedge funds exhibited a low correlation with the performance of long only funds and that they aimed to have positive returns only.  Supposedly, diversifying into Hedge funds meant a lowering of risk to the overall portfolio.  Market risk was reduced but default risk increased.  In order to combat the risk of default of any one fund, Fund of Funds were offered.  A Fund of Funds has money invested in a number of Hedge funds to spread the risk.  No one wanted a repeat of LTCM! The sales pitch was successful and money poured into Hedge funds.  Funds grew from $500 million in 2000 to $2 trillion in late 2007.

Will Hedge Funds Survive?

Hedge Funds became very popular in the naughties, growing to about $2trillion in late 2007.  Funds were awash with cash and too many funds were chasing the same anomalies.  Anything that appeared to be a good idea was quickly swamped and the price pushed up or pushed down beyond anything that could reasonably be justified fundamentally.  For example, the rush into oil caused petrol prices to increase dramatically, curtailing demand for gas guzzling cars which has had a major detrimental effect on the car industry in America. This change in demand may have occurred naturally but it would have taken more time and given the car industry time to adjust.  Similarly, the vast, rapid short selling of Fannie and Freddie and other banks has destabilised the financial system in the USA and elsewhere.  Again these banks and institutions clearly had problems but the speed of the punishment is the issue, giving no one time to fix anything before they were worthless .  Governments will not sit idly by and watch the destruction of their economies and they have already instigated a number of changes that will impact adversely on Hedge funds.  Short selling has been banned for periods of time and this is a major tool in which a Hedge fund hopes to make money, particularly in a declining market. Credit default swaps ( a big factor in allowing the sub prime crisis to occur) will now have to go through a centralised clearing house.  There is no doubt that greater monitoring and transparency will make it harder to make money. 

What future does this leave for the Hedge Fund?  These funds have not delivered their promised mandate of positive returns.  Some have performed very badly, particularly those invested in convertibles as spreads blew out and stocks became illiquid. There have been significant redemptions of Hedge funds, putting further downward pressure on markets as the Hedge funds are forced to sell anything they can.  Governments will continue to introduce restrictive measures aimed at curtailing any potential damage Hedge funds can inflict on the markets and the economy in future.  Investors are increasingly shying away from risk further reducing the appeal of Hedge funds.  In conclusion, although Hedge Funds may not be actually outlawed, going forward the outlook for their viability is very poor and only a few will survive.

Why prices of grains and oil have tumbled - Its the hedge-funds SILLY!

The idiots have been run into hiding for now. From McSweeney’s Internet Tendency Atlas Shrugged Updated for the Current Financial Crisis:

“Why make a product when you can make dollars? Right this second, I’m earning millions in interest off money I don’t even have.”

“There’s a whole world out there of byzantine financial products just waiting to be invented, Dagny. Let the leeches run my factories into the ground! I hope they do! I’ve taken out more insurance on a single Rearden Steel bond than the entire company is even worth! When my old company finally tanks, I’ll make a cool $877 million.”

Black Friday Addendum

Around the time this week’s Black Friday story hit the presses, someone pointed out that Nov. 28 is also “Buy Nothing Day,” a day of protest against consumerism, originally founded by Vancouver artist Ted Dave and later promoted by Adbusters magazine.

Adbusters suggests:

As the planet starts heating up, maybe it’s time to finally go cold turkey. Take the personal challenge by locking up your debit card, your credit cards, your money clip, and see what it feels like to opt out of consumer culture completely, even if only for 24 hours. Like the millions of people who have done this fast before you, you may be rewarded with a life-changing epiphany.

So, before you head out to buy local and indie, you might want to consider staying home today to eat leftovers. (And no shopping online either.)

There’s also a parallel Buy Nothing Christmas movement, founded by Mennonites.

They supply this song, “Buy Nothing At All” by Joel Kroeker

Addendum 2: Relatively good news for those like Bayshore Mall manager Sue Swanson, who own stock in General Growth Properties, the company that owns the mall:

The Chicago Tribune reported Tuesday:

General Growth Properties Inc.’s battered shares have nearly doubled, after hedge fund manager William Ackman’s Pershing Square Capital Management disclosed that it has acquired a 7.5 percent stake in the financially struggling Chicago-based mall operator.

I’m not sure that a partial purchase by a hedge fund solves the company’s problems, and there’s no word on negotiations regarding the $900 mill note due today on GGP’s Vegas properties. We’ll have to wait and see what happens next.

Addendum 3: There’s an early present available for those like Councilman Larry Glass, who’ve been eagerly awaiting the EIR for the Marina Project. Yes, as Heraldo points out, it’s here.

You’ll have to do some downloading if you want to read the whole thing, but after the jump we’ll give you the portion of the EIR that relates most directly to topics addressed in the Black Friday story and the potential impact on local retailers.

Spoiler alert: We’re guessing the EIR will be much debated in the weeks to come, but the conclusion re: contribution to urban decay is as follows:

The potential for the Marina Center project, in conjunction with other development, to result in urban decay in the greater Eureka area would be less-than-significant, and the project would not make a cumulatively considerable contribution to cumulative urban decay impacts.

Section P: Urban Decay

Project Impact P-1: Would the Marina Center project result in urban decay in the Retail Trade area?

Generally, the economic and social effects of a proposed project are not considered by CEQA. (CEQA Guidelines Section 15131 (a)). Where economic or social effects of a proposed project will directly or indirectly lead to an adverse physical change in the environment, then CEQA requires disclosure of the resulting physical impacts (CEQA Guidelines Section 15064(e)). Economic or social changes need not be analyzed in any detail greater than necessary to ascertain what physical changes may occur as a result of economic or social changes (CEQA Guidelines Section 15131 (a)). Here, the potential impact of vacancy leading to urban decay would be a physical change that would need to be addressed.

Urban decay is physical deterioration that is so prevalent and substantial it impairs the proper utilization of affected real estate or the health, safety, and welfare of the surrounding community (CBRE, 2006). Urban decay can be caused when the competitive effects of a commercial development project are so severe that other stores can be expected to close as a result of the proposed development and that the buildings containing those stores anticipated to close will not be re-tenanted or reused within a reasonable time but will remain vacant and lead to the decline of other real estate.

The CBRE Consulting analysis determined that the site is currently in a state of urban decay and negatively impacts the surrounding neighborhood, including the Historic Old Town district that borders the project site at C Street. The proposed project would be beneficial to the project site and prevent it from going into further decay. Cleaning up and redeveloping the land would be an improvement over its current state.

In Humboldt County in November 2007, there was a total of 5.1 million square feet of retail inventory with only 121,590 square feet vacant (CBRE, 2007), which has increased by roughly 100,000 square feet with the recent or soon to be 2008 closings of Hancock Fabrics, Gap Stores, Old Navy, and Mervyn’s. McMahan’s Furniture was not included in the vacancy figures as the opening of a newly constructed furniture retailer at the corner of Myrtle Avenue and Fifth Street occurred in early 2008. However, despite the increase in vacancy, the overall vacancy rate in Humboldt County remains very low at about 4 percent, which indicates a countywide tight retail market with very low vacancy rates. Brokers working in Eureka have been able to re-tenant smaller vacancies as they occur.

The Bayshore Mall, the largest shopping mall in Humboldt County, houses the majority of recently vacated retail space due to the past and pending closings of apparel retailers Old Navy, The Gap, and the primarily apparel oriented Mervyn’s department store. However, due to the low vacancy rate and lack of large, adequately parked retail spaces in the county, it is not expected that these store closings will lead to long term vacancies as evidenced by past vacancies that have been quickly re-tenanted at this particular property. Therefore, sufficient retailer demand is anticipated to exist to absorb vacated space in the event that existing Humboldt County retailers close due to any negative economic impacts of the Marina Center project, and/or other identified planned projects (CBRE, 2006).

One of the primary conditions leading to urban decay, existing high vacancy rates and long retenanting times, is not present in Humboldt County. While the Marina Center project could result in some existing store closures, the low vacancy rates of existing shopping centers indicates stable performance and the ability to re-tenant smaller vacancies as they occur.

In the event that Anchor 1 itself is vacated, it is likely that it would be re-tenanted because large format retail space in Humboldt County has been quickly re-tenanted in the past and certain large format stores have expressed interest in entering the Humboldt County market. In addition, the space for Anchor 1 has been designed so that it could be broken into three smaller spaces of 20,000 to 40,000 square feet and more easily re-tenanted. As a result, potential project vacancies would be unlikely to cause physical deterioration in the area.

Because the proposed project and its associated infrastructure improvements would not create or maintain urban decay and would instead eliminate the conditions for urban decay, the project would result in a less-than-significant impact.

Mitigation None recommended.

Finding of Significance The potential for the Marina Center project to result in urban decay in the greater Eureka area would be less-than-significant.

Cumulative Impacts Impact P-2: Would the Marina Center project, in conjunction with other development, result in urban decay in the area?

For the purposes of evaluating the cumulative impacts of the project on urban decay, the EIR considers not just the projects in the Eureka area, but also the addition of a business park in Redway, a newly constructed retail shopping center in Fortuna with a general merchandise/drug store (Walgreen’s), restaurants, financial services, and small scale service retail, and a planned large-scale regional shopping center containing a general merchandise store (Wal-Mart) and home improvement store (Lowes) in Fortuna which would directly compete with the project’s Home Depot anchor store. Humboldt County has a very low vacancy rate for commercial space. While a competing general merchandise and home improvement store in Fortuna would divert sales from Eureka, there does not appear to be any cumulative impact from the project and other proposed or approved projects that would result in physical deterioration considered prevalent and substantial in the community. In keeping with the low retail vacancies in Humboldt County, two recently closed building material and garden supply spaces in Fortuna were re-tenanted in a reasonable amount of time (CBRE, 2006). When considered cumulatively with other potential future development in Eureka and the vicinity, the proposed project would not result in significant cumulative impacts.

Mitigation None recommended.

Finding of Significance The potential for the Marina Center project, in conjunction with other development, to result in urban decay in the greater Eureka area would be less-than-significant, and the project would not make a cumulatively considerable contribution to cumulative urban decay impacts.

Thanks Bob, blind consumerism is what has brought the US to its knees.

Watch for more bankrupt malls and retail, and anyone with a considerable sum on a credit card balance can expect a steep % increase.

Should be over soon… ahem.

Far far far far East

id="blog-title">LSO on Tour

I think someone has moved Japan since I was last here.

Seriously, its taken us such a long time to get here, its the only explanation that I can come up with. I left my house at midday on Monday and I finally got into bed at Midnight in Sapporo on Wednesday. Now even taking into account that Japan is 9 hours ahead of London that is one hell of a long time. I think its about 28 hours of travelling. If that isn’t right, please don’t write and tell me, I’m jet lagged and really couldn’t care less. For those of you who travel business class and sit on 12 hour flights in business class, well if you carry on walking for another 50 metres, you’ll reach economy class where all of us (and hedge fund managers) sit. Its a bit cramped to be honest, and even someone as short as me finds it a bit of a squeeze for that long. However, on this occasion, after the 12 hour flight, we arrived at Osaka airport. The efficiency of the staff there meant that, unlike at Heathrow, we were through immigration and baggage in about 20 minutes. This would normally be great except we had to wait for our next plane to Sapporo for 6 hours.

I have never been so bored in my life. It was Chi’s birthday as well, but no matter how many times we wished him many happy returns, no matter how many free drinks he was given, no matter how many cards he received, we couldn’t get away from the fact that today, his birthday was a crap day. To make matters worse, the orchestra had been split into 2 groups, the other group left after us and arrived before us. There was a secret ballot, so I’m told, so secret in fact that nobody knows who did it…maybe I should start being nice to Sue again.

So when we finally arrived at Sapporo airport we had an hour and a half bus journey to get to the hotel. I could resist sleep no longer and finally drifted off. When we pulled up outside the hotel I could see the other half of the orchestra in the bar opposite eating and drinking and trying really hard not to look smug. They were not successful at all. I pied straight in for some food and beer until I lost the ability to talk which made some people very happy, I collapsed into bed and slept very heavily indeed.

We had a free day, very generous, on Wednesday where I went to a volcano. It hasn’t erupted for a while and indeed didn’t when we went, but it was free to get in so I didn’t complain. It was very nice to walk around after being stuck on public transport for a few days. So once again, I slept well last night, unusually for me in Japan.

Today, we started the musical part of our tour. o be honest, at the rehearsal, the band and Valery sounded and looked a little sleepy. He asked us to save our energy for the concert, which we did. The people I work with never cease to amaze me, we all got changed, Gergiev walked on stage and the orchestra played like its life depended on it. I was only in Romeo in the second half, but the audience demanded an encore. We played the march from 3 oranges, an excellent encore, loud and short!

Tomorrow the tour starts in earnest, we leave early and go hell for leather for the next week,with a concert every day. We have to fly from the North island to the south island. lets hope they haven’t moved that too, I’m sick of travelling and we have only just started…

As a new feature of the blog on this trip I will be uploading photos of fabulous English translations from menus and signs. This was inspired by a department store today which wanted to get us all into the Christmas spirit with a sign outside that said

“Lets punch Xmos”

I have no idea either. This shall be called Lost in Translation. Here is the first.

See you soon

Japanese surrealist menu

This injustice shall not be tolerated!

Pax Arcana

First my effort to supply both major political parties with a viable and wealth-friendly candidate was rebuffed (my son, Thatcher, is adequately suited to manage a hedge fund but not steer the ship of state? Rebuke!). Now, a group of vexatious do-gooders in the federal government have the temerity to question the validity of my farm subsidies!!

The nerve of these people!

An individual or farm entity was ineligible if average adjusted gross income exceeded $2.5 million over three years — unless 75 percent or more of that income came from farming, ranching and forestry.

According to the report, the 2,702 recipients exceeded the $2.5 million and got less than 75 percent of their income from these activities. The payments to them totaled more than $49 million.

“USDA has relied principally on individuals’ one-time self-certifications that they do not exceed income eligibility caps, and their commitment that they will notify USDA of any changes that cause them to exceed these caps,” the GAO said.

And I am not the only one suffering from such degradatious scrutiny. Many of my golfing partners, and half my wife’s charity board of directors, are suffering similar insults!

To wit:

– A founder and former executive of an insurance company received more than $300,000 in farm program payments in 2003, 2004, 2005, and 2006 that should have been subject to the income limits.

– An individual with ownership interest in a professional sports franchise received more than $200,000 for those same years that should have been barred by the income limits.

– A person residing in a country outside of the United States received more than $80,000 for 2003, 2005, and 2006 on the basis of the individual’s ownership interest in two farming entities.

– A top executive of a major financial services firm received more than $60,000 in farm program payments in 2003.

– A former executive of a technology company received about $20,000 in years 2003, 2004, 2005, and 2006 that were covered by the income limits. This individual also received more than $900,000 in farm program payments that were not subject to those limitations.

This outrage cannot stand. I assure you that the nosy pecksniffs who concocted this slanderous investigation will get what is coming to them, post-haste. My team of lawyers has been informed of my desire to seek a swift retribution, and I shall presently be filing all the necessary paperwork to ensure that happens.

Just as soon as I am finished tilling these fields and plowing the chicken coops, naturally.

Millionaires get farm payments; nobody checking [Boston.com]

Immediate 6 Step Program to Turn Around Economy Proposed

On November 18, 2008 I gave a presentation to the local chapter of the American Association of Invididual Investors (AAII) at the Multnomah Athletic Club here in Portland, Oregon regarding the overall state of the financial markets.  The talk focused upon how we arrived where we are and what to look for going forward.  Also included were what I believe are the six most important regulatory reforms, all of which are able to be implemented immediately, and that will collectively turn around the economy.

These could all be passed and implemented in one week, the only missing ingredient being desire.  It is somewhat astonishing how the current solution is focused on providing trillions of taxpayer dollars to various failed institutions when, if the objective is increased market conficence, these measures can be implemented with little or no cost.  They are:

1)  Requirement that hedge and private equity firms register with the SEC and disclose their top 25 holdings, top 25 sources of funding  and key accounting policies on a quarterly basis.

2)  Expanded oversight of bond ratings agencies and requirement that Warren Buffett and other investors who do significant business with these rartings agencies divest themselves of equity positions in the same rating agencies.  Buffett is currently Moody’s largest shareholder.

3)  Provide the SEC with oversight of public pensions, now the nations largest investment pools.  They currently have no jurisdiction or oversight over such funds, which is simply astonishing given their growth and related impact on the market.

4)  Expanded oversight of proxy firms and development of new competitors in this crucial area.  Currently one firm, Institutional Shareholder Services (ISS), has a monopoly over the market.  ISS is owned by Risk Metrics, a company that recently went public, whose primary owners are unregulated hedge funds.  It is unthinkable that unregulated hedge funds would hold the levers over the most important entity with respect to corporate governance, the entity that votes key corporate resolutions for many leading fund managers regarding mergers, executive compensation, etc.

5) Stock option accounting must be standardized and based upon values captured when such options are exercised rather than using arcane math formulas and related assumptions.  This is simple but has been bitterly fought against by the technology industry, most notably John Chambers of Cisco Systems.  Microsoft has provided the leadership when it terminated its stock option program in 2003, it now provided restricted stock that vests 20 percent each year and whose cost is fully accounted for.

6)  Reform the tax code to prohibit net operating losses (nol’s) from being aggregated and used to purchase profitable companies and avoid taxation.  Such losses should be amortized over 15 years, as is the case when profitable companeis purchase other companies with operating losses.  Such amortization was created when a loophole was closed in the 1980’s due to a public outcry, the closure was led by then Republican Senate Finance Chairman Bob Packwood of Oregon.  Packwood and others never conceived that the loophole would be worked in reverse to escape the reform, that is someone aggregating losses and rolling in profitable companies.  Closing this loophole will dlow down mergers that make no economic sense and preserve millions of jobs that would otherwise be lost for no sound economic reason other than a few managers leveraging growth in their stock options for short term gain.

Summary:  These are all administrative rules that can be changed next week.  Again, the only missing ingredient is desire.  Please pass this along to any policy makers who might be interested. A VIDEO with excerpts from the talk to the AAII can also be accessed on youtube by searching for “Parish Speaking.”

Black Friday

My sister is going to rescue me and take me to the YMCA for two hours of exercise followed by sauna.  Then I might hit Circuit City for a new LCD TV for my basement. Meanwhile, here is the latest installment of the “Who could have predicted?” series.  Today’s entry is from Paul Krugman in Lest We Forget.  Actually, it is The Shrill One who is saying No $#@% Sherlock to his buddies:

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

Well, there were *some* people who saw it coming but they were laughed at.  Peter Schiff is the classic example.  Of course, he comes from the Austrian School of economics, which is as austere and uncompromising as it sounds.  For Schiff, it’s all laissez faire and all natural law all the time. It must be a legacy of the Hun invasion.  Who knows?  But this little clip that has gone viral is a thing of beauty:

Who’s laffing now?

Still, Krugman is indulging in a bit of wishful thinking of his own:

Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. Will the Fed’s ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere? Will the Obama administration’s fiscal stimulus turn output and employment around? (I’m still not sure, by the way, whether the economic team is thinking big enough.)

No, Paul, it will likely not be big enough.  *Someone* spent $600,000,000 to install Obama over our objections (BTW, Gov. Jon Corzine was a former CEO at Goldman-Sachs.  Fancy that!).  Obama has been running from The New Deal like it was the ebola virus.  But he sure has a lot of nice things to say about Reagan.  Ah, yes, the Reagan Era.  Those were the days.  I was a student, Pell grants dried up, tuition skyrocketed, there were no jobs to be had…  Those were the days when a person who was the first in her family to attend college could build her character by mopping floors in a fast food joint at 2am, stay up until 4am studying and fall asleep in psych 101 at 8am the next morning.  It made me the old, bitter, uneducated (with a degree in a hard science) working class (professional researcher) sino-peruvian lesbian I am today!

Grrrr, I need a good aerobics class.

Meltdown far from over, new mortgage crisis looms

from the Associated Press:

Black Friday’s retail shoppers hunting for holiday bargains won’t be enough to stave off what’s likely to become the next economic crisis. Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

“It’s a toxic drug and nobody knows how bad it’s going to be,” said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens ‘n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money.

Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

“Credit markets have seized up,” corporate securities lawyer Michael Gambro said. “People are not willing to take risks. They’re not buying anything.”

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

“The system has never been tested for a deep recession,” said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

“He’s created havoc in the marketplace by changing the rules,” Rosen said. “It was the stupidest statement on Earth.”

The Securities and Exchange Commission is considering another option that might ease the crisis, one that would change accounting rules so banks don’t have to declare huge losses whenever the market declines.

But the only surefire remedy is for the economy to stabilize, for businesses to start expanding and for investors to trust the market again. Until then, Tross said, “There’s going to be a lot of pain going forward.”

‘Recovery’ Is in; ‘Stimulus’ Is So Seven Months Ago

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Democrats are bailing out on the word “stimulus.”

In a notable shift, Congressional leaders and officials of the incoming Obama administration are actively trying to retire that term and use the more marketable “economic recovery program” as the descriptor for the multibillion-dollar economic initiative to be considered early next year.

The change in emphasis reflects a realization that words matter. Architects of the $700 billion Treasury Department program concluded too late that something unabashedly promoted as a Wall Street “bailout” conjured images of well-heeled suspects sprung from jail or water feverishly tossed from a rapidly filling boat. By the time officials tried to rebrand it as a Wall Street “rescue,” the bailout’s reputation was sunk. Full  : http://tinyurl.com/6ztoth

Falling Sales Widen loss @ Borders

The Borders Group said Tuesday that falling sales widened the company’s loss in the third quarter and that the company was no longer considering selling its core business. Full  : http://tinyurl.com/6bxvjo

TiVo, the maker of digital video recorders, posted a profit in the third quarter, helped by a payment it received in a patent suit even as revenue declined, the company said Tuesday.

TiVo, based in Alviso, Calif., earned $100.6 million, or 98 cents a share, reversing a loss of $8.2 million, or 8 cents a share, a year earlier. Full : http://tinyurl.com/5kgy7a

Man Vs. Machine on Wall Street

n the midst of the biggest financial crisis in a generation, a tiny biotech company, called Gene Network Sciences, of Cambridge, Mass., thinks it can make Wall Street smarter. How? Get rid of the humans.

Their idea: Take the supercomputers Gene Network Sciences already uses to help Pfizer and Biogen Idec invent drugs and use them to help hedge funds trade stocks, bonds,and other assets. “Computers and data are smarter than people,” says Colin Hill, the theoretical physicist who founded GNS and will be chairman of its new trading spinoff, Fina Technologies.

“We believe the economy and the financial system are governed by complex networks, just like the genes that control cells and the neurons that control brains,” says Hill. “And we believe that, using artificial intelligence, we can start to extract that circuitry from raw data.” Full  : http://tinyurl.com/55juq6

Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash.

Citigroup Inc., Genworth Financial Inc. and New York Times Co. are leading 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends, according to data compiled by Standard & Poor’s. The reductions in November exceeded the 81 dividend cuts in October and 60 in September. Full time : http://tinyurl.com/6fpo6f

Economic quandries or quackeries

There is much discussion about our economy and the future direction for it and for the green movement.  It occurs to me that there are some overlooked bumps in the road that no one is discussing however.   Logical thought can ponder some near term and long term consequences of planned and proposed action from the new administration.  Then there are those ugly unintended consequences that no one has imagined yet.   Those are always the real surprises and sometimes the nastiest ones to deal with.

The defiict will probably be even higer than already projected for the next year at least.  We have already programmed spending for the various bailouts and stimulus packages proposed that will  push the deficit to historic and dangerous levels for next year.   It is dangerous because we are borrowing money and the day might come when our lenders (China, the Arab states) either don’t have the money to loan or else they decide not to loan for political reasons.   When the Treasury can’t find buyers for  US Treasury bills and notes we are in very deep trouble.   There is a limit to how much we can borrow and how much our creditors will lend us.  I don’t pretend to know that number or limit but there is one as sure as the sky is blue.   I fear we might be perilously close to testing that limit sooner rather than later.  There is going to be an additional add on to the deficit due to reduced tax revenues.   The losses in the stock market have been huge this year.   Normally December is a selling month as the big investors and institutions take intentional losses on their bad investments to offset their capital gains on their winners during the year.  This year I don’t think the winners will be that big and the capital gains will be dramatically reduced from what you would expect in a normal year.   I am sure some egg head economist could estimate that number.  But the hedge funds are selling hundreds of billions of dollars worth of stocks and so are the mutual funds to meet their cash demands for customer redemptions and to cover margin calls.  That doesn’t even count the millions of ordinary folks who have big losses and have sold out taking those losses in exchange for a cash position.  Come next spring the Federal tax collector will get much less revenue from capital gains taxes than would ordinarily be the case.  Those revenues will fall off the chart is my prediction.   We are talking billions.    In addition to that you have the threat and certainity of increased taxes whether they come right away or are delayed a year or two.    People don’t like paying taxes, even those smarmy Hollywood types, and they will be doing everything they can to reduce their tax burden by delaying income or diverting that income to another entity.   That will be another drag on tax revenues that will show up the following year–only 16 months from now.

We are going to creat zillions of new jobs by promoting a green economy, whatever the hell that is.   Just remember that those new jobs come at a cost of lost jobs also.  For a new job working on a wind farm there will be an offsetting job lost by a worker  at a coal fired energy plant.   For every new job created to maintain a electric car there will be a job lost by a traditional mechanic working on a gasoline engines.   The list of lost jobs goes on and on.  You think it through  for yourself and you will come  up with many examples and probably many  I never thought about.    Coal miners will be devastated.  That is an industry that employes hundreds of thousands when you include the transportation of  coal.   We need to very carefully make the politicians talk about and acknowledge the jobs that will be lost when they talk about creating new jobs.   Farm jobs will take another big hit if free trade is curtailed as proposed.   Caterpiller the giant industrial and earth moving company  will be whacked because they will not be able  to compete without free trade agreements.  The import tariffs will be too high.   The politicians should have to adhere to truth in advertizing standards and talk about “net” jobs created, if any.

Everyone is on the electric car bandwagon.   They say we have the technology in place to development these cars within a decade on a commercial basis.  Supposedly it will reduce carbon emissions and save money by not sending it to foreign countries.  Those are all great ideas.  But the technology is based upon lithium and cobalt for the battaries.  By the way the Chevy Volt that gets so much hype I find puzzling.  They advertise with glee that it gets 40 miles! on one charge before it has to be renewed.  I guess you folks living in the east coast corridor may think that sounds good but hell I couldn’t drive to see a client and back to my office on that charge.  Sounds damn inconvenient to me to say the least.   Of much more importance is to realize that the essential ingredients in these batteries are not abundant in the US.  Those supplies will have to come from Russia, China and the Congo.   Now you tell me how comfortable you are with that idea of depending on them for your energy source.  Russia is not exactly our best buddy and will certainly not have our best interests at heart.  The Chinese are not known for a charitable nature and I wouldn’t trust them at all.  The Congo….is there anything more to say about unreliability.   Now we depend upon the Arabs for most of our oil but I am far from convinced that swapping them for the Russkies, Chinamen and whoever is in control of the Congo at any given time is an improvement.   Think about that for a while.   Also just to fill out the thinking game, think about where the electricity is going to come from to charge up those cars.   The electricity has to be produced with power.   It won’t be from solar or wind for decades if ever and it won’t come from hydroelectric for many reasons (not the least of which is to protect the snail darter fish!).   There are trade offs I don’t think we have thought through.   Seems to me if we are going to pump billions of dollars into green industry then we should do it for coal.  Make coal a clean energy source.   We have enough to last centuries and would not be dependent on foreigners for our source.  Some express great confidence in American ingenuity when it comes to green technology; I wish they would show the same confidence in our science and innovativeness when it comes to improving coal.  I don’t own any coal and never will but I do love my country and that solution would be so much better for our economy and would keep jobs and then we could have reduced carbon emissions and along the way improve the gas mileage of our vehicles.  The oil supplies would then loom so much larger because the demand would be reduced dramatically.

You better remember to take the turkey out of the freezer today.  They take a lot longer than you think to thaw out.  Many a Thanksgiving dinner has been delayed because someone find the turkey still hard as a rock on Thanksgiving morning after setting it out to thaw only the night before.

Bye, bye world

We had some good times, we had some bad times. But right now its time to say goodbye.

This week was crazy. Civil strfie in Thailand but more importantly a terrrorist attack in India.

Yesterday night, while I was monitoring my positions, with a very reluctant heart, I had to increase some major short positions. Reluctantly - and I also had to sell most of my Citigroup positions, and take profit.

#1 - Never love your positions.

#2 - Always stay ahead of the pack.

Some positions I had nurtured as early as a month back. It was getting whacked, and I doubled down. You’ll know about Citigroup - and right now the WJK Rembau Hedge Fund has cashed out 80% of its holdings in Citi. And cashed out 50% of its holdings in Chicago Bridge and Iron, which is the US equivalent of KT Tenaga, Rainhill, Muhhibah combined together and times by 2. CBI was the first position I had taken, it was a short when the stock was trading at USD 40++. I then stayed clear, and began to actively buy the stock after it collapsed to USD 10.

It did what all good stocks do, which is to drop further and it went to a low USD 5.

I did what all good traders do, which is double down!

So yesterday, CBI closed at USD 10.17. The WJK Rembau KP Hedge Fund cashed out 50% of its holdings for an average gain of about 60%.

I also began to increase major short positions, firstly against Merrill Lynch (because the stock begins with the letter ‘M’) and a major position against Visa. Now the Visa short case will be the craziest story you will ever hear. Right now Visa is trading at USD 53, well below its IPO price.

Why - because I am begining to price in Nuclear Conflict.

Read my lips - the attack on the Taj Mahal will be the defining story in 2008. Not Oba-mah, Not PRU 12. Not anything else.

Its the attack on the Taj Mahal.

Interview part 2

Interview part 1

This week for the class assignment, I interviewed Lingling Wei, a journalist with the Wall Street Journal covering commercial real-estate market, about two of her favorite pieces– ‘Recourse’ Sequal: For Developers, Loan Get Personal and Perot Fund Liquidates As Debt Bets Turn Sour. The following is the interview about how the stories came into being and her views on the current development of the commercial real-estate market. Part one of the interview is about general thoughts about how she got the ideas for articles; the second part is about sourcing and structure.

Great piece by Krugman..

@ NYTimes presently..

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say…: “What do you mean ‘we,’ white man?”

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but … there were plenty of precedents… Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform … shouldn’t wait until the crisis is resolved. …

Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer … is that nobody likes a party pooper. While the housing bubble was still inflating, lenders[, investment banks, and money managers] were making lots of money… Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

There’s also another reason the economic policy establishment failed to see the current crisis coming. … [T]he crisis of 1997-98… showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World”… who “prevented a global meltdown.” In effect, everyone declared … victory…, while forgetting to ask how we got so close to the brink in the first place.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears,… investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed … prudential regulation of the financial system.

Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. …

And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be … regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.

For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.

So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now.

Paul Krugman: Lest We Forget

Paul Krugman, The New York Times, November 28, 2008

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.

About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

Read More Here

Panic: The Story of Modern Financial Insanity

Panic: The Story of Modern Financial Insanity

From W.W. Norton & Co.

When it comes to markets, the first deadly sin is greed. Michael Lewis is our jungle guide through five of the most violent and costly upheavals in recent financial history: the crash of ‘87, the Russian default (and the subsequent collapse of Long-Term Capital Management), the Asian currency crisis of 1999, the Internet bubble, and the current sub-prime mortgage disaster. With his trademark humor and brilliant anecdotes, Lewis paints the mood and market factors leading up to each event, weaves contemporary accounts to show what people thought was happening at the time, and then, with the luxury of hindsight, analyzes what actually happened and what we should have learned from experience.

I have to admit, I read the Dave Barry segment first. In it I learned that there are three proven techniques guaranteed to lose you money in real estate: Buy an old house, buy a new house, or get a mortgage. After I finished laughing about OHDD (Old House Delusion Disease), I moved on.

This anthology has a simple idea: “to re-create the more recent financial panics, in an attempt to show how financial markets now operate.” Each of the four parts of the book has articles written during the heat of the crisis, and more penned afterwards about the causes and effects and repercussions of the event. Part I examines the stock market crash of 1987. Part II looks at the Asian currency crisis of 1999 which triggered the Russian government bond default that brought down the hedge fund Long-Term Capital Management. In Part III the Internet bubble bursts. Lastly, and most poignantly, Part IV delves into the current subprime mortgage debacle.

Review More

4th Wave of Foreclosures coming

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

“It’s a toxic drug and nobody knows how bad it’s going to be,” said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

AP-Yahoo news

Oil price goes below $50 a barrel - BBC

US light sweet crude fell to $49.62, while London-traded Brent crude fell to $48.90 a barrel.

The price of oil is around two-thirds cheaper than in July, when it hit a record above $147 a barrel.

Members of oil cartel Opec are to meet on November 29, after opting to cut output by 1.5 million barrels per day.

“The lack of any positive news on the demand front as well as continued global economic turmoil continues to result in a dearth of bullish news,” said Jonathan Kornafel, Asia director of Hudson Capital Energy.

On Wednesday, the Federal Reserve said it expected the US economy to shrink in the first half of next year, adding to fears over lower demand for fuel.

Figures from the Energy Information Administration released on Wednesday showed US stocks of crude oil increased by 1.6 million barrels last week - twice as much as expected.

Meanwhile figures from Japan showed the country experienced its second trade deficit in three months in October, with exports 7.7% lower year-on-year.

Amid signs of the wider slowdown, investors and hedge funds have been turning to cash, and away from commodities.

Hedge Fund Manager: Goodbye and Fuck You

A very interesting article.. was planning to post this a while back but never got to it… theres interesting bits about the current human condition…

From the Scorched Earth Files:

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse.

Last month, he did the unthinkable — he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his “goodbye” letter, a rollicking missive on everything from greed to economic philosophy. Enjoy.

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

Just How Big is This Economic Crisis? And How Did

David Brooks puts into perspective just how grandiose the current, on-going economic bailout is.

Over the past year, the federal government has poured money into the economy hundreds of billions of dollars at a time. It has also guaranteed investments, loans and deposits worth about $8 trillion. Barry Ritholtz, the author of “Bailout Nation,” points out that this project constitutes the largest infusion in American history.

If you add up just the funds that have already been committed, you get a figure, according to Jim Bianco of Bianco Research, that is larger in today’s dollars than the costs of the Marshall Plan, the Louisiana Purchase, the New Deal, the Korean War, Vietnam and the S.&L. crisis combined.

Paul Krugman chastises the Establishment for not noticing the economic freight train that has been approaching at top speed for the past few years:

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

He answers that they did see it coming, but that no one wanted to be the party pooper.

Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

[After the crisis of 1997-98] everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

…investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

Now is the time, says Krugman, to begin to prevent the next catastrophe.

Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later. For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines.

Michael Porter, a Massachusetts Republican from Harvard Business School, who worked with the Mitt Romney presidential campaign, thinks that we still have the problem of looking at economics from a fragmented and incoherent political and short-term tactical perspective, rather than from a strategic perspective.

Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years. Congress and the Executive Branch are organized around discrete policy areas, not around the overall goal of improving competitiveness. Neither candidate has put forward anything close to a strategy; rather, each has presented a set of disconnected policy proposals with political appeal. Both parties contribute to the problem by approaching the economy with long-held ideologies and policy positions, many of which no longer fit with today’s reality.

Ironically, while other countries understand the importance of fair competition, America is shrinking from the competetive.  While we have been falling back to focus on short-term gains, other countries are increasing college education, reinvestment in science and technology as a means to foster entrepeneurship, and they spend an increasing share of GDP on research and development.  In a “me-me-me” consumerism society, this is not surprising that we are falling behind.

THREE STUPID GENIUSES: GREENSPAN, RUBIN and SUMMERS

Mr. Krugman is halfway smart: he is an economist who understands some of the dangers of the Floating Currency. But he doesn’t go after ‘free trade’ or he would lose his perch at the NYT, I guess. But yesterday, he took off after the ‘Three Musketeers’: Greenspan, Rubin & Summers. This is because the dumb trio pretended to be too stupefied to foresee the very obvious housing and buy-up bubbles. In his editorial, Mr. Krugman mentions a very interesting Time Magazine article from 1999.

 

It is important for us to read this old article. It is full of information about the Asian Currency Crisis that tells us exactly why Greenspan, Rubin and Summers should all be kept far, far away from any monetary policy making positions and Greenspan, arrested for fraud and reckless endangerment of an economy.

 

Krugman - Lest We Forget - NYTimes.com

Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

 

 

Two things took off for the skies: the US trade deficit ballooned right as all our housing values ballooned. These were part of the outcome of the tax cutting coupled with military overspending and let us not forget the ‘free trade’ business which ground onwards, eliminating nearly all US trade protections.

 

I remember that time well. Bush pushed for emergency tax cuts to ’save the economy.’ I was disgusted. Clinton and the GOP, due to hating each other and snarling up Washington, DC’s massive debt machine, balanced the budgets for the first time since President Kennedy. It was obvious, by 1999, the US was in the middle of a very disastrous and energetic inflow of foreign funds driving up stocks. iTulip.com was launched in 1999 during the Dot Com stock market madness.

 

iTulip is a great way to find information that seems to be obscured from the eyes of the Three Marketeers:

 

The Three Marketeers - TIME Feb. 15, 1999

 

The Asian collapse of 1998-1999 was fixed in two very interesting ways: the nations that either went through the collapse or who anticipated runs on their own finances all began to amass gigantic FOREX reserves. Before the Asian Currency Crisis, virtually no one had FOREX reserves bigger than $80 billion. Afterwards, Asian and then, in the last three years, nearly all our trade partners ran up their FOREX reserves. In Asia, these grew from less than $80 billion to $2 trillion or more in size.

 

One thing that our brainless Three Marketeers should think about is exactly this: the sudden surge in FOREX reserves after a series of bubbles popped in Asia. After all, the Federal RESERVE is supposed to be the entity holding our dollars, eh? And instead of changing direction after Asia and then the world, changed direction, the US stubbornly kept the old reserve levels. We should had been buying and holding euros and yen. We didn’t. And so our trade deficit shot upwards to nearly a trillion in losses a year by 2007.

 

Greenspan, Rubin and Summers were supposed to be MONETARISTS. This means, the manipulate the CURRENCY. To do this, they use tools and one of these is the FOREX reserves! Duh! Why on earth don’t they understand this simple story?

 

According to Krugman, the semi-sane economist, these nutty guys claim they have no idea what went wrong here. They couldn’t see bubbles forming. This, of course, is a lie. At the point where Krugman talks about this pretense of ignorance, he should have gone off to see why this is so. Why do our leaders always profess stupidity when messes they made are obvious to anyone?

 

HAHAHA. They are a bunch of very naughty little boys, aren’t they? They don’t want anyone to know their dirty deeds. So, once they drop the cookie jar, they hold up their hands and yell, ‘I didn’t touch it!’

 

I still remember the Asian crisis. Note how the article from back then, clearly states that this was due to too much real estate and useless factories being built. And the value of all existing systems suddenly shooting upwards as FOREIGN money flowed suddenly into Asian lands!

 

OK: here is where it gets most interesting. WHOSE MONEY WAS FLOWING INTO ASIA???? Ah! This is the key. We know how these bubbles form. Someone is very reckless with lending money to someone else. That someone else takes these stupid sub-1% loans and dumps them all over everything on this planet, seeking someone to be trapped into paying interest rates forever and ever.

 

And what bank dropped their interest rates to nearly zero in 1996? This, incidentally, is when the bubbles began to suddenly form and grow rapidly, in Asia, in South America. Well, I look around and I spot someone who is probably the guilty party: the Bank of Japan!

 

The carry trade began in 1996. By 1998, it was a roaring business in Asia. This tsunami of easy credit pouring out of the Bank of Japan was carried offshore. It was Japan’s greatest export product! On top of this, Japanese exporters and Japanese savers needed to park money offshore and have it earn a higher interest rate since rates in Japan were at 0%. So a flood of savings and profits from the world’s #2 economy flooded all of Asia and sluggishly flowed over South America. And the US itself. Housing values in these places began to balloon nearly instantly.

 

Bloomberg.com: Latin America

 

Why is that? HAHAHA. Mortgages are for 30 years! Guaranteed income for life. The Time Magazine 1999 article left this dynamic out. Indeed, no one in the media mentioned the words ‘Japanese carry trade’ back then. It was a devil of a time for me to figure this out during the last decade. A real educational experience.

 

The Three Marketeers - TIME

The initial downturn didn’t surprise the Fed or the Treasury too much. For the better part of two years, Greenspan and Rubin had been quietly fretting about the narrowing “spread”–the difference in interest rates–between U.S. bonds and emerging-market bonds. By 1996 banks were lending money to countries such as Malaysia at interest rates just a few percentage points above what the U.S. Treasuries commanded. The implication: Malaysia was not a much riskier bet than the U.S. This was nonsense, and the committee knew some correction was in order.

But the speed of the collapse, when it came, was breathtaking, and proof that world markets had entered a new and much more volatile phase. Summers has a favorite analogy: “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.”

 

Summers and Rubin didn’t run the Bush train off the tracks. But Greenspan obviously was the main driver in this present crash. But Summers and Rubins are meddlers who were VERY active in dealing with the previous Bank of Japan-engineered crashes. Since they ran around the world, ‘fixing’ things, they bear a lot of responsibility for the present mess. Because they didn’t fix what was really wrong. Instead, we are all striving now to ape the Bank of Japan!

 

Namely, all the INDUSTRIAL NATIONS are dropping interest rates to 0%, fast. And all the COMMODITY nations are raising interest rates! Isn’t that rather queer? Especially since the US market is rather a big more a commodity exporter compared to Japan or England, just for example.

 

Bloomberg.com: Exclusive

“I’m in the middle of shifting my cash holdings to hedge funds,” Sagami, 48, said in an Oct. 14 interview at his Hisashi Kobayashi-designed house on a 3,300 square-meter (0.8 acre) lot. “This is the beginning of the biggest bargain sale.” He confirmed last week he is still investing in the funds….Department Chief Hiromitsu Nakagawa said he offers mutual funds that include hedge funds to individuals with more than 500 million yen in financial assets. He said many clients want to diversify portfolios that are mostly made up of inherited properties and securities.

 

Whenever an economic system develops whereby a large upper class simply sits back and collects wealth via inheritance and clipping coupons, we get long, long depressions. Japan is in the grip of this epic depression and like Victorian England, the upper classed don’t mind this one bit. Indeed, they work very hard to prevent it from ending. The benefits of seeing their holdings grow steadily while the prices fall at home is a lot of fun.

 

On the other hand, it kills economies. The dead hand of debt accumulation eventually grinds commerce to a halt. In Japan, this is deliberate. The ruling LDP is made up of these sorts of people who want money to flow steadily into their laps. They do NOT want a consumer surge that might encourage imports. Once a country has an ‘inheritor class’ in charge of things, it is all downhill. This is why we had such high inheritance taxes here. It was a sociological experiment at trying to prevent depressions due to a nation being run by people who inherit their wealth.

 

It is now set at 0%. The rich can happily accumulate wealth without working, for infinite lengths of time. It is also part of our budget crisis. Money is no longer flowing in like it used to. I remember when the inheritance tax was first reduced: it was to save ‘the family farm.’ Instead, ‘family farms’ are dying as they are turned into vast estates that are worked by foreign stoop-labor of mostly illegal aliens from the South.

 

Since the repeal of the inheritance tax, nearly all the small family farms in my community have vanished. Now, mega-rich people like the McCain family can hand off their wealth intact to their children. Couple this with the drop in the number of babies produced by these rich families and we get an accumulation of wealth that is very dangerous. If rich families marry each other and then have one or at most, two children, this ‘old wealth’ will accumulate into fewer and fewer hands! This is bad. Very bad. Nowhere on earth do democracies thrive when there is this sort of passive wealth accumulation at work.

 

The Three Marketeers - TIME

The three men trying to cope with these mid-ether collisions of dollars and expectations are an unlikely team. Greenspan, the data-loving analyst with government roots sunk back into the financial and moral chaos of the Nixon Administration, and a shaman-like power over global markets. Rubin, the Goldman Sachs wonder boy who ran the firm’s complex and dangerous arbitrage operations and then led it to rocket-ship international growth. And Summers, the Harvard-trained academic who is invariably called the Kissinger of economics: a total pragmatist whose ambition sometimes grates but whose intellect never fails to dazzle.

What holds them together is a passion for thinking and an inextinguishable curiosity about a new economic order that is unfolding before them like an Alice in Wonderland world. The sheer fascination of inventing a 21st century financial system motivates them more than the usual Washington drugs of power and money. In the past six years the three men have merged into a kind of brotherhood, with an easy rapport.

 

All Goldman Sachs people should be permanently banned from working in the government. Especially the Treasury or the Federal Reserve. Ditto, JP Morgan. These clowns have, as the article in 1999 points out, invented this financial system! And it truly is an ‘Alice In Wonderland’ world: the Mad Hatter’s Tea Party as well as the Queen of Heart’s court. These guys eat a meal and then move down the endless table, leaving us, Alice, to eat off of their dirty plates.

 

When she suggests they ALL move forwards to clean dishes, the Mad Hatter and the March Hare regard her as insane. The criminal brotherhood of these three guys has prepared a global feast where 90% of humanity gets to eat the crumbs off of their dirty dishes! While they dine on clean dishes. I will note here that there are many ‘widdershin’ aspects to both ‘Alice in Wonderland’ and ‘Through the Looking Glass’ stories.

 

 

The three men have a mania for analysis that has bred a rigorous, unique intellectual honesty…. This pragmatism is a faith that recalls nothing so much as the objectivist philosophy of the novelist and social critic Ayn Rand (The Fountainhead, Atlas Shrugged), which Greenspan has studied intently. During long nights at Rand’s apartment and through her articles and letters, Greenspan found in objectivism a sense that markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct….they all agree that trying to defy global market forces is in the end futile….In the same way that the threat of mutually assured destruction helped Kissinger replace Washington ideology with Realpolitik, the shadow of a massive economic meltdown has helped the committee sell a market-driven policy that could be labeled Realeconomik.

 

Ayn Rand is like any number of demons in the Cave of Wealth and Death. She knew that there is a connection between sex and money. She exploited this information. Note here that this toxic trio viewed the collapse of the Japanese-carry-trade flood of lending to Asia is a motivation to INCREASE danger by pursuing a MARKET-DRIVEN policy. Misnamed as ‘Realeconomik’.

 

How about ‘Realcrash’? For this was obvious by 1999: flooding any nation with lots of easy lending leads to bubbles and terrible crashes. So why did the US immediately volunteer to be the new destination of all this Japanese carry trade loot? It was obvious, back then, this was a very bad thing!

 

And if the ‘markets’ are correct, then why interfere with them? The markets are obviously screaming, ‘This was a BAD BUBBLE! RUN AWAY!’ And off, we go, seeking shelter in gold or bonds, classic depression items. Instead, everyone is struggling to restart this goofy lending business that failed so abruptly in 2007.

 

The Three Marketeers - TIME

The IMF has taken particular heat because even as these nations suffer, the U.S. and Europe continue to grow. The committee believes that the IMF remains a key international tool, especially as it works to clean up the abuses that led to the current mess and makes it easier for investors to get back into those developing markets.

That means trying to reduce volatility where possible. Many countries are at the mercy of international lenders who can decide, if they feel nervous, to jerk billions of dollars from country to country. This would be like having your bank pull your mortgage because your banker heard you’d had a bad day. The solution to the problem, the men believe, is more honesty on the part of borrowers–so banks know what they are getting into–and more caution on the part of banks. While some economic thinkers–notably Soros and Malaysia’s Mahathir–have lobbied for more dramatic controls, Rubin warns that simply locking capital in place can often become a substitute for much needed reform, delaying an inevitable correction. As for the impact of speculators, who have been torched by politicians around the world, Rubin says they are a part of the crisis but a much less important factor than the real economic problems of the countries they hit.

 

No nation has more economic problems than the US. No nation is running so huge a deficit in government spending, so huge a trade deficit. These two things doom our nation to destruction. Yet, no one is trying to stop either. Only after inflation of necessities sucked dry, nearly everyone’s bank accounts in the US, has the spending on imports slowed down.

 

Capital being ‘locked in place’ is not the problem nor the solution. Preventing floods of easy lending: that is the problem. The IMF forbade countries undergoing collapse to spend on social services or increase public debt. Yet, as the US spends to infinity, probably doubling our government debt obligations in ONE YEAR! Well…the IMF is silent, of course. All the smaller nations who were hammered by the US officials in the IMF in the past are steamed that the US gets a free ride.

 

But international powers like China and Russia are quite happy about letting the US continue to build up debts! They want us to go bankrupt. This is called ‘revenge.’ And is best eaten cold. And the leaders of Russia and China can be quite cold-blooded.

 

Note also, in the old Times article, the writers mention that banks should be more cautious. And borrowers shouldn’t lie about their incomes! HAHAHA. Both did the opposite here in the US when the flood of Japanese carry trade lending hit our own shores! Money was ladled out like there was no tomorrow. And when tomorrow came, everyone began to default. Fast.

 

The Three Marketeers - TIME

To operate effectively in this new world, Rubin has remade the Treasury into an organization that is “more like an investment bank,” says Tim Geithner, the 37-year-old Under Secretary for International Affairs….And fresh thinking has been crucial in the new economic order. One legacy of 1998 has been the destruction of some of academe’s and Wall Street’s most cherished models of the world. More data and faster markets, says Greenspan, mean more opportunities to make money.

They also mean more chances to lose your shirt, something he calls “the increased productivity of mistakes.” Computers make it possible to push a button and destroy a billion dollars of wealth. The chairman was warning about the problem long before Long-Term Capital Management vaporized $4 billion, but that debacle silenced any skeptics of the new risks.

 

All our investment banks are bankrupt. They all changed their names to ‘regular banks’ and are struggling to recapitalize themselves AT GOVERNMENT EXPENSE. They can’t attract wealth anymore. They are negative wealth machines due to the Derivatives Beast eating anything they park inside their banks. Instead of giving up and having all our systems nationalized, we are trying to use future taxes to recapitalize these stupid banks that are bankrupt.

 

The Treasury has no money. Our government has run in the red nearly my entire life! How can a Treasury be an ‘investment bank’ if all it has is epic red ink? It is a NEGATIVE system. All such systems eat capital, not create capital. Right now, everyone wants treasuries only because we are in a NEGATIVE FLOW situation thanks to the investment bankers! Selling our debts, cheap, isn’t productive. It still increases our net out-flow. It still destroys, not makes, our nation. Here is the latest news about US Treasuries:

 

Bloomberg.com: Bond

 

The Three Marketeers - TIME

The problem, the men say, is that the markets are encumbered by all kinds of imperfections. Even tiny flaws create problems. A Thai banker who breaks the rules by passing $100,000 to his brother-in-law puts the whole system at risk.

To help resolve the riddle of imperfect markets, the committee has spent six years working on an experiment. It’s called the U.S. economy. The current boom is as much a part of the committee’s legacy as is its battle to stem global turmoil. It was Rubin–via the 1993 deficit-reduction plan–who navigated the Clinton Administration into budgetary agreements that helped create the first surplus in 29 years. This fiscal responsibility helped lower interest rates, which kicked off a surge in business spending. Greenspan, who dovetailed his own monetary policy with those goals, let the economy build up its present head of steam. The men don’t get all the credit for the boom–they’re the first to say all they did was let the markets work–but on both Wall Street and Pennsylvania Avenue, they get the bulk of it.

 

The flood of corruption that flows through the Washington, DC sewer is far worse than some Thai banker giving his goofy brother some loot. I have pointed out in the past, the ‘imperfections’ are exactly where wealth is created. The investment bankers, hedge fund geniuses and other people restlessly roam about, seeking loopholes, creating loopholes via bribing politicians, they seek imperfections and hammer away at them, turning them into mega-abuse opportunities for free funny money.

 

Another lie here: constricting US spending does NOT cause lower interest rates! When we were overspending merrily by 2001, Greenspan dropped rates due to 9/11. Then kept them at a ridiculous 1% as energy costs soared. As the budget deficit grew, rates remained low.

 

Then, in a hurry, Bernanke tried to raise them again. Only to panic and drop them BELOW 1%, heading to 0% by December.

 

The Race to Zero Interest Rates - Seeking Alpha

When a central bank runs out of room to cut interest rates, it resorts to Quantitative Easing. This term was coined by the Bank of Japan in 2001 when interest rates were already at zero and the central bank stopped targeting the overnight call rate and turned to targeting a current account level. Their goal was to flood the Japanese financial system with liquidity by buying trillions of yen of financial securities including asset-backed instruments and equities.It can be argued that the US has already engaged in Quantitative Easing as the government has recently announced plans to spend $800 billion to unfreeze the consumer and mortgage market.

They have agreed to buy mortgage backed securities backed by government sponsored entities and could accelerate that if interest rates hit zero. Excess reserves have also increased significantly, driving the effective fed funds rate well below 0.5 percent. This would have been one of the desired outcomes of quantitative easing. Last week, Fed vice chairman Donald Kohn said quantitative easing measures were under review at the central bank as normal contingency planning.

The goal would be to encourage banks to lend more aggressively by coming in as a buyer at specified rates. Even though quantitative easing drove Japan into deflation, it was the key to turning around the economy and this is a risk that the US central bank may have to take.

 

I have pointed out in the past that the US cannot do what Japan has done: run eternal depressions that benefit mostly the coupon-clipping inheritors of wealth. We cannot imitate Japan’s 0% system because we run a trade deficit. We import far too much energy products to run a Fortress Japan situation. This is due to Japan restricting the use of energy going to workers and the poor.

 

This is why Japanese workers must toil in colder or hotter offices, for example. And live in homes that are uncomfortable. The US loves climate systems even though we need to import fuel to run our delightful McMansion energy systems. And of course, how can the US be doing ‘quantative easing’ when the stated result is supposed to be no depression but a light form of inflation?

 

Either this will boomerang badly and become mega-inflation or it will do what it did to Japan: kill the lower classes off. Guess which system the very rich who have children, want?

 

Of course! The Japanese system whereby they can clip coupons and marry each other and concentrate wealth more and more in the hands of fewer and fewer people.

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

Oil Prices Near the Bottom? How Did They Get So Low in the First Place?

It seems like it’s been forever since I could buy a gallon of gas for $1.65.  That might be about as low as it’s going to get, according to Bloomberg.

Oil options contracts indicate that a growing number of investors expect prices to rise from three- year lows, industry consultant Petromatrix GmbH said. The number of outstanding contracts that give traders an option to buy crude oil is nearly the same as the number giving the right to sell for the first time since July 2007…

Hedge funds and other large speculators bet last week that futures will recover, reversing three weeks of bets that prices will fall, according to U.S. Commodity Futures Trading Commission data.

In other words, the speculators are betting that the price of oil will go up.

Back in June, Republicans were claiming oil prices to be on the rise because Democrats were blocking off-shore drilling, but they didn’t talk about the upward effect on prices due to speculation.  Although U.S. off-shore drilling would have an almost immediate downward impact on the world price of oil, the effect of speculation on oil prices reaching record levels in 2008 should not be overlooked.

In the following video, Keith Olbermann talks about how john McCain supported what’s come to be known as the Enron loophole, which unleashed the ability of speculators to run up energy prices.  Olbermann calls it “a legalized form of insider trading” which “lets speculators overwhelming trading in oil futures.”

[http://www.youtube.com/watch?v=ugss-PcNomg]

By being able to speculate on the future of oil prices, according to Olbermann, the speculators have driven up the price of oil to more than double what it was before the loophole was created, and this speculation has created the potential explosion of a large ‘oil bubble’.

Has the bubble finally burst?

Is deregulated speculation a good thing?  Apparently not when employed by self-seeking shysters like Enron, who nearly brought California to its knees by speculating on electricity.  Enron cornered the market on energy, and were able to drive up prices dramatically because of it.

The speculators have not just been placing bets on the price of energy, they have been controlling the future prices in an effort to profit from it, according to Michael Greenberger, former chairman of the US Commodity Futures Trading Commission, who testified before a US Senate committee  meeting on June 3, 2008.  It was estimated that in the last two years, the average family has spent at least $1500 on energy due to collaborative speculation.  Speculation, according to George Soros, has allowed banks and other financial institutions to set aside larger reserves of petroleum than we have in our entire U.S. national reserve.

The Enron Loophole was closed on September 30, 2008.  Not long thereafter, prices started coming down precipitously.  Obviously, other factors, such as declining demand in a weak worldwide economy, have contributed to the downward pressure.  However, it’s clear that speculative control of large swaths of the market caused the price to go up.  It’s more than coincidental that prices have gone down markedly since the Enron Loophole was closed on September 30th.

An Address in Mayfair - Donald MacKenzie on Hedge Funds

You could walk around Mayfair all day and not notice them. Hedge funds don’t – can’t – advertise. The most you’ll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you’re serious, and have the money and confidence to pay the world’s most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It’s fortunate therefore that hedge funds don’t need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer. Read more.

I Second That Emotion

The recent financial meltdown and  accompanying  general handwringing by our great and all-knowing financial overlords is a bit much, isn’t it?  For years,  these  uber-mayvins at the  “great” investment banking houses, financial firms, banks and  hedge funds have been looting more and more of our  economy for themselves.  Were these titans of lucre abashed about their stay at the trough?  Were they the slightest bit embarrased by their Herculean accumulation?  Well, if they were, let me know, because I must have missed that part of the past decade.  Instead, they loudly and aggressively justified their renumeration, insisting that it was an accurate reflection of their skill, wisdom, and value to the economy, and that competitive market forces - forces that could not be checked by intervention of mere mortals without Bloomberg boxes  - required the payment of these vast sums because, without their bloated compensation “packages,”  no one  would bear the hardship, physical danger, and exposure to the elements associated with an analyst job at, say, AIG, Bear Stearns, Citigroup, or any of the other free market temples that we taxpayers are now opening our wallets for.  

Now, the flood has arrived.  Their finely tuned and intricately engineered  financial instruments have soured.  Their models have failed.  Their stewardship of our money has turned out to be a cartoonish version of a gambler in over his head.  Do we get an “I’m sorry?”  No, we get a bailout for the fallen gods.  Do we get anything like a ritual Hari-Kari?  No, we get lectures from the “investment community” about the need for autoworkers in Flint to become poorer.  Do our overlords acknowledge thier prior hubris?  No, we simply get excuses - the dog ate our homework, our grandma died, no one could have foreseen this.  On that point, check out this post by Matt Yglesias.  http://yglesias.thinkprogress.org/archives/2008/11/nobody_could_have_predicted.php

Recession: When the money goes, so does the toxic wife

‘You loser!” screamed Katie, aiming a vase at her husband. “You’ve destroyed my life,” she continued, hurling it. “Just look at my hair, look at my nails! You loser, you jerk, you nobody.”

Katie’s husband, Jack, whose property portfolio disintegrated in the financial crash, had just told his wife that she would have to cut back on her thrice-weekly visits to Nicky Clarke, the nail salon in Harvey Nichols, and the oxygen facials, chemical peels and seaweed wraps at Space NK.

Not only that, but they no longer had the money to pay for an army of bullied Eastern Europeans to wait on her hand and foot.

Worse was to come – the brow-lift would have to be cancelled; her black Amex card would have to be snipped in half; and there was no way, he told her, that he could carry on spending £28,000 a year on Henry’s school fees at Eton.

Chloe, too, would have to leave the marginally cheaper (only £25,000 pa) Wycombe Abbey immediately.

Such was the aggression and verbal and physical abuse that followed that Jack was left with cut lips and blood streaming from a broken nose.

Their eight-year-old child, not yet at boarding school, sat cowering in a corner and dialling 999. When they arrived, they had to restrain Katie forcibly from attacking her husband.

An extreme and isolated example of the global economic meltdown hitting the £1 million home? Sadly no. When the super-rich feel the pinch, inevitably, the Toxic Wife heads off.

The Toxic Wife, first identified in these pages almost two years ago, is a particular and terrifying species.

Not to be confused with the stay-at-home mother who selflessly devotes herself to the upbringing of her children, with all the housework and domestic chores that entails, the Toxic Wife is the woman who gives up work as soon as she marries, ostensibly to create a stable home environment for any offspring that might come along, but who then employs large numbers of staff to do all the domestic work she promised to undertake, leaving her with little to do all day except shop, lunch and luxuriate.

Having married her wealthy husband with his considerable salary uppermost in her mind, the Toxic Wife simply does not do “for richer, for poorer”. Little Dorrit, she ain’t.

Indeed, lawyers and financial advisers have reported a 50 per cent increase in the number of divorce inquiries since the financial markets collapsed in September.

A recent survey conducted by community website makefriendsonline revealed that a third of 10,000 respondents believe that financial hardship will cause a relationship to fail, while matrimonial law specialists Mishcon de Reya have reported up to 300 per cent more inquiries.

Numbers have risen significantly as couples seek to reach an agreement before the recession tightens its grip. But for the Toxic Wife, “agreement” is the last thing on her mind.

There are countless stories of them acting in the most bizarre and inhumane ways. For gold-diggers are materialistic to such an extent that they are emotionally detached from other people.

There’s an inability to empathise with another human being. They certainly don’t ”do” conscience. Money, on the other hand, they both love and understand.

”I told my wife to stop this organic food malarkey,” said Jeremy, a beleaguered hedge-fund manager, another man who fell for an extremely beautiful yet extravagant woman.

“She went ballistic. Organic Hass avocados cost £1.75 each and she wanted me to buy six of them! In the end, I just peeled off the labels that said they were certified organic and put them on ordinary avocados – she didn’t notice the difference. I did the same with bananas…”

”So why did she walk out on you?” I asked.

”She has a very high standard of living,” he said. ”She’s never taken the Tube or a bus; it’s always taxis. And she likes to eat out a lot, at the best restaurants, and she likes to buy expensive gifts for people she wants to impress.

“As soon as the financial wobbles started, she must have joined some upmarket dating agency because somehow she’s found another very rich man pretty damn fast.”

Another case is Sasha who, for the past few months, had been gloating about the £3.4 million chalet in Verbier her husband was about to exchange on, how she’d managed to hire a high-society interior decorator to do it up for a song (”more an anthem, actually”, she’d giggled) and how much she was looking forward to a white, snowy Christmas there.

At the last minute, Husband pulled out of the deal. Never mind that he had lost his lucrative job in the City, she felt he had deliberately traumatised her and is suing him for divorce on the grounds of mental cruelty. ‘

‘She’s got the personality of an overindulged infant,” he sighed, ”a spoilt brat who starts screaming the moment a toy is taken away.”

In the grown-up world that toy is money and what it can buy: status, power, glamour and arrogance. It also has a way of making these particular women precious. ”Because I’m worth it” has become the catch-all legitimiser for any personal indulgence.

According to Susie Ambrose, a marital psychotherapist and CEO of Seventy-Thirty, an upmarket introduction company that takes its name from the work versus free time balance, there has been an unprecedented demand from married women recently.

”We are being targeted by women on the fence between leaving their husbands who are on the brink of losing their wealth, and wanting to meet someone extremely rich straight away,” she says.

Like a frog, the Toxic Wife needs to hop safely on to another lily pad, and a rich one, before leaving her husband. She won’t stand on her own two feet. And finding a job is quite beneath her.

Yet Susie Ambrose thinks such women ”are like businessmen – utterly ruthless”. The rich man is the career path, the meal ticket, and it doesn’t matter how fat, old, balding or unattractive he is – it’s solely about money.

”These particular women know how to fake love,” adds Ambrose. ”They’re actually very good at it.”

She now has a waiting-list for her life-coaching sessions – a course costs between £10,000-£60,000 – on how to distinguish a gold-digger from a genuine woman.

Men, it seems, have got wise to the potential Toxic Wife and don’t want to end up with someone who is going to bolt the moment they experience some financial bad luck.

For men, divorce is one of the most expensive trials in life – emotionally and financially. As the joke doing the rounds among City men goes: “This credit crunch is worse than a divorce. I’ve lost half my net worth and I still have a wife.”

But this is no joke. I’ve seen at first hand how, as soon as money disappears, so does love.

Olivia and Richard had a set of beautiful and expensively conceived twins (we’re talking around £30,000 worth of IVF treatments for the right gender – she joked how she would send them back if they were girls), a fabulous house, great holidays several times a year, two nannies and a lifestyle of which most of us lesser mortals could only fantasise.

How we laughed when Richard, with admiration in his voice, mentioned at a drinks party last year that he’d turned to his wife in the middle of the night and asked her if she’d still love him if he lost all his money.

”F— no!” had been her answer. Such a feisty, amusing (and obviously joky) response delighted him. But today he is scratching his head with abject dejection. She had meant it.

She left him the moment he lost his senior post at an investment bank and immediately hooked up with another rich man.

Worse, she took their boys with her and he rarely sees them because she has since moved to America to start afresh with her new, unsuspecting milch-cow.

As most of us are battening down the hatches and finding inventive ways to cope with the new austerity, some unfortunate men have not only lost their jobs, they are also having the scales ripped from their eyes.

The horrible truth has dawned: they married a woman who wanted them solely for their money.

Commercial Mortgage Meltdown Has Just Begun

According to the AP, there is another mortgage crisis looming. That mortgage crisis involves commercial real estate including malls from Georgia to Michigan. The crisis doesn’t end there though. The meltdown is happening in hotels in Tucson, Ariz., and Hilton Head, S.C., also about to default on their mortgages.

More from the AP:

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

More commercial foreclosures, more unemployment. With the loss of tax income cities and schools will run into deeper budget deficits. Nevada is one state who is counting on more tax revenue from the 200 more hotel rooms being built there. This information regarding commercial foreclosure doesn’t bode well fro Nevada.

More from the story:

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

“It’s a toxic drug and nobody knows how bad it’s going to be,” said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

Other things are happening in the consumer markets. There is a downturn in consumer spending, with no guarantee this holiday season will make it any better. With unemployment increasing and those losing their unemployment benfits, more than likely spending will show a reat downturn.

Retail store closings are increasing as well.

The retail outlook is particularly bad. Circuit City and Linens ‘n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Malls are losing rental income with store closings which they depend on to pay their mortgages. Now there is a question whether malls will be able to make their payments. With many commercial mortgages coming due in the next couple of years, owners may not have the money to cover these payments.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year _ 2010 and 2011 totals are projected to be even higher _ many property owners won’t have the money.

Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida _ states with a high concentration of mortgages in the securities market, according to Fitch _ are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

None of this is good news. It is another indicator. It is showing the affects of the recessionary economy on commercial real estate. Here is “the worst case scenario”:

And it goes something like this:

With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

“Credit markets have seized up,” corporate securities lawyer Michael Gambro said. “People are not willing to take risks. They’re not buying anything.”

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

“The system has never been tested for a deep recession,” said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

“He’s created havoc in the marketplace by changing the rules,” Rosen said. “It was the stupidest statement on Earth.”

It seems King Henry has really thrown a monkey wrench into the economy. And there really is only one for the bleeding to stop, and that is stabilization of the economy.

The Securities and Exchange Commission is considering another option that might ease the crisis, one that would change accounting rules so banks don’t have to declare huge losses whenever the market declines.

But the only surefire remedy is for the economy to stabilize, for businesses to start expanding and for investors to trust the market again. Until then, Tross said, “There’s going to be a lot of pain going forward.”

Obviously, “King” Henry Paulson has done some good but much left undone will cause more downturn in the economy. However we know that “King Henry” seems to change his mind every other day. There is no way to know what he will do next week, nor who he has given money to.

Hedge Funds can now buy banks

 

 

 Investors including private-equity firms may find it easier to acquire U.S. banks after the Federal Deposit Insurance Corp. said it will let groups without charters bid for the deposits and assets of failing lenders.

The FDIC change, announced in a press release today, will help ensure “failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund” by marketing assets to “known, qualified and interested bidders.”

“This may indicate that the FDIC is experiencing difficulties in finding local and traditional buyers of failed banks,” the report said.

We knew this was coming (it has been well telegraphed) but the idea of letting hedge funds anywhere near consumer deposits is breathtakingly stupid. 

We are rabid anti-regulation types. However, banking has to be an exception to laissez faire as banking is by definition a confidence game to start with (emphasis on “con” in confidence). If we lend out money we don’t have as individuals we got to jail. If we buy a bank it is business as usual. Now a completely unregulated industry can buy access to Mom and Pop savings.

oh yeah. it

id="desc">a brainfart here and there.

good thing i got out with my severance in july  =D

http://online.wsj.com/article/SB122697733672536313.html?mod=dist_smartbrief

Funds waiting to grab cheap Asian properties

They are raising funds for direct property investments in the region as values slide

AS property values in Asia slide, hedge funds, private equity funds and pension funds are waiting in the wings to swoop in on good buys, according to KPMG’s global head of real estate, Jonathan Thompson.

‘We’re aware that some (hedge funds and private equity funds) have been raising money for distressed situations,’ Mr Thompson told BT.

Investors have been on the lookout. Just last month, Merrill Lynch completed fundraising for its Asian Real Estate Opportunity Fund, collecting some US$2.65 billion to invest in real estate assets and companies.

Reuters also reported on Wednesday that AMP Capital Investors is trying to raise up to S$2.9 billion for direct property investments in Asia. The Australian fund manager hopes to purchase Japanese shopping malls at a bargain as falling sales hit retailers and credit tightening squeezes landlords. Industrial buildings and offices beyond the main financial district in Singapore are other potential targets.

Pension funds are also showing more interest in Asian real estate, said Mr Thompson. According to him, these investors are drawn to growing economies with a structural shortage of properties. The economies would also have to be politically stable, with transparent and sound regulatory systems.

‘(Singapore and Australia) are the easiest countries to invest in,’ he said. But he added that China will attract considerable attention.

Across Asia, Mr Thompson believed that ‘the fundamentals for real estate are better than they are in Europe or America’. But because of the global economic slowdown and tighter credit, property values in Asia will continue to fall.

Savills Singapore predicted in a report on Thursday that prices for high-end and super-luxury private homes could drop more than 20 per cent in the next five quarters.

The property consultant also estimated that Grade A office rents could ease 5 to 10 per cent in Q4 this year and a another 15 to 20 per cent next year.

International Real Estate Specialist Sean Glickman Joins Stirling Sotheby’s

You’re currently reading “International Real Estate Specialist Sean Glickman Joins Stirling Sotheby’s,” an entry on Florida Distressed Real Estate Market

How to do economics

 

Getting to grips with economics is a daunting task. Most of us reserve our energies for less muddy waters – and leave matters economic to a few twitchy anorak types. But as the world economy collapses round our ears it affects much we hold dear. Some of us feel compelled to try to understand things economic – if only to judge where the world is heading. Below are suggestions to anyone embarking on this journey.

Do it collectively

There is no substitute for learning about economics with other people. In Bristol there are at least two groups where people meet monthly to discuss the world economy. We take it in turns to introduce a topic (‘banks’ say, or ‘the US car industry’) and then discuss it. Between us we can usually come up with explanations of how things work. And we can draw on the range of economic experience the group has – of different jobs, of visits to various parts of the world, of memories of past events. While our culture continually emphasises the lonely achievement of isolated individuals – ‘great minds’ – in reality thought and understanding is socially generated.

Get your head round numbers

OREO For 11 30 08

OREO For 11 30 08

Lessons from the Crisis

we need a commission of top industry professionals and academics to address the challenge of measuring and detecting systemic risk and provide the underpinning of an effective “early warning” system.

I see little hope of creating any kind of “early warning” system, if by that Mike means better forecasting. Crises like the current one are inherently unpredictable. If they were predictable, hedge funds and other money managers would not lose so much money during them.

True, a few people were sounding an alarm in advance of the current crisis: Nouriel Roubini, in particular, comes to mind. And a few hedge funds have made money during the crisis. Yet that fact is not very meaningful. Given the diversity of opinion at any point in time, someone will always look right ex post. The key question is whether the event is reliably predictable ex ante.

Policymakers at the Fed and Treasury cannot do better than rely on the consensus judgment of experts, and a couple years ago the consensus opinion was not predicting anything like what is now occurring. To suggest a regulatory system that gives an “early warning” is like saying we need to find a better crystal ball. Good luck with that.

FDIC DATA ABOUT COLLAPSING BANKING SYSTEM

Today, we visit the FDIC to look at the latest charts and graphs they publish. And we visit the Nikkei news in Japan to get more graphs. This is all about understanding why the biggest, most international banking/investment systems went under so suddenly and so totally. Throwing good money after bad is stupid. Rubin and Greenspan don’t have a clue…their own words….as to what is going on. So maybe we can clue them in!

This graph illustrates the suddenness as well as the amazing level of losses in the last year. This isn’t a mere handful of banks going under. It is a huge number of huge banks going under rapidly. This is due partially to the Derivatives Beast eating up all the reserves of all the banks, one after another. If the US government and Federal Reserve didn’t capitalize these banks to the tune of trillions of dollars, the entire banking system would have gone bankrupt.

In this regard, this graph is false. It shows only $348 billion in losses. If nature were to follow her natural course, it would really be well over $2.5 trillion and climbing rapidly. The Reagan/Bush Sr. collapse is still over $700 billion in today’s dollars. But again, this was when the US government didn’t have to bail out the entire banking business like they are doing today.

This graph is meaningless unless we figure out why there was almost no bank collapses between 1994 and 2008 with a tiny smidgen late in 2007. What happened during that time, anyway?

This curious question must be asked! For from 1998-2001, we had first, the Asian Currency Crisis then the Dot Com collapse! This caused a global recession. But no banks went under in 1998. $2 billion in losses in 1999. And zero losses again, in 2000. Even when Greenspan and Bush Jr claimed we had a financial crisis and Greenspan dropped interest rates to 1% while Bush cut taxes heavily, there were zero bank closings from the middle of 2003-2007.

My own theory here is obvious to regular readers: the Japanese carry trade began in 1994. It abruptly ended with a bang in mid-July, 2007. This is the only obvious cause that comes to mind. The day and night difference between the carry trade easy-lending era and its sudden end is obvious! For example, the first crashes in the West were exactly one month after the carry trade ended. Since many loans were 30 days short term loans so hedge funds and investment banks would work up ‘deals’, the sudden ending of this easy money caused all these deals to crash into the flight decks of all the biggest banks.

Thanks to the Seeking Alpha story, I was reminded it was time to revisit the official FDIC: Quarterly Banking Profile to see more charts and graphs besides the ones in the Seeking Alpha story.

This chart clearly shows that from 1999-end of 2003, there were the usual ‘problem institutions’. But they didn’t go bankrupt. And the valley was at the peak of the housing bubble: 2005-2006 saw the fewest banks in trouble. then, the trouble began to rapidly climb to higher levels than in 2002. But the startling thing is to compare this with the graph showing the actual losses.

The losses are epic today. Somehow, the infusion of funny money from 1994-2007 created a sudden, totally catastrophic crash in 2008. The number of institutions is not that big. It is the size of each that is startling.

Unlike previous crashes when small banks went under first, the first to go in this whacky cycle are the biggest, not the smallest. Many of the very smallest, the credit unions, barely have noticed this banking meltdown. The reason is obvious: THEY HAD NOTHING TO DO WITH THE JAPANESE CARRY TRADE. Thus, small, regional, local systems were immune to this crash.

Another set of banks have gone under: the big housing/business real estate bankers are going under very fast. Anyone who participated in the sub-prime markets is being cleaned out. But the capitalization for these loans, I would suggest, came out of the Japanese carry trade via the Caribbean Islands, for example.

Not ONE US region has banking capitalization at 10%. Most are well under that. While China, in 2007, raised the reserve ratios all the way up to over 16%, the US allowed our own reserves to drop. While China and Japan ran up huge FOREX reserves, the US didn’t buy yuan or yen and thus, capitalize our own FOREX reserves. I am very beastly about all this: the key to banking lies in savings. The US doesn’t save nearly enough compared to our lending.

Savings, in general, have collapsed in the US. We don’t buy our own government bonds, for example. Foreigners buy these. We know that over 80% of our national debt is now bought by either international corporations or foreign governments. In stark contrast, let’s look at Japan: Market Anxious Govt Spending May Lead To Higher Interest Rates

Here is the Nikkei news pie chart showing how many aliens own Fortress Japan:

It is the reverse of America’s debts. Barely 7% of Japan’s debts are owned by foreigners. The US, it is now over 50% is sold overseas or to internationalist organizations. Japan’s banks own most of it. And the Bank of Japan owns nearly 10%. If we consider all the LDP-controlled entities to be one and the same creature [which they all are] then the percentage of government debt owned by LDP-controllers which includes the Bank of Japan, the Public Pension Funds, the Japan Post Insurance and Banking system from pre-WWII Japan, this is nearly three quarters of Japan’s debts.

Japan has a lot more debt versus GDP than the US. It is now at 160% of the GDP. The Japanese expect 93% of this new debt the government plans to issue the next several years to be internally purchased, not sent overseas. I wonder if this will simply make the ‘depression’ in Japan much worse. The US has been able to hide the depressed economy for 20 years via outsourcing and the Japanese carry trade in tandem with shipping all our excess spending overseas to be held in foreign capitals like Tokyo and Beijing or offshoring it to the many pirate island faux banks.

Back to the FDIC data:

This liabilities pie chart isn’t a good turkey dinner eating experience. Only one third of US savings is insured by the FDIC. So far, we have no domestic losses in this area, the FDIC has kept up with the losses. The emergency bail out bills are for the three quarters of this pie that is being eaten by the Derivatives Beast. Mmmmmm….good. Munch, munch. And look at that 20% red slice of pie! ‘Other BORROWED funds’. How much of this is loans from Japan? The pie chart doesn’t break this sector down. It included Federal funds of various TARPian sorts, I guess. I don’t know. We need more information, don’t we?

One thing is certain here: savings are considered LIABILITIES because the bankers have to pay to hold this money. This is why they press the Federal Reserve very hard to drop interest rates. Then, they don’t have to pay savers. Savers, in turn, are exiting the banking system which is why savings have collapsed in the last decade to below zero growth rates.

Commercial lenders is nearly half of this pie chart. I do believe, they are mostly the guys who created those multi-multi billion dollar buy out and buy up deals. This sector has just begun to fall apart! The housing bubble ended a whole year before this sector began to collapse. The biggest deals on earth occurred in 2007 until the whole system began to fall apart after August, 2007. This sector is, in particular, in very dire condition today. All past deals did was pile debt on existing organizations.

This was utterly unlike the previous bubbles which saw investment in start-ups, for example. This business was all about simply finding existing companies and dumping on top of them, a mountain of funny money debts.

This graph shows how all systems are converging. Always, when systems change gears and things that are below yesterday are on top, tomorrow, this is usually a sign of fundamental changes in the ecosystem. When 30 year debt returns equal today’s, this is another bad sign.

This graph shows that consumer lending collapsed during most of 2006. Note the Xmas spike. By 2007, lending to consumers collapsed to negative numbers during the normal Xmas spike. Except for the Xmas spike in 2005, commercial lending has been always greater than consumer spending. During 2007, note how these deals shot through the roof! Consumer lending went very deeply into negative numbers after the Xmas spike which really was not much of a spike but rather, a flat system.

The government was already opening all its private lending windows during this entire year, yet at the end of it all, in last March, consumer lending collapsed into negative numbers. -34% during the start of the Xmas lending spike period! Commercial lending still exists but is dropping very rapidly and is lower than any time in the last 4 years.

Net operating income fell off the cliff right after the Japanese carry trade began to unwind in late 2007.

We see yet again, the hump of troubles in the 2000-2003 period when the Dot Com bubble burst and the 9/11 attacks caused economic problems. But few banks went under. For the Japanese carry trade bailed us out during that recession!

But look at how the graph does the dread ‘hockey stick’ climb! Noncurrent loans means someone isn’t paying their debts. This is growing rapidly. It is not ‘humping’.

2004-2007, construction loans climbed as more and more banks lent to builders. All have been caught in the gears now. The number of banks doing this is dropping. But I think this graph will, next year, show a very steep drop in early 2009 onwards.

Like this graph! Real estate loans have nosedived after the top of the housing bubble. which was in 2005. Below is the graph from SPIEGEL ONLINE - Nachrichten from Germany. It shows the collapse in auto sales both in Germany and the US.

Porsche sales, in particular, went bad in the US. Many investment geniuses bought Porsches to race at private race tracks. Now, that fad is over. Maybe they will be reduced to bike racing? Or marathon running from the law?

All the sales of big, fat, gas guzzlers are below 3o%. Only small cars are seeing any growth. Just like the small banks are doing OK. A lesson is here, somewhere.

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

FDIC DATA ABOUT COLLAPSING BANKING SYSTEM

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Today, we visit the FDIC to look at the latest charts and graphs they publish. And we visit the Nikkei news in Japan to get more graphs. This is all about understanding why the biggest, most international banking/investment systems went under so suddenly and so totally. Throwing good money after bad is stupid. Rubin and Greenspan don’t have a clue…their own words….as to what is going on. So maybe we can clue them in!

FDIC Graphs Show the Extent of the Financial Crisis - Seeking Alpha

This graph illustrates the suddenness as well as the amazing level of losses in the last year. This isn’t a mere handful of banks going under. It is a huge number of huge banks going under rapidly. This is due partially to the Derivatives Beast eating up all the reserves of all the banks, one after another. If the US government and Federal Reserve didn’t capitalize these banks to the tune of trillions of dollars, the entire banking system would have gone bankrupt.

 

In this regard, this graph is false. It shows only $348 billion in losses. If nature were to follow her natural course, it would really be well over $2.5 trillion and climbing rapidly. The Reagan/Bush Sr. collapse is still over $700 billion in today’s dollars. But again, this was when the US government didn’t have to bail out the entire banking business like they are doing today.

 

This graph is meaningless unless we figure out why there was almost no bank collapses between 1994 and 2008 with a tiny smidgen late in 2007. What happened during that time, anyway?

 

This curious question must be asked! For from 1998-2001, we had first, the Asian Currency Crisis then the Dot Com collapse! This caused a global recession. But no banks went under in 1998. $2 billion in losses in 1999. And zero losses again, in 2000. Even when Greenspan and Bush Jr claimed we had a financial crisis and Greenspan dropped interest rates to 1% while Bush cut taxes heavily, there were zero bank closings from the middle of 2003-2007.

 

My own theory here is obvious to regular readers: the Japanese carry trade began in 1994. It abruptly ended with a bang in mid-July, 2007. This is the only obvious cause that comes to mind. The day and night difference between the carry trade easy-lending era and its sudden end is obvious! For example, the first crashes in the West were exactly one month after the carry trade ended. Since many loans were 30 days short term loans so hedge funds and investment banks would work up ‘deals’, the sudden ending of this easy money caused all these deals to crash into the flight decks of all the biggest banks.

 

Thanks to the Seeking Alpha story, I was reminded it was time to revisit the official FDIC: Quarterly Banking Profile to see more charts and graphs besides the ones in the Seeking Alpha story.

This chart clearly shows that from 1999-end of 2003, there were the usual ‘problem institutions’. But they didn’t go bankrupt. And the valley was at the peak of the housing bubble: 2005-2006 saw the fewest banks in trouble. then, the trouble began to rapidly climb to higher levels than in 2002. But the startling thing is to compare this with the graph showing the actual losses.

 

The losses are epic today. Somehow, the infusion of funny money from 1994-2007 created a sudden, totally catastrophic crash in 2008. The number of institutions is not that big. It is the size of each that is startling.

 

Unlike previous crashes when small banks went under first, the first to go in this whacky cycle are the biggest, not the smallest. Many of the very smallest, the credit unions, barely have noticed this banking meltdown. The reason is obvious: THEY HAD NOTHING TO DO WITH THE JAPANESE CARRY TRADE. Thus, small, regional, local systems were immune to this crash.

 

Another set of banks have gone under: the big housing/business real estate bankers are going under very fast. Anyone who participated in the sub-prime markets is being cleaned out. But the capitalization for these loans, I would suggest, came out of the Japanese carry trade via the Caribbean Islands, for example.

 

Not ONE US region has banking capitalization at 10%. Most are well under that. While China, in 2007, raised the reserve ratios all the way up to over 16%, the US allowed our own reserves to drop. While China and Japan ran up huge FOREX reserves, the US didn’t buy yuan or yen and thus, capitalize our own FOREX reserves. I am very beastly about all this: the key to banking lies in savings. The US doesn’t save nearly enough compared to our lending.

 

Savings, in general, have collapsed in the US. We don’t buy our own government bonds, for example. Foreigners buy these. We know that over 80% of our national debt is now bought by either international corporations or foreign governments. In stark contrast, let’s look at Japan: Market Anxious Govt Spending May Lead To Higher Interest Rates

 

Here is the Nikkei news pie chart showing how many aliens own Fortress Japan:

 

It is the reverse of America’s debts. Barely 7% of Japan’s debts are owned by foreigners. The US, it is now over 50% is sold overseas or to internationalist organizations. Japan’s banks own most of it. And the Bank of Japan owns nearly 10%. If we consider all the LDP-controlled entities to be one and the same creature [which they all are] then the percentage of government debt owned by LDP-controllers which includes the Bank of Japan, the Public Pension Funds, the Japan Post Insurance and Banking system from pre-WWII Japan, this is nearly three quarters of Japan’s debts.

 

Japan has a lot more debt versus GDP than the US. It is now at 160% of the GDP. The Japanese expect 93% of this new debt the government plans to issue the next several years to be internally purchased, not sent overseas. I wonder if this will simply make the ‘depression’ in Japan much worse. The US has been able to hide the depressed economy for 20 years via outsourcing and the Japanese carry trade in tandem with shipping all our excess spending overseas to be held in foreign capitals like Tokyo and Beijing or offshoring it to the many pirate island faux banks.

 

Back to the FDIC data:

This liabilities pie chart isn’t a good turkey dinner eating experience. Only one third of US savings is insured by the FDIC. So far, we have no domestic losses in this area, the FDIC has kept up with the losses. The emergency bail out bills are for the three quarters of this pie that is being eaten by the Derivatives Beast. Mmmmmm….good. Munch, munch. And look at that 20% red slice of pie! ‘Other BORROWED funds’. How much of this is loans from Japan? The pie chart doesn’t break this sector down. It included Federal funds of various TARPian sorts, I guess. I don’t know. We need more information, don’t we?

 

One thing is certain here: savings are considered LIABILITIES because the bankers have to pay to hold this money. This is why they press the Federal Reserve very hard to drop interest rates. Then, they don’t have to pay savers. Savers, in turn, are exiting the banking system which is why savings have collapsed in the last decade to below zero growth rates.

 

Commercial lenders is nearly half of this pie chart. I do believe, they are mostly the guys who created those multi-multi billion dollar buy out and buy up deals. This sector has just begun to fall apart! The housing bubble ended a whole year before this sector began to collapse. The biggest deals on earth occurred in 2007 until the whole system began to fall apart after August, 2007. This sector is, in particular, in very dire condition today. All past deals did was pile debt on existing organizations.

 

This was utterly unlike the previous bubbles which saw investment in start-ups, for example. This business was all about simply finding existing companies and dumping on top of them, a mountain of funny money debts.

 

This graph shows how all systems are converging. Always, when systems change gears and things that are below yesterday are on top, tomorrow, this is usually a sign of fundamental changes in the ecosystem. When 30 year debt returns equal today’s, this is another bad sign.

 

This graph shows that consumer lending collapsed during most of 2006. Note the Xmas spike. By 2007, lending to consumers collapsed to negative numbers during the normal Xmas spike. Except for the Xmas spike in 2005, commercial lending has been always greater than consumer spending. During 2007, note how these deals shot through the roof! Consumer lending went very deeply into negative numbers after the Xmas spike which really was not much of a spike but rather, a flat system.

 

The government was already opening all its private lending windows during this entire year, yet at the end of it all, in last March, consumer lending collapsed into negative numbers. -34% during the start of the Xmas lending spike period! Commercial lending still exists but is dropping very rapidly and is lower than any time in the last 4 years.

 

Net operating income fell off the cliff right after the Japanese carry trade began to unwind in late 2007.

We see yet again, the hump of troubles in the 2000-2003 period when the Dot Com bubble burst and the 9/11 attacks caused economic problems. But few banks went under. For the Japanese carry trade bailed us out during that recession!

 

But look at how the graph does the dread ‘hockey stick’ climb! Noncurrent loans means someone isn’t paying their debts. This is growing rapidly. It is not ‘humping’.

 

2004-2007, construction loans climbed as more and more banks lent to builders. All have been caught in the gears now. The number of banks doing this is dropping. But I think this graph will, next year, show a very steep drop in early 2009 onwards.

Like this graph! Real estate loans have nosedived after the top of the housing bubble. which was in 2005. Below is the graph from SPIEGEL ONLINE - Nachrichten from Germany. It shows the collapse in auto sales both in Germany and the US.

 

 

Porsche sales, in particular, went bad in the US. Many investment geniuses bought Porsches to race at private race tracks. Now, that fad is over. Maybe they will be reduced to bike racing? Or marathon running from the law?

 

 

All the sales of big, fat, gas guzzlers are below 3o%. Only small cars are seeing any growth. Just like the small banks are doing OK. A lesson is here, somewhere.

 

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

Hedge Funds can now buy banks

 

 

 Investors including private-equity firms may find it easier to acquire U.S. banks after the Federal Deposit Insurance Corp. said it will let groups without charters bid for the deposits and assets of failing lenders.

The FDIC change, announced in a press release today, will help ensure “failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund” by marketing assets to “known, qualified and interested bidders.”

“This may indicate that the FDIC is experiencing difficulties in finding local and traditional buyers of failed banks,” the report said.

We knew this was coming (it has been well telegraphed) but the idea of letting hedge funds anywhere near consumer deposits is breathtakingly stupid. 

We are rabid anti-regulation types. However, banking has to be an exception to laissez faire as banking is by definition a confidence game to start with (emphasis on “con” in confidence). If we lend out money we don’t have as individuals we got to jail. If we buy a bank it is business as usual. Now a completely unregulated industry can buy access to Mom and Pop savings.

Government Revival of Lending Uses Taxpayers

 

Spin on Meltdown Defuses Indignation

By I. Langalibalele

Two contending views exist concerning how the financial meltdown happened. Neither one is entirely incorrect, yet whichever view dominates will determine how society responds to the bail out. People must understand that their interpretation of events is based upon however themselves they perceive their relationship to the power structure and to the economic forces that run this country. Which in turn determines how democracy will operate thru the next period of political hegemony over the masses of Americans.

On the one hand, there is the belief that an over-extended practice of credit lending stretched thin the liquidity of US financial institutions. This view says that Americans lived on credit. They used credit to pay for everything from big ticket items like houses and autos and furniture and plasma screen televisions, to paying off utility, grocery and clothing bills. This view is not entirely wrong, but it is not at the root of the problem.

According to Milton Friedman, late architect of the cut and spend voodoo economics of every administration from 1981 to the present, economic crises stem from cash being regulated rather than distributed. In this scenario, the cash being regulated by the banks and corporate finance institutions have done what is characteristic under capitalism.

Wealth hoarded from society by financiers gets concentrated. They transform it into asset-backed commercial paper, which can be packed into briefcases, transported and negotiated anywhere. Sophisticated funds such as hedge funds, arbitrages, derivatives and other forms of capitalism are driven from the very credit market that the right-wing accuses Americans of having abused. Freidman was not wrong about cash being locked up, but he was the leading advocate of those responsible for concentrating wealth, a seeming paradox.

Liquidity is locked up in asset-backed commercial paper. Huge funds are driven by firms that bundle mortgages and sell them to investors; your home is only worth the down payment. Investors back their speculative investments such as oil futures on bundled real estate which has in part driven the price, not the cost, of gasoline over the last three years.

Wealth is locked up, Milton Friedman, by a handful of capitalists making war against society, assisted at the uppermost levels of the State.

Out of this current period, a massive shakeout of small investors has taken place, whereby people having their pensions tied up in stock options have taken another hit. From the S&L scandals of the Eighties and Nineties, to the DotCom shakeout and the stock option swindles — led by Tyco, Enron, Worldcom-MCI, and others — to the current financial crisis caused by the subprime housing market started during the Clinton era, the cycles of massive fraud and rip offs by corporate America seem to be building with increased frequency and viciousness.

Imperialism, international monopoly finance capitalism, has arrived at the point in history where it must cannibalize its base inside the world capitalist centers. For this, capitalism has less use for colonialism and racism. It no longer requires a theory of white supremacy as it shifts capital resources into China and India. Capitalism’s continuation as an economic force today depends upon reducing the conditions of all workers to the lowest possible state and keeping them divided.

Were that not the function of capitalism, workers would actually be paid for the value of their labor. Which underscores the logic that the crisis in social relations occurs at the point of production. This economic meltdown derives from the crisis in social relations created by capitalism, which takes place wherever the class struggle bumps heads. It is bumping heads right now where the banks are being bailed out to the tune of $700 billion. If the government directly bailed out mortgagees, that would reduce the amount to only $150 billion or so.

The Gubernatorial-Oppenheimer Party wiped out the biggest economic boom in history, That was like wrapping a show-room floor Maserati around a tree on a test drive, and walking away unfazed. The party of democracy thru Imperialism, using Imperialism to spread its limited democracy, has achieved its mission, waiting awhile to implement neo-fascist economic and political policies to eradicate unions, the Left, and civil society. It must wait for the Dems to lure the people back to sleep by working Imperialism thru democracy.

So, to say the credit system caused the financial meltdown is not completely true or even remotely accurate. The money locked up by banks derives from value produced by every worker in America and then lent back to them at exorbitant rates.

Working people build houses, thereby transforming raw land into real estate. And in America, land was never honestly purchased or traded; it was looted from the Turtle Islanders. American capitalism on free land built upon the slave labor of African people still cannot produce wealth without thievery, deception and misery.

This tendency adversely effects democracy and defines the next period of hegemony over working and poor people. Once the so-called government bail out of the banks gets finalized, new regulations and policies will go into effect.

As the corporate media defines democracy and flagellates the average American about having used too much credit, guilt becomes the new black. The supposed white guilt about racism that never was — because anti-racism never was about white guilt — will miraculously become transfigured into white guilt about finances. And the Democratic Party will implement the new regime under what will be, in  the upshot, Imperialism thru democracy.

What might happen to world food prices

Meal Ticket

By Chris Mayer in Rude Awakening - 25. November 2008

“In my own case, the Depression brought a strange result,” writes Eddie Cantor in 1931. “Before the crash, I had a million dollars, a house, three cars and four daughters. Now all I’ve got left is five daughters.”

Eddie Cantor (1892-1964) was a comedian, singer, songwriter and actor. “Banjo Eyes,” as he was sometimes called, was also the author of two little books on the Great Depression. “People used to rob banks,” he writes in Yoo-Hoo Prosperity. “Now we’re lucky when it isn’t vice versa.” Cantor jokes about many troubles in the Great Depression, but one recurring theme is the relative lack of food.

A millionaire is “one who eats three square meals a day.” Things were so bad that “the pigeons are now feeding the people.” They were funny lines…sort of. For many of the people living during those times, Cantor’s jokes were not so far from the truth.

We have it comparatively easy in this, the crisis of 2008. We may have to make do with fewer Swatch watches and Coach handbags. We may have to pass on the latest iPod and make do with last year’s winter coat. These hardships are not important, except for people selling those goods. But the credit crisis is also affecting the world’s ability to produce one thing important to everyone: food.

It’s harder for farmers to get credit for next season’s crop, especially farmers overseas. They need fertilizer, seed, fuel and more. And most farmers need to borrow money to obtain these essential items. No credit; no crops.

Therefore, the global credit squeeze might reduce plantings of key grains, even as world inventories of these grains hover near historic lows. In Russia, for example, cash-starved banks have cut off funding for the industry. The head of the Russian Grain Union says, “Many farmers probably won’t be able to borrow money for the spring sowing.” This is important because Russia is no lightweight in the grain division. It produces 9% of the world’s wheat, for instance. No surprise that the United Nations considers Russia a critical component of the global food supply.

Ironically, Russia just had its best harvest ever. And still, global grain inventories remain low. Bloomberg reports that global inventories of corn, wheat and soybeans are the second lowest they’ve ever been since 1974.

A number of countries already fear what might happen next year. The Washington Post Foreign Service in Shanghai reports that China adopted a number of measures to protect itself from the worsening food crisis: “Among the most extreme measures [China] took was to impose new export taxes to keep critical supplies such as grains and fertilizers from leaving the country.”

Fertilizers are absolutely critical in maintaining (and improving) crop yields. Without them, we’d produce far less per acre. As a result, in parts of Africa where people depend on Chinese fertilizers, the food supply problem is now more acute. China’s export taxes and bans follow those of other grain producers, including the Ukraine, India, Pakistan and Argentina.

Amazingly, despite these various maneuvers around the world to prevent grain exports, the prices for wheat, corn and soybeans are all half of their mid-summer highs. It seems the market believes a global recession will dampen demand. Maybe so, or maybe the market doesn’t know anything. The severe commodity selloff during the last few weeks might be saying a lot more about the desperation of hedge fund managers to raise cash than about the prospect that grain demand will fall - in which case, we could see another surge in prices next year.

Demand for grains is still very strong. In China, each wage-earner devotes about 40 cents of every dollar earned to buying food. In India, that number is a staggering 70 cents out of every dollar earned. In other words, the food budget in these countries is hardly a discretionary item. It will remain constant, or even rise, no matter what the global economy does.

Meanwhile, the people in these countries who have a couple of extra rupees to toss around are upping their consumption of meats, which increases the per capita demand for grains. As PotashCorp chief William Doyle recently pointed out: “The average daily protein intake in China has increased by 40% over a 20-year period, with the greatest percentage of that increase coming from meat consumption.” You can see it in the size of the people themselves: The average 6-year-old Chinese boy is 12 pounds heavier and 2 inches taller than 30 years ago. These people aren’t going back to the ways thing were. This is a long-term story, and these trends should continue.

Yet even if demand growth for grains slows, it’s not likely that those low global grain inventories will improve. Even if grain demand fell to 2% per year, we’d still need record production to keep grain inventories from falling further.

Beyond that, irrigation companies have come way down, even after posting outstanding results. Lindsay (NYSE: LNN) and Valmont (NYSE: VMI) are two irrigation equipment makers, for example, both coming off great quarterly results.

In 1931, Eddie Cantor wrote that the biggest thing in years was bread. “Why, they’re giving it away free! Whenever four men get together at a street corner, it used to be a merger,” he writes. “Now it’s a bread line!” It’s funny now. Next year, it might not be, at least to some.

Eξω τά κλείνουνε τά Mall, μά εδώ ανοίγουν Golden Hall

Matt Apuzzo, The Associated Press Comment on this story WASHINGTON - The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts nationwide.

Even as the holiday shopping season gets into full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in.

Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

The pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one hurting like never before.

In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

“It’s a toxic drug, and nobody knows how bad it’s going to be,” said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells about the residential market.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years, with big payments due at the end.

About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens ‘n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Landlords expected the rent those retailers were paying to help them cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money.

Some will survive, but property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing was once an option, but many properties are worth less now than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

Afraid of risk

The worst-case scenario goes like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

“Credit markets have seized up,” corporate securities lawyer Michael Gambro said. “People are not willing to take risks. They’re not buying anything.”

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

“The system has never been tested for a deep recession,” said Ken Rosen, a real estate hedge fund manager and University of California, Berkeley professor of real estate economics.

One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer plans to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

“He’s created havoc in the marketplace by changing the rules,” Rosen said. “It was the stupidest statement on Earth.”

Day 20 of 30, 2 more poems

Nate and I are launching an online literary journal called Ill Move. We are accepting submissions through February 12, 2008. There’s a link under pages about Ill Move on my blog, so make sure you inform yourself, especially if you’re a writer. Nate and I wanted to capture the changing cultural landscape of our world and this is our attempt to do so. As always, Nate’s poems.

Poster Above My Bed

Why do we underpay our best CEOs?

Why do we underpay our best CEOs?

Why do we underpay our best CEOs?

Quitting your Job in Style

Some people are happier than others to get out of the rat race.  Andrew Lahde, a California hedge fund manager, made over 850% returns betting on the subprime collapse.  Realizing he hated his job, he resigned a wrote a great resignation letter.  Read his slam against foolish, Ivy League trained money managers.  His comment about Blackberry’s and vacations is classic.  Finally, ends his letter by slamming the US Congress and praising marijuana.  Hilarious:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.

Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country?

Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

‘Correction,

id="blog_description">Notes on the Web

N+1 feels right in print. Despite the promise of “Web only” content once or twice a week, I rarely visit its Web site, which is odd behavior for me, given that most of my news is filtered through blogs or social media like Twitter, Facebook, Friendfeed and Delicious. (There is some good stuff there, like this article about being a student of David Foster Wallace).

An infrequently published print journal of incoherent aims is an anachronism, to be sure, but an enjoyable one — the news writ slow. I devour it in a way I do not devour The New Yorker, which tends to pile up into a tall stack that taunts me until at last, weeks behind, I skim wildly, looking for the articles people went out of their way to mention. “Did you see in The New Yorker…” Well, yes, I saw it.

This issue of N+1 was not a disappointment. It was perfect like hot coffee on a cold November morning. Here’s how it went down:

Weekend Update

Mike: While most economic attention is being paid to the holiday shopping weekend, the layoff news continues to roll  in. Even if the shopping numbers come in at a decent level, it won’t stop the job loss news, which is still gathering steam. Here are a few employment stories from the last couple days.

The housing bust is going to cripple many a city that was living large on housing track development fees and increased property tax revenue expectations that are now being shredded by lowering home values and sales:

PHOENIX – The city of Phoenix is preparing to trim hundreds of millions of dollars from the city budget, meaning 1,200 jobs city jobs will be eliminated next fiscal year, Mayor Phil Gordon acknowledged Tuesday.

http://www.kpho.com/news/18147104/detail.html

Mike: The following link http://www.networkworld.com/slideshows/2008/091708-biggest-it-layoffs-of-2008.html has some good information on large job cuts in the IT field. 

IT professionals looking for work should expect the number of open positions to decline in coming months as those currently employed in high-tech brace themselves for budget cuts, possible pay cuts and of course, layoffs (view a slide show of the largest IT layoffs in 2008).

http://www.networkworld.com/news/2008/112508-it-job-market.html

Traditionally, they are the best positioned to bear the brunt during an economic slump.

But some discounters, including Harbor Freight Tools, are looking leaner, reducing work force and trimming hours.

About 20 people have left the privately held Camarillo-based discount tool retailer in the past three months, because of performance, a mismatch of skills and job elimination as a result of changed processes or implementation of automated tools, said Pete Roberts, vice president of human resources.

http://www.venturacountystar.com/news/2008/nov/25/harbor-freight-cuts-jobs-hours/

National Gypsum announced earlier this week that the Gold Bond Building Products factory on Riverside Avenue Extension will shut down in January, leaving about 73 workers jobless. 

http://www.zwire.com/site/news.cfm?BRD=248&dept_id=462341&newsid=20209225&PAG=461&rfi=9

Mike: The following is a reminder that unemployment benefits are taxable. Unfortunately, the benefits are taxable at your normal earnings rate, but our clueless government leaders allow hedge fund managers to pay only the capital gains rate for many of their earnings. So if you make millions as a hedge fund manager, you could easily pay a lower tax rate than that imposed on unemployment benefits. 

Downing: Remember, unemployment benefits are taxable

What to do?

You can simply have tax withheld from your unemployment benefit payments, said Bob D. Scharin, senior tax analyst from the Tax & Accounting business of Thomson Reuters.

There are other ways to deal with the issue, such as making quarterly estimated tax payments. But withholding is the most convenient method for many beneficiaries, Scharin said.

By choosing to have tax withheld, “It means you will not have to come up with a chunk of cash” during tax season to cover a balance due, he said. It could help you avoid any potential penalty for underpayment of tax, he said.

http://www.projo.com/business/content/BZ_MoneyLine_November_29_11-29-08_K7CEE08_v9.322b8d5.html

For the Record: November 24, 2008, Heng Swee Keat, Managing Director of the Monetary Authority of Singapore: Ensuring stability – international perspectives on creating an effective regulatory framework - Statement given at the Inaugural Plenary Session, World Islamic Banking Conference, Bahrain

Release here.

Research Comment: For those interested in Islamic finance and banking, you should read. Also, the topic of Islamic finance is potentially an interesting subject for a master’s or doctoral thesis.

Good morning, ladies and gentlemen.

I am honoured to speak at this opening plenary, following the keynote remarks by His Excellency, Governor Rasheed Al-Mara.

I am also delighted to be in Bahrain, recognised globally as one of the leading centres for Islamic Finance. Besides having a core of active Islamic financial institutions, Bahrain also plays host to a number of organisations central to the development of Islamic Finance, including AAOIFI, the LMC, IIFM and the IIRA, and of course, this WIBC.[Footnote 1 - Source: CBB website, http://www.cbb.gov.bh. AAOIFI - Accounting and Auditing Organisation for Islamic Financial Institutions; LMC - Liquidity Management Centre; IIFM - International Islamic Financial Market; IIRA - Islamic International Rating Agency; WIBC – World Islamic Banking Congress.]

The Central Bank of Bahrain ["CBB"], a highly regarded regulator, has played a key role in spearheading the development of Islamic Finance. The CBB has scored many “firsts”, including the first central bank sukuk in 2012 and being the first country to develop and implement regulations specific to the Islamic banking industry. The CBB has also established the Waqf Fund to finance research, education and training in Islamic Finance. There is much that the MAS can learn from the CBB.

The current global crisis – some root causes

The theme of this session – having an effective regulatory framework – is of great relevance given the on-going financial crisis. The current financial crisis is unprecedented in terms of its scale, complexity, and speed of transmission. While the series of coordinated actions by financial authorities and Governments have helped to stabilise the markets somewhat, sentiments remain fragile, and many of the underlying problems remain. Many reasons have been offered about the root causes of the current crisis. Let me just highlight a few of these.

The first is the unprecedented levels of leverage taken on by global financial institutions coupled with very loose lending standards in the credit markets. Consumers in the US were also highly leveraged. The high leverage enabled asset values and consumption to be raised to unsustainable levels. When sentiments finally turned, there was massive deleveraging.

The second is that complexity magnifies risks. The proliferation of complex securities and derivatives had not diversified risk amongst different counterparties as was originally intended, but instead increased aggregate systemic risk throughout the financial system. Not only banks and investment banks were affected but a whole range of players including credit insurers, hedge funds and investors in asset-backed commercial paper have also suffered major losses.

The third is the inadequate assessment of risks and compression of yields. Many of the assessments were based on complex modeling and did not give sufficient regard to the tail risks in these financial products including the illiquidity risk. In some instances, there may not have been sufficient diversity of views of the risks and pricing of structured credit, with a heavy reliance on rating agencies.

Against these key causes, we must include the backdrop of unsustainable macro-economic imbalances that were building up in the global economy, and policy responses which effectively allowed yields to fall to very low levels. The aggressive search for returns also led to severe compression of yields which distorted investor behaviour and long-term valuations.

The interaction of high leverage, excessive complexity and compression of yields meant that when sentiments turned, the magnitude of price falls across asset classes have been sharp, and the dynamics of the deleveraging process unpredictable. Financial institutions and markets have also become so highly interconnected that an event in one area sets off a chain of events that magnify and exacerbate the initial shocks.

The shocks in the financial markets have now been transmitted to the real economy in the developed countries. Through both the financial as well as the trade and investment channels, these shocks are also propagated to emerging economies. The negative feedback loop between the deterioration in the real economy and sell-offs in financial assets have added to the uncertainty. It will take some time before the crisis runs its course.

Policy agenda

Our immediate focus must be to limit the damage of the financial crisis on the real economy, and stop the downward spiral created by the negative feedback loop. Policy measures must include not just fiscal and monetary policy stimulus, but also an acceleration of structural changes to correct the underlying imbalances, to put the global economy on a sounder footing for renewed growth.

There has also been much discussion about regulatory reform. Reform is certainly necessary, but we must avoid swinging the regulatory pendulum to the other extreme. While the present system has major flaws, it is not fundamentally broken. Fixing these flaws demands thoughtful and pragmatic changes at the global level. Piecemeal quick fixes, which may be logical and perhaps even headline grabbing, may end up creating unforeseen and unintended consequences. It would be a mistake, for instance, to swing towards overly prescriptive rules, or to severely restrict all forms of securitisation and financial innovation. As financial markets are at different stages of development in various countries, we must also avoid a “one-size-fits-all” approach. Certainly, we will need greater international cooperation, and the work of bodies such as the IMF, FSF, BCBS, IOSCO, IAIS,[Footnote 3 - IMF – International Monetary Fund; FSF – Financial Stability Forum; BCBS – Basel Committee on Banking Supervision; IOSCO - International Organisation of Securities Commissions; IAIS - International Association of Insurance Supervisors.] and initiatives sponsored by groupings such as the G20 will be important in this reform effort.

An effective regulatory framework for Islamic finance

The current global crisis has posed a series of extreme stress tests on financial systems and our regulatory approaches, and offers many important pointers for the development of Islamic Finance. Allow me to highlight a few.

First, one of the most significant lessons about the crisis is also the most basic, that is, finance needs to return to its basic function of allocating scarce capital to the most productive uses, with the capital earning an appropriate risk-adjusted return.

In this regard, the underlying Shariah precept in Islamic Finance of not using capital for speculation, but to build productive capacity and generate sustainable economic growth, takes on great relevance. By adhering to this basic precept, I am confident that Islamic Finance will assume a more prominent role in the coming years.

Second, whatever the forms of intermediation, we must remain focused on the types and nature of risks, and how these risks are distributed among the players. Before this crisis, the main focus was on risks posed by hedge funds. As it turns out, a large part of the risks were sitting in the core banking system, in the form of off-balance sheet items held in SIVs. Mortgage lenders which originated subprime mortgages were outside the regulatory ambit. The main lesson here is that we have to examine risks holistically, across the value chain of activities and across different asset classes and markets, and not be blinkered in pre-judging where risks sit. For tail risks in particular, the dark corner where we shine the light may not necessarily be the place where those risks reside.

Many of the risks inherent in Islamic Finance are similar to those of conventional finance, including credit risks, market risks, market conduct risks, operational and reputational risks. However, the exposure to those risks could differ between conventional and Islamic finance. For instance, Islamic banks are generally exposed to substantially more liquidity risk than their conventional counterparts, as the range of liquid instruments and hedging instruments are more limited. Islamic banks tend also to be more exposed to the property and infrastructure sectors, in part because these are the prevalent asset classes in the Gulf and also in part because Islamic finance has to be based on physical assets. Given the “large and lumpy” nature of such transactions and the tendency for asset bubbles to build up quickly, it is a risk that merits special attention.

In addition, there are also risks unique to Islamic Finance such as Shariah-compliance risk. If products are later found to be non-Shariah compliant, the institutions not only face reputational damage, but also costly unwinding of such structures, with possible losses to investors. The third point is that to achieve a good outcome, an effective regulatory approach needs to embrace a tripartite approach. Regulators, financial institutions and investors all have a role to play.

Allow me to share briefly the approach that MAS takes. As a regulator, MAS looks at both the micro-prudential aspects, looking at the safety and soundness of individual financial institutions, as well as macro-prudential aspects, looking to see if system-wide risks have been built up in the aggregate.

In doing this, we adopt a risk-based approach towards supervision and regulation, in order to promote sustainable development of the sector. For example, we set appropriate limits and capital charges to address the credit, market and other risks. The standards of governance and risk management are set at levels commensurate with the activities and the risks being taken. Sometimes we are accused of being overly conservative, but this prudence has served us well.

In all instances, we seek to find the right balance between “principles-based” and “rules-based” regulation; to avoid being over-prescriptive in rule-making or being over-reliant on market discipline alone to curb excessive risk-taking. Similarly, market conduct measures focus on upholding principles of fairness and transparency, for instance, through requirements on disclosure to investors and a fair-dealing sales process.

The fourth pointer from the current crisis is the importance of preventing regulatory arbitrage, and ensuring a level playing field. With regards to Islamic Finance, in particular, MAS seeks to ensure a level playing field between the conventional and Islamic financial players. Where the economic substance and risks are similar, the same regulatory treatment is accorded, regardless of whether the product is a “conventional” or “Islamic” product. For example, Singapore-based banks treat murabaha-based5 asset financing as a credit risk exposure to the customer for the purpose of maintaining regulatory capital. As Islamic Finance grows, our regulatory framework must continue to evolve to maintain regulatory consistency in managing the underlying substance of the risks.

International collaboration

The fifth and very crucial point that emerges from the current crisis is the importance of international collaboration. As Islamic Finance grows, cross border transactions will multiply. We must therefore take an international perspective in preventing and resolving problems right at the outset. Allow me to suggest three areas where regulators can work closely.

The first area is that legal, regulatory and supervisory frameworks that are developed should be based on internationally recognised principles and standards. The work done by international standard-setting bodies such as the IFSB, IDB, AAOIFI and IIFM [Footnote 6 - 6 IFSB - Islamic Financial Services Board; IDB – Islamic Development Bank; AAOIFI - Accounting and Auditing Organisation for Islamic Financial Institutions; IIFM - International Islamic Financial Market.] is instructive in this regard. For example, “The Ten Year Framework and Strategies” co-issued by the IFSB and IDB is a thoughtful blueprint. AAOIFI has also produced standards in areas such as accounting, auditing, ethics, Shariah compliance and governance. Today, the applications of Shariah precepts differ somewhat in certain areas. It will eventually be desirable to have some standardisation to enhance consistency and to remove one source of regulatory risk.

However, our goal should be to achieve a gradual harmonisation of standards and approaches to regulation, rather than immediate convergence. Even in conventional finance, regulatory approaches and standards differ across different jurisdictions. A flexible, risk-based approach will also allow continued innovation to take place, while ensuring the resultant risks are appropriately managed.

Second, we need to develop a wider range of tools to detect and mitigate risks. In conventional finance, work is underway in reviewing shortcomings in capital adequacy and liquidity management in the Basel II framework, as well as the provision of clearing and settlement infrastructure for derivatives. For Islamic Finance, we need to continue to develop instruments that help to mitigate risks. Bahrain’s initiative in developing the Liquidity Management Centre [Footnote 7 The Bahrain Monetary Agency was the primary sponsor in establishing the Liquidity Management Centre] is an excellent example of such an effort.

In this regard, I am pleased to announce that the Monetary Authority of Singapore is now in the final stages of setting up a sukuk issuance facility. I had announced, at this May’s Islamic Murabaha-based asset financing refers to mark-up asset financing, commonly used in home financing and car financing. In such a transaction, banks generally purchase the asset to be financed, and then sells it to the customer at a mark-up, to be paid on a deferred basis.

Financial Services Board Summit, Singapore’s plan to set up a facility to provide Shariah-compliant regulatory assets to these financial institutions as part of our efforts to promote the growth of Islamic Finance in Singapore.

The sukuk structure is based broadly on the Al-Ijarah structure, or the sale-and-leaseback of an underlying property. Sukuk issued by the facility will be given equal regulatory treatment as Singapore Government Securities, or SGS, and returns will be tied to the risk-free yield of SGS of equivalent tenor. The facility is open to all financial institutions that plan to or are currently carrying on Shariah-compliant financial services in Singapore. We are issuing on a reverse enquiry basis, which means we can size and time the issuance according to the needs of the financial institutions. A number of financial institutions have already expressed interest and we expect the first issue to take place at the start of next year. We invite eligible and interested financial institutions to approach MAS as we work towards a formal launch.

Last but not least, efforts to further international collaboration will need to be supported by a solid platform for co-operation and information sharing amongst regulators. Formal agreements between regulators on the scope of cooperation and information sharing will be helpful in this regard. Singapore, as a full member of the IFSB, and a signatory to MOUs with various GCC countries, is keen to explore further avenues for cooperation and collaboration.

Underpinning all these, of course, is the need to continue to broaden and deepen knowledge and expertise on Islamic Finance among regulators and industry players. An investors’ education platform to promote risk awareness of Shariah compliant products will also serve to reinforce market discipline by raising awareness of the characteristics and risks of Shariah products, as well as boosting demand for such products.

Conclusion – opportunities for Islamic finance

I would like to end on an optimistic note by reiterating the opportunities available in Islamic Finance. While we must expect the global economy and financial activities to slow in the coming months, the long-term structural improvements in Asia and the GCC will continue. Between Asia and the GCC, for instance, total trade grew by 17% annually since 2000 to exceed US$328 billion in 2006 [Footnote 8 - 8 Based on IMF and CEIC statistics.] Total cross-border capital flows between Asia and the GCC are also predicted to increase from US$15 billion at end 2006 to US$300 billion by 2020. [9 Source: http://archive.gulfnews.com/articles/08/05/25/10216034.html. Even if only half of these projections are realised, growth is still sizeable. It is thus crucial that we remain focused on enabling long term growth and development even as we tackle the current crisis.

There are many productive areas for the private sector to work in close partnership. I look forward to working closely with our colleagues in the Middle East to further promote cooperation in financial services and Islamic Finance, which will serve as key pillars for promoting long-term, sustained economic development and cooperation in our two dynamic regions.

On that note, I would like to thank you all for your kind attention this morning, and I wish everyone a fruitful conference.

Lehman Brokerage Lost $400 Billion in Assets Before Bankruptcy

Dari Bloomberg: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aH6Cz4OKDh.U

By Linda Sandler

Sept. 27 (Bloomberg) — Lehman Brothers Holdings Inc.’s brokerage unit, in the months before its parent filed for bankruptcy protection, lost more than $400 billion in assets, according to the trustee overseeing customer accounts.

Lehman’s holding company filed for bankruptcy Sept. 15 claiming $639 billion in assets, using four-month-old data. The wholly owned brokerage unit shrank to less than $100 billion in assets from $500 billion “a few months ago,” according to a Sept. 19 court statement by James Giddens, the trustee overseeing the settling of Lehman brokerage customer accounts by the Securities Investor Protection Corp.

The loss in value was caused by “changes in the market,” according to Giddens, a partner at law firm Hughes Hubbard & Reed, who spoke at a bankruptcy court hearing in Manhattan. The runoff may indicate Lehman’s customers, including many hedge funds, canceled and closed out trades as they began to doubt the firm’s ability to navigate the credit crunch, bankruptcy analysts and lawyers said.

“There was the proverbial run on the bank” at Lehman, said Martin Bienenstock of the law firm Dewey & LeBoeuf, who is advising clients including Walt Disney Co. on recovering their money from Lehman. There was a similar capital flight from Bear Stearns earlier this year, he said.

Most of Lehman’s pre-bankruptcy assets were securities, according to its balance sheets. Lehman said on Sept. 10 that the consolidated gross assets of the firm stood at $600 billion and net assets at $311 billion. The difference between net and gross is the so-called matched book, which is overnight lending or securities pledged for overnight borrowing.

Bear Stearns

Bear Stearns, once the fifth-biggest U.S. securities firm, sold itself to JPMorgan Chase & Co. in March after customers and lenders fled because of speculation the company faced a cash shortage. Lehman was the fourth-largest investment bank before its bankruptcy.

Giddens didn’t return calls yesterday seeking comment on his statement. SIPC President Stephen Harbeck said he’d seen the brokerage’s latest asset totals and couldn’t remember the numbers, which “we don’t need to know to do our job” of settling the 630,000 customer accounts.

Mark Lane, a Lehman spokesman, didn’t return a call and an e-mail seeking comment yesterday.

Customer accounts at the Lehman Brothers Inc. brokerage that aren’t on the balance sheet total about $138 billion, Lehman’s bankruptcy lawyer Harvey Miller said in court on Sept 19. The trustee’s figure of about $500 billion for brokerage assets before the runoff corresponds to a balance sheet published in 2007, which calculated assets at $478 billion.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.netYalman Onaran in New York at yonaran@bloomberg.net

Last Updated: September 27, 2008 00:01 EDT

finance_01/12/2008

Source : NEP (New Economics Papers) | RePEc

Lest We Forget (por miedo a olvidar)

New York Times: November 27, 2008

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.

About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.

Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. Will the Fed’s ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere? Will the Obama administration’s fiscal stimulus turn output and employment around? (I’m still not sure, by the way, whether the economic team is thinking big enough.)

And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.

For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.

So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now.

A version of this article appeared in print on November 28, 2008, on page A43 of the New York edition.

Mumbai under Siege: the risk of becoming a global city

Ramola Naik-Singru

The obvious unpreparedness of the State Government to respond in a quick and efficient manner to the terrorist attack and the complete chaos in managing the process showed the deep fragmentation in the Indian governance system. A lack of co-ordination, risk assessment and decision-making was evident by the delay in bringing in the elite National Security Guards (NSG) and Indian Naval Commandos on part of the State Government. There was no evidence of any disaster management plan in place which could have resulted in faster action and response to the terror attacks.

It was appalling to hear the State Government of Maharashtra’s Chief Minister Vilasrao Deshmukh on television immediately after the blasts, stating that it was the hotel’s responsibility to deal with security issues. It is to be wondered what his administration and the Coast Guards not to mention the Indian Navy, which has a large base close to the location of the targeted hotel, were doing when the terrorists landed on the shores of Mumbai in rubber dinghies. Whose security lapse was that?

How did a city aiming to be the global face of India get into this situation?

To the business interests and politicians aiming to make Mumbai a ‘global’ city this is validation that it is already on the footsteps of London albeit as the target for the terror attacks. One thing it has achieved is to become the global face of risk and terror in urban India. Mumbai has in the last 60 hours managed to attain the dubious distinction of being the new site for the war on terror and the burning image of the Taj Mahal hotel is embedded in the world’s imagination of Mumbai.

However the intrinsic resilience of the city and its citizens is to be marvelled at once again. Indian markets opened lower as trading resumed on Friday afternoon at the Bombay Stock Exchange (BSE) where the Sensex index recovered to 9,092.72 points later in the day confirming the resilience of the economy and the faith of the investors. If the purpose of the terrorists was to paralyse the Indian economy then they did not succeed. While in the short term tourism and foreign direct investment may suffer a setback there is no doubt in the minds of investors outside the country that India remains a star amongst the emerging markets in the world noted a spokesperson on BBC World news yesterday. In any case markets and foreign direct investments have been affected by the wider financial crisis and it would be difficult to dissociate it from the implications on the market due to the terror strikes. These strikes have come at a time when western institutional investors and hedge funds have pulled out of the market with the Sensex index of India’s leading 30 shares dropping 56.0% since the start of the year leaving investment sentiment rather vulnerable (Vidya Ram).

If the purpose of the terrorists was to vilify India’s image as a growing economy and to instil fear in the citizens of Mumbai, they did not succeed. In fact it brought together the citizens in strange ways. Citizens set up blogs, help-lines and twitted to help people find their relatives, to extend support in all matters from donating blood to putting up lists of injured victims. It was a revolution in forms of social media. The emergence of citizen journalists reporting and updating information created a virtual space for people concerned with this event. For those based outside India this forum was a lifeline of information and is to be commended (see CJ on IBNlive).

Marker of global discontent

This was neither an internal attack Hindu-Muslim conflict nor the usual suspect Pakistan-India conspiracy. With the startling revelation that the gunmen were looking for Americans and Britons, it is obvious that this is part of a global retaliation rather than a domestic insurgency and the targets were clearly urban elite both Indian and foreign. This brings to fore a new dimension to urban violence hitherto arising out of socio-economic inequality. The spatial targeting in an emerging ‘global’ city of a high profile elite hotel hosting international guests and domestic urban elites categorised as ‘global’ citizens goes beyond the general discontent of economic inequality. It can in a strange sense be called ‘global inequality’ encompassing economic and spatial disparity at the same time social and religious antagonism.

Admitted that this was a brazen attack that has not been previously encountered at this scale on a dense urban area in India, but that precisely reveals the lax security and failure of intelligence networks that the terrorists could attempt such a frontal attack (note on the Fidayeen technique by Sumantra Bose) on the landmark hotels. This was not an unplanned operation as it appeared in the early stages of the siege. It was a methodical and systematic operation where the terrorists knew the layout of the structures very well. They had placed their people well within the environs of the target sites advantageously using their intelligence networks. This also suggests that the destructive elements were not only ‘external’ but possibly internal elements that were working in tandem. If terrorists can overcome regional boundaries why cannot governments and people do the same?

While blaming the neighbours provides easy vindication for Indian politicians in any terrorist situation, it would be unwise to take such measures at a stage when there is possibility of dialogue and peaceful resolution of long standing conflicts. It is unfortunate that external elements and non-state actors can create situations that are engineered to increase the distrust between India and Pakistan. This situation calls for maturity and resolute convictions that peace can be attained in the region through concerted action rather than resorting to age-old blame games.

Pakistani Prime Minister Yousuf Raza Gilani said he would send a representative of his intelligence agency (ISI) to help with the investigation. Pakistan’s offer should be seen as a well meaning gesture to address terrorism as the global threat it is rather than an issue of conflict between these two countries. We have come a long way in creating a world image of a progressive nation and it is time to put systemic distrust on the shelf and move towards evaluating the world through a new lens. Pakistan is grappling with its own internal problems and certainly would not want a conflict at this stage as was obvious from the remarks of PM Gilani. India should seize this moment to create a platform for regional cooperation towards resolving conflict and increasing security in the region. If we can get beyond the political distrust it might be a defining moment in not just the regional history but also in the way the world tackles global security issues.

Dysfunctional democracy?

It was in bad taste that Indian politicians used the background of targeted sites to create a political platform for canvassing their ideas when Mumbai was under siege. What the citizens would have preferred their elected leaders to be seen helping arrange support systems and help lines rather than network mileage from TV appearances. It is time that politicians get savvy in their approach. In fact it is time for us to vote savvy, intelligent and committed politicians that inspire confidence in the system.

I am constrained to say that India may be the largest democracy in the world but it is not a working democracy. In this system your vote does not count because you are voting at the lowest rung of the parliamentary system. It does not affect the people at the top. They are far removed from the actual citizens and hence feel complacent within the well layered protection the system provides and their assured vote-banks in ‘safe’ constituencies. Question is whether you are electing the person or the party. If it is the party you can only hope that they might put a sensible person at the helm as was the case when Manmohan Singh became Prime Minister. With coalition politics here to stay it is becoming a lucky draw system. It may be time to change to a presidential system as advocated by Shashi Tharoor.

When are we going to start a self evaluation of our system – parliamentary, governance, bureaucratic and institutional; when it is showing obvious signs of dysfunction? This might be the right time to revamp our systems. It is heartening to note that the Prime Minister Manmohan Singh has started evaluating the intelligence lapse, lack of inter-agency coordination and security issues. However, it is not just the government but the citizens who must take cognisance of where we are headed – where our lifestyles, cities and country is headed. It is about time that we took charge of the future of our cities and made proactive changes rather than ‘blame it on the politicians’.

Noam Chomsky: “What Next? The Elections, the Economy, and the World”

Full transcript via: Democracy Now

 

EXCERPT:

The goal of advertising is to create uninformed consumers who will make irrational choices. Those of you who suffered through an economics course know that markets are supposed to be based on informed consumers making rational choices. But industry spends hundreds of millions of dollars a year to undermine markets and to ensure, you know, to get uninformed consumers making irrational choices.

And when they turn to selling a candidate they do the same thing. They want uninformed consumers, you know, uninformed voters to make irrational choices based on the success of illusion, slander, and effective body language or whatever else is supposed to be significant. So you undermine democracy pretty much the same way you undermine markets. Well, that’s the nature of an election when it’s run by the business world, and you’d expect it to be like that. There should be no surprise there. And it should also turn out the elected candidate didn’t have any debts. So you can follow Brand Obama can be whatever they decide it to be, not what the population decides that it should be, as in the south, let’s say. I’m going to say on the side, this may be an actual instance of a familiar and unusually vacuous slogan about the clash of civilization. Maybe there really is one, but not the kind that’s usually touted.

So let’s go back to the evidence that we have, rhetoric and actions. Rhetoric we know, but what are the actions? So far the major actions are selections, in fact the only action, of personnel to implement Brand Obama. The first choice was the Vice President, Joe Biden, one of the strongest supporters of the war in Iraq in the Senate, a long time Washington insider rarely deviates from the party vote. In cases where he does deviate they’re not very uplifting. He did break from the party and voting for a Senate resolution that prevented people from getting rid of their debts by, individuals, that is, from getting rid of their debts by going into bankruptcy. It’s a blow against poor people who’ve caught in this immense debt that’s a large part of the basis for the economy these days. But usually, he’s a, kind of, straight party-liner with the democrats on the sort of ultra naturalist side. The choice of Biden was a, must have been a conscious attempt to show contempt for the base of people who were voting for Obama, or organizing for him as an anti-war candidate.

Well, the first post-election appointment was for Chief of Staff, which is a crucial appointment; determines a large part of the president’s agenda. That was Rahm Emanuel, one of the strongest supporters of the war in Iraq in the House. In fact, he was the only member of the Illinois delegation who voted for Bush’s effective declaration of war. And, again, a longtime Washington insider. Also, one of the leading recipients in congress of funding from the financial institutions hedge funds and so on. He himself was an investment banker. That’s his background. So, that’s the Chief of Staff.

The next group of appointments were the main problem, the primary issue that the governments’ going to have to face is what to do about the financial crisis. Obama’s choices to more or less run this were Robert Rubin and Larry Summers from the Clinton–Secretaries of Treasury under Clinton. They are among the people who are substantially responsible for the crisis. One leading economist, one of the few economists who has been right all along in predicting what’s happening, Dean Baker, pointed out that selecting them is like selecting Osama Bin Laden to run the war on terror.

Bubble smut

The streams of narratives that now flow from the carcass of high finance are as addictive they are poisonous. The latest AAA rated tale of despair has an upbeat angle: a star is born. Or, rather, a fresh breed of masters of the universe are appearing, now that the sky has fallen, to plot the new constellations.

This story by Michael Lewis is great. His project was to track down the sharp ones who had enough faith in themselves and in the inevitability of the impending disaster to invest other people’s money accordingly.

Their hands got a little dirty in the process, helping to feed the beast they knew was bound to explode. The article is silent about the returns of the hedge fund it focuses on. At times like this it is poor form to gloat with numbers, but the characters do get a chance to strut and cluck.

When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”

“Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.

“Yes?” the C.E.O. said, obviously irritated. “Is that another question?”

“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.

It is hard to begrudge the man maybe a little license in the retelling of the story.

photo © Michael Jastremski for openphoto.net CC:Attribution-ShareAlike

RMI: Risk and Return for Different Asset Classes

Three Major Asset Classes introduced namely,

Risk and Returns for US wealth indices for different asset classes : 1926-99

Source : Francis and Ibbotson (2002)

Homework to do on my own : lookup 1. Sharpe Ratio 2. Markowitz theory

Key takeaways from the lecture

Paul Krugman:

With all due respect to Timothy Geithner, Lawrence Summers, and the rest of President-elect Obama’s economic team, there is one name I would like to have seen included on that list–that of Nobel prize winning economist Paul Krugman.

Here’s why. From a Krugman op-ed piece in the New York Times recently:

“A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.

About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?”

Put more succinctly by Upton Sinclair:

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

Mr. Krugman’s conclusion, and one I hope is heeded by the Obama administration, is that now is the time not only to focus on the short-term crisis, but to make the long-term fixes that will prevent the next one from occurring.

Top Theorists Examine Rippling Economic Turbulence

As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis.

LISTEN TO INTERVIEW HERE

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair’s sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world’s hottest investment advisers these days, Nassim Nicholas Taleb, author of “The Black Swan,” who’s been warning of a crash for years, betting on one, and winning big.

He’s been ubiquitous in the financial media of late, from cable TV’s “Colbert Report” to the BBC’s “Newsnight,” where he was infuriated by what he called “bogus accounting.”

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they’re both scared.

NASSIM NICHOLAS TALEB: I don’t know if we’re entering the most difficult period since — not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we’ve been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It’s very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

Complexities of the banking system

PAUL SOLMAN: Mandelbrot’s key insight came in the ’60s with a study of cotton price surges and plunges, suggesting the world moves in fits and starts, especially the human world.

Decades later, after the stock market crash of 1987, Taleb came to the same conclusion. He appeared on the NewsHour two years ago to help explain the death of a hedge fund before the current crisis. He dubbed the event “a black swan,” impossible, Europeans had always thought, because they’d never seen one.

NASSIM NICHOLAS TALEB: We saw a lot of white swans. Every white swan was confirming that, you know, hey, all swans were white.

PAUL SOLMAN: Taleb’s book, published in April 2007, was called “The Black Swan” because, in 1697, Dutch explorers discovered Australia and black swans.

NASSIM NICHOLAS TALEB: And, sure enough, they saw that black version and said, “Hey, one single observation, OK, can destroy thousands of years of confirmation.” So, likewise in the markets, all you need is one single bad month to destroy years of track record.

PAUL SOLMAN: In the book, Taleb wrote, “The increased concentration among banks seems to have the effect of making financial crises less likely. But when they happen, they are more global in scale and hit us very hard. True, we now have fewer failures, but, when they occur, I shiver at the thought.”

NASSIM NICHOLAS TALEB: The banking system, the way we have it, is a monstrous giant built on feet of clay. And if that topples, we’re gone.

Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties.

PAUL SOLMAN: But there’s been complexity before. There has been overextension of credit before. We’ve had crashes in American history many times before. We’re a resilient system. Won’t we pull out of it?

NASSIM NICHOLAS TALEB: Let me tell you why it’s not like before. Look at what’s happening. The world is getting so fragile that a small shortage of oil — small — can lead to the price going from $25 to $150.

PAUL SOLMAN: A barrel.

NASSIM NICHOLAS TALEB: A barrel. A small excess demand in an agricultural product can lead to an explosion in price.

We live in a world that is way too complicated for our traditional economic structure. It’s not as resilient as it used to be. We don’t have slack. It’s over-optimized.

PAUL SOLMAN: What do you mean by “over-optimized”?

NASSIM NICHOLAS TALEB: Let me tell you what is happening in the ecology of the banking system. They’re swelling to large banks, OK, because it’s vastly more optimal to have one large bank than 10 small banks. It’s more efficient.

PAUL SOLMAN: Well, we’ve certainly seen the consolidation of the industry.

NASSIM NICHOLAS TALEB: Exactly. And that consolidation is what’s putting us at risk, because we are — when one bank, large bank makes a mistake, OK, it’s 10 times worse than a small bank making a mistake.

PAUL SOLMAN: And I guess I’m realizing that that’s where your famous work comes in. It’s always been characterized by the work that you’re central to as the butterfly somewhere disturbs a little bit of air and, halfway across the world, a tornado hits or something, right? Is that what we’re talking about here?

BENOIT MANDELBROT: Certainly very similar. The word “turbulence” is one which actually is common to physics and to social scientists, to economics. Everything which involves turbulence is enormously more complicated, not just a little bit more complicated, not just one year more schooling, just enormously more complicated.

PAUL SOLMAN: Turbulence is why, because it’s badly understood, weather forecasters can’t necessarily get it right.

BENOIT MANDELBROT: Precisely. In fact, the basic — the basis of weather forecasting is looking from a satellite and seeing a storm coming, but not predicting that the storm will form. The behavior of economic phenomena is far more complicated than the behavior of liquids or gases.

Impacts from sudden changes

PAUL SOLMAN: So, getting back to your fundamental work and insight, this is a system that can become turbulent or is inherently turbulent, that doesn’t have enough of a buffer, and that’s the danger?

BENOIT MANDELBROT: That is not well-understood. In fact, that is misunderstood for which tools have been developed which assume that changes are always very small.

If one of them comes, nothing bad happens. If several of them come together, very bad things have happened. And the theory does not take account of that, and the theory doesn’t take account of very large and sudden changes in anything.

The theory thinks that things move slowly, gradually, and can be corrected as they change, whereas, in fact, they may change extremely brutally.

NASSIM NICHOLAS TALEB: Now you understand why I’m worried. I hope I’m wrong. I wake up every morning — actually, I don’t wake up every morning now. I start to wake up at night the last couple of weeks hoping that I’m wrong, begging to be wrong.

I think that we may be experiencing something that is vastly worse than we think it is.

PAUL SOLMAN: And we think it’s pretty bad.

NASSIM NICHOLAS TALEB: It’s worse. Of all the books you read on globalization, they talk about efficiency, all that stuff. They don’t get the point. The network effect of that globalization, OK, means that a shock in the system can have much larger consequences.

Hedge funds’ looming impact

PAUL SOLMAN: What is the doomsday scenario? I mean, what actually happens tomorrow, next week?

NASSIM NICHOLAS TALEB: I mean, I am convinced — there’s been a package recently of $700 billion. It’s pocket money, because you don’t understand — they don’t understand the ripple effect that hedge funds have, OK, that the banks not lending to hedge funds will force hedge funds to liquidate positions.

PAUL SOLMAN: Sell off?

NASSIM NICHOLAS TALEB: Sell off positions. These positions, sold off by hedge funds, will impact other entities.

PAUL SOLMAN: Driving down the price.

NASSIM NICHOLAS TALEB: Driving down the price. Driving down some prices. That a supermarket, OK, needing funding, will not be able to find a bank solvent enough to lend them money against inventory to make payroll, OK?

You may have chain reactions we’ve never imagined before. And these come from the intricate relationships in the system we don’t understand.

PAUL SOLMAN: You’ve been around a lot longer than we have. That’s possible. Is it likely?

BENOIT MANDELBROT: Well, we don’t know the probability. We don’t have enough knowledge. We don’t have enough information. We don’t have enough reliable information on data which are not published. I mean, I sleep better, perhaps, than Nassim, but I don’t sleep very well.

Challenges to prediction

PAUL SOLMAN: Is it possible that what’s also unimaginable, which is that this will simply right itself, is that a possibility?

BENOIT MANDELBROT: Everything is a possibility. I mean, again, it is not — I try my best to answer questions which are scientific, and which I can respond to and which have scientific evidence and not personal opinion.

Everything is imaginable. What’s the joke, that prediction is very easy when you predict the past or something?

PAUL SOLMAN: Well, predictions are — predictions are difficult, particularly about the future.

BENOIT MANDELBROT: That’s what I wanted to remember.

PAUL SOLMAN: Benoit Mandelbrot, Nassim Nicholas Taleb, thank you very much.

NASSIM NICHOLAS TALEB: Thank you.

BENOIT MANDELBROT: Thank you.

RAY SUAREZ: On our Web site, you can watch all of Paul Solman’s reporting on the financial crisis and ask him questions on the economy. Visit us at PBS.org. Just scroll down to NewsHour Reports.

Ref: PBS

LISTEN TO INTERVIEW HERE

Top Theorists Examine Rippling Economic Turbulence

As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis.

LISTEN TO INTERVIEW HERE

RAY SUAREZ: Finally tonight, we return to a subject on many minds these days: the financial crisis. Our economics correspondent, Paul Solman, checked back in with one particularly prominent voice in the investment world and his colleague, who guided his thinking.

Here is the pair’s sobering conversation on what may lie ahead.

PAUL SOLMAN, NewsHour Economics Correspondent: One of the world’s hottest investment advisers these days, Nassim Nicholas Taleb, author of “The Black Swan,” who’s been warning of a crash for years, betting on one, and winning big.

He’s been ubiquitous in the financial media of late, from cable TV’s “Colbert Report” to the BBC’s “Newsnight,” where he was infuriated by what he called “bogus accounting.”

NASSIM NICHOLAS TALEB, Scholar and Author: The first thing I would get immediately, immediately, I would suspend something called value at risk, quantitative measures of risk used by banks, immediately.

PAUL SOLMAN: We sat down with Taleb and the man he calls his mentor, mathematician Benoit Mandelbrot, pioneer of fractal geometry and chaos theory. And even more than feeling vindicated, they’re both scared.

NASSIM NICHOLAS TALEB: I don’t know if we’re entering the most difficult period since — not since the Great Depression, since the American Revolution.

PAUL SOLMAN: The most serious situation we’ve been in since the American Revolution?

NASSIM NICHOLAS TALEB: Yes.

PAUL SOLMAN: Professor Mandelbrot, can that possibly be true?

BENOIT MANDELBROT, Mathematician: It’s very serious.

PAUL SOLMAN: More serious than the Great Depression, possibly?

BENOIT MANDELBROT: Possibly. I hope not.

Complexities of the banking system

PAUL SOLMAN: Mandelbrot’s key insight came in the ’60s with a study of cotton price surges and plunges, suggesting the world moves in fits and starts, especially the human world.

Decades later, after the stock market crash of 1987, Taleb came to the same conclusion. He appeared on the NewsHour two years ago to help explain the death of a hedge fund before the current crisis. He dubbed the event “a black swan,” impossible, Europeans had always thought, because they’d never seen one.

NASSIM NICHOLAS TALEB: We saw a lot of white swans. Every white swan was confirming that, you know, hey, all swans were white.

PAUL SOLMAN: Taleb’s book, published in April 2007, was called “The Black Swan” because, in 1697, Dutch explorers discovered Australia and black swans.

NASSIM NICHOLAS TALEB: And, sure enough, they saw that black version and said, “Hey, one single observation, OK, can destroy thousands of years of confirmation.” So, likewise in the markets, all you need is one single bad month to destroy years of track record.

PAUL SOLMAN: In the book, Taleb wrote, “The increased concentration among banks seems to have the effect of making financial crises less likely. But when they happen, they are more global in scale and hit us very hard. True, we now have fewer failures, but, when they occur, I shiver at the thought.”

NASSIM NICHOLAS TALEB: The banking system, the way we have it, is a monstrous giant built on feet of clay. And if that topples, we’re gone.

Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties.

PAUL SOLMAN: But there’s been complexity before. There has been overextension of credit before. We’ve had crashes in American history many times before. We’re a resilient system. Won’t we pull out of it?

NASSIM NICHOLAS TALEB: Let me tell you why it’s not like before. Look at what’s happening. The world is getting so fragile that a small shortage of oil — small — can lead to the price going from $25 to $150.

PAUL SOLMAN: A barrel.

NASSIM NICHOLAS TALEB: A barrel. A small excess demand in an agricultural product can lead to an explosion in price.

We live in a world that is way too complicated for our traditional economic structure. It’s not as resilient as it used to be. We don’t have slack. It’s over-optimized.

PAUL SOLMAN: What do you mean by “over-optimized”?

NASSIM NICHOLAS TALEB: Let me tell you what is happening in the ecology of the banking system. They’re swelling to large banks, OK, because it’s vastly more optimal to have one large bank than 10 small banks. It’s more efficient.

PAUL SOLMAN: Well, we’ve certainly seen the consolidation of the industry.

NASSIM NICHOLAS TALEB: Exactly. And that consolidation is what’s putting us at risk, because we are — when one bank, large bank makes a mistake, OK, it’s 10 times worse than a small bank making a mistake.

PAUL SOLMAN: And I guess I’m realizing that that’s where your famous work comes in. It’s always been characterized by the work that you’re central to as the butterfly somewhere disturbs a little bit of air and, halfway across the world, a tornado hits or something, right? Is that what we’re talking about here?

BENOIT MANDELBROT: Certainly very similar. The word “turbulence” is one which actually is common to physics and to social scientists, to economics. Everything which involves turbulence is enormously more complicated, not just a little bit more complicated, not just one year more schooling, just enormously more complicated.

PAUL SOLMAN: Turbulence is why, because it’s badly understood, weather forecasters can’t necessarily get it right.

BENOIT MANDELBROT: Precisely. In fact, the basic — the basis of weather forecasting is looking from a satellite and seeing a storm coming, but not predicting that the storm will form. The behavior of economic phenomena is far more complicated than the behavior of liquids or gases.

Impacts from sudden changes

PAUL SOLMAN: So, getting back to your fundamental work and insight, this is a system that can become turbulent or is inherently turbulent, that doesn’t have enough of a buffer, and that’s the danger?

BENOIT MANDELBROT: That is not well-understood. In fact, that is misunderstood for which tools have been developed which assume that changes are always very small.

If one of them comes, nothing bad happens. If several of them come together, very bad things have happened. And the theory does not take account of that, and the theory doesn’t take account of very large and sudden changes in anything.

The theory thinks that things move slowly, gradually, and can be corrected as they change, whereas, in fact, they may change extremely brutally.

NASSIM NICHOLAS TALEB: Now you understand why I’m worried. I hope I’m wrong. I wake up every morning — actually, I don’t wake up every morning now. I start to wake up at night the last couple of weeks hoping that I’m wrong, begging to be wrong.

I think that we may be experiencing something that is vastly worse than we think it is.

PAUL SOLMAN: And we think it’s pretty bad.

NASSIM NICHOLAS TALEB: It’s worse. Of all the books you read on globalization, they talk about efficiency, all that stuff. They don’t get the point. The network effect of that globalization, OK, means that a shock in the system can have much larger consequences.

Hedge funds’ looming impact

PAUL SOLMAN: What is the doomsday scenario? I mean, what actually happens tomorrow, next week?

NASSIM NICHOLAS TALEB: I mean, I am convinced — there’s been a package recently of $700 billion. It’s pocket money, because you don’t understand — they don’t understand the ripple effect that hedge funds have, OK, that the banks not lending to hedge funds will force hedge funds to liquidate positions.

PAUL SOLMAN: Sell off?

NASSIM NICHOLAS TALEB: Sell off positions. These positions, sold off by hedge funds, will impact other entities.

PAUL SOLMAN: Driving down the price.

NASSIM NICHOLAS TALEB: Driving down the price. Driving down some prices. That a supermarket, OK, needing funding, will not be able to find a bank solvent enough to lend them money against inventory to make payroll, OK?

You may have chain reactions we’ve never imagined before. And these come from the intricate relationships in the system we don’t understand.

PAUL SOLMAN: You’ve been around a lot longer than we have. That’s possible. Is it likely?

BENOIT MANDELBROT: Well, we don’t know the probability. We don’t have enough knowledge. We don’t have enough information. We don’t have enough reliable information on data which are not published. I mean, I sleep better, perhaps, than Nassim, but I don’t sleep very well.

Challenges to prediction

PAUL SOLMAN: Is it possible that what’s also unimaginable, which is that this will simply right itself, is that a possibility?

BENOIT MANDELBROT: Everything is a possibility. I mean, again, it is not — I try my best to answer questions which are scientific, and which I can respond to and which have scientific evidence and not personal opinion.

Everything is imaginable. What’s the joke, that prediction is very easy when you predict the past or something?

PAUL SOLMAN: Well, predictions are — predictions are difficult, particularly about the future.

BENOIT MANDELBROT: That’s what I wanted to remember.

PAUL SOLMAN: Benoit Mandelbrot, Nassim Nicholas Taleb, thank you very much.

NASSIM NICHOLAS TALEB: Thank you.

BENOIT MANDELBROT: Thank you.

RAY SUAREZ: On our Web site, you can watch all of Paul Solman’s reporting on the financial crisis and ask him questions on the economy. Visit us at PBS.org. Just scroll down to NewsHour Reports.

Ref: PBS

LISTEN TO INTERVIEW HERE

Selling Consultative Positioning Strategies

The definition of business partner is therefore the customer manager’s definition: someone who can add incremental value to the manager’s contribution to profits. If you are going to qualify as a consultant partner, you must make yourself incrementally valuable to a business manager. This means you must deliver one or more of three types of added value:

These “deliverables” set the standards of performance for consultative sellers. You will be judged for your partnerability by the manager’s answers to three questions: How much value do you propose to add? How soon do you propose to add it? How sure can I be that you will add as much value as you propose as soon as you propose to add it?

Consultative sellers succeed or fail on their ability to ally themselves with their Box Two counterparts. They cannot sell without them because Box Two sells for them in ways that they cannot. Their alliances are founded on creating an ongoing stream of Profit Improvement Proposals for the customer managers to sell internally, thereby obtaining the funds to support the consultative seller’s strategies. In order to act consultatively, the seller must conform to the requirements outlined in Figure.

Box One thinks, feels, and acts in ways that are standard operating performance for all Box One managers, emulated by all Box Two managers who interface with them, and virtually unknown to everybody else. Box One’s position self-description is that of a money manager.

As a money manager, Box One is preoccupied with financial stewardship, the management of other people’s money. This involves making prudent, duly diligent investments, the control and fractionalizing of risk into small, survivable bites, and a conservative management style that emphasizes certainty over the chance for a windfall, incremental gains over breakthroughs, and consistency over flashes in the pan.

Your alliances at the Box Two level depend on the same standards of performance as your Box Two counterparts’ internal alliance with their own Box One: the contributions that you make to competitive profit making. When you work in partnership with Box Two function managers, the added contribution you make to them becomes incremental to the contribution they have committed to make to Box One. That is why they will partner with you. The incremental value of your contribution becomes their test of how much you are worth as a partner.

These are very different questions from the traditional ones raised at the Box Three purchasing interface. When vendors make their sales calls there, they are asked how much performance they can propose and how little price they can charge for it. But Box Two managers do not buy products; they invest in value. They do not buy at all; they sell proposals to obtain funds for their own operations. The Box One managers they sell to are your customers’ ultimate buyers. They buy investment opportunities that can put their money to work at the highest rates for the surest return within the shortest periods of time.

They judge their Box Two operating managers by how good they are as money managers. “If I give you one dollar,” they ask in effect, “How much more will you give me back? How long before I get it? How sure can I be?” Managers who partner with you as their consultative seller are betting that you can help them enhance their performance by enabling them to return more money than they could alone, or return it faster, and return it more surely.

When you reduce one of the Box Two managers’ critical cost factors, you can help them improve the contribution they return from their operation. When you increase one of their critical revenue factors, you do the same. These are the mutual objectives of your cooperative partnerships because they are the achievements that improve your mutual profits.

Box Two managers have a simple set of needs:

In order to position yourself for Consultative Selling, you must be able to prove to customer managers that you can help them get their hands on money, that you can help them to get it soon, and that you can supply them with a steady stream of investment opportunities that will enable them to make more money. These are the empowering features and benefits that will make you compellingly partnerable.

There are three main strategies for optimizing a customer’s operating mix:

In order to consult with a customer line-of-business manager (LOB), you must be expert in the customer’s markets. This means that you must have three kinds of smarts. You must be process smart, knowledgeable in the flow of the customer’s products through their distribution processes and where their critical values are added. You must be applications smart, knowledgeable in how to apply your products and services to the customer’s sales and distribution process so that revenues or margins can be increased. And you must be validation smart, knowledgeable in how to quantify your contribution.

In order to consult with a customer function manager, who supports or supplies a line of business, you must be expert in his or her operation. This means that you must have three kinds of smarts. You must be process smart, knowledgeable in the flow of the customer’s process and where the critical costs cluster. You must be applications smart, knowledgeable in how to apply your products and services to the customer’s process so that costs can be reduced or productivity can be increased. And you must be validation smart, knowledgeable in how to quantify your contribution.

In common with all products, value has its own specifications. These give it its performance capability, that is, what it is able to do inside a customer’s business. Your performance capability is customer-dependent and will vary for each customer application. Each of your “products” will be unique to its customer. No two values will be the same, except by chance. As a result, you will no longer be able to print a price list. As values differ customer by customer, moving up and down within the range that establishes your norms, the price you require in the form of a customer’s investment to achieve each value will also differ.

Value has three specifications:

ENGLAND

England is still paying interest on ancient loans from WWI. These loans are INFINITE. They will never vanish. The interest paid has paid off the loans many times over. England has a long history of falling into depressions that sometimes last for more than a generation. Seems that Japan likes to do the same.

So today, we read very old newspapers and talk about very old debts. And how depressions are beloved of coupon clippers and other people who rely on collecting rents and holding bonds.

Hedge Fund Manager Hendry Bets on British Deflation, Buys World War I Debt

(Bloomberg) — Hugh Hendry, who oversees about $500 million as co-founder of Ecletica Asset Management in London, said he’s buying World War I debt on the bet the U.K. is due for its worst round of deflation since the Great Depression.

This is how welfare systems really work: coupon clippers who get their hands on government debt that is NEVER paid off! If one has enough of these debts, one can sit back and enjoy life….but ONLY if there is a depression! Here is an extremely old newspaper story from the beginning of the Long Depression:

Two years ago, I decided the key to understanding the present international collapse is to understand previous ones. Many people refer to the Great Depression. Some refer to the Panic of 1907. Fewer talk about the 19th century collapses. The post-Civil War collapse that enveloped all of Europe as well as the US and South America and even extended deep into Asia and Africa is of greatest interest to me. It was the first ‘developed capitalist nations’ collapsing and causing a cascade of monetary as well as trade woes.

What makes me sit back and laugh very hard is the last paragraph of this story: ‘Without going further back along the chain of causes, we find that prior to 1874, an era of SPECULATIVE ACTIVITY, DURING WHICH CONSUMPTION WAS ABNORMAL, both profits and wages correspondingly high. In other words, the business reporters over a century ago were quite clear about what was the cause of these crashes! WHAT THE HELL???

HAHAHAHA! Well! Haven’t we all matured over the centuries? Sad, isn’t it? Today, we have a parade of pirates and gnomes, none of whom want to be punished for creating and inflating one of the worst speculative bubbles in history, all of them claiming, ‘NO ONE KNEW THIS WOULD HAPPEN!’ All of these clowns are ‘geniuses’ yet a humble, ill-paid business reporter in 1878 could figure out what is obvious. This hyper-smart reporter is a million times smarter than today’s economic geniuses running our systems into the ground. He even figures out another obvious thing: the bubble that burst didn’t affect any one country nor industry: it was global. The entire article is a good read because it was written by an intelligent, now anonymous reporter who obviously had a better grounding in the dynamics of economic systems compared to the lunatic crew that is destroying us today.

England slid into this depression after the collapse of the 1878 speculative bubble. This was called ‘the Long Depression.’ Indeed, the Great Depression didn’t start in England in 1930. It began at the end of WWI. The debts from that war were supposed to be paid off by the Germans. So England felt certain, just like Germany in 1873, that war reparations would bring in wealth and it didn’t matter if the government handed out INFINITE debt notes in 1914.

The French ran a lottery/subscription to pay the war reparations to Germany [this whole business led to WWI, by the way]. This lottery was so popular [note how they used gambling tools to dig themselves out of difficulties!] it was grossly over-subscribed so there was two floods of money flowing suddenly in Europe. This, in turn, spurred speculative deals where people poured this loot into various industries, rail road building, etc across the planet.

Like all speculative bubbles, this was very delicate and when the US needs for more money for war ended with the surrender of the South, the whole system had one last run up to infinity and collapsed very suddenly in a matter of days, starting in Vienna and rapidly moving across the world as speculators were forced into default and banks closed their doors.

Back to the news about Britain STILL not paying off the 100 year old war debts: coupon clippers owning debt, especially government debts, like to do this to infinity. To passively sit there and wait for the money to pour in is paradise! But they hate inflation! Governments can’t sell debt unless they promise people they will get infinite returns over hundreds of years. This is why government debt goes so cheap: people figure, governments will be around a long, long time. Whereas, businesses go belly up.

Bloomberg.com:

The 1917 notes were first sold with a coupon of 5 percent, a rate Prime Minister Lloyd George regarded as “penal,” according to Johnston’s book, first published in 1934 and republished by Ossian Publishers Ltd. in 1994. Neville Chamberlain, then Chancellor of the Exchequer, cut the coupon payment to 3.5 percent in 1932, where it has remained ever since.

Savers love depressions and spenders love inflation. Systems waver between one or the other. If any one or the other gets their way, totally, we get to live with the terrors of either the Goddess of Inflation or the Goddess of Depression. Instead, we must strive to balance these forces. The entire excuse for a central bank was, they would do this service effortlessly via interest rate manipulations which controls the money supply.

One thing is absolutely certain: no one should ever be allowed to issue infinite debt. England has been politically paralyzed by the coupon clippers who want this ridiculous debt to go forwards, forever. This is like using a damn credit card! And never paying off any of the balance, ever! Credit card companies hate people who pay up. They love people who are deep in debt and keep paying over and over again, for years, for things that cost very little compared to the compounding payments that double, redouble and so on to infinity.

The more a system relies on these sorts of open-ended infinite loans [credit cards are infinite!] end up in depressions because people have to spend precious income on paying interest on things that dwindled in relation to the debts to nearly nothing. After paying interest for 100 years, the principal is not paid down even one penny! This is very destructive. This is why there has to be limits on debt issuance. The US, like England, is simply piling more new debts on old debts and turning the old ones over and over so they become a bigger and bigger dead weight on the present.

Yields `Next to Nothing’ Lure Treasury-Only Funds to Goldman, Morgan Bonds

(Bloomberg) — In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago….

This is the game today: have the government take all responsibility for insuring against losses so the guys whose over-speculation actions caused this mess can buy up each other’s profit making systems. The government is the bank. But we still don’t run the Federal Reserve which remains firmly in the hands and the control of….Morgan Stanely, JP Morgan, Chase, etc! They are selling to themselves the good stuff while sticking us with the crummy stuff. They get to be the ‘good bank’ and the taxpayers are the ‘crappy bank.’

This is a classic transfer of wealth. Via moving risks and losses off of the books of the speculators and onto the taxpayers.

Company Bonds Return Most Since ‘03 With Record Yields to Government Debt

Investment-grade U.S. bonds returned 3.6 percent this month, after losing 7.4 percent in October, as Treasury yields declined on concern the recession is deepening, according to Merrill Lynch & Co. indexes. European notes returned 1.5 percent, the most since September 2003. The positive returns were the first since August, before the collapse of Lehman Brothers Holdings Inc. sent company debt tumbling. Sales of new debt rose.

As the spread between one month government bonds and 10 year bonds narrows to nothing, the spread between business and government bonds widens. This sets into motion the ‘depression’ cycle systems. I would suggest, since so many investment [I wrote 'infestment' :)] banks hold a lot of this stuff, they will want a depression cycle to enhance these bonds. If they hold mostly stocks, for example, they want inflation.

This is why, when systems reset, it is so hard to change them. The bankers and investment houses at the center of the messes they created in the past hang on for dear life to whatever new system they have created. For example, Japan could have ended its own ‘Long Depression’ easily when the rest of the world was going into a wild bubble/inflation cycle. But they didn’t because of political power in the upper reaches as well as an army of coupon clippers who loved the depression. Even as it kills off the next generation.

Last year, the financiers wanted to resume the inflation cycle systems. This year, now that they all hold a lot of long-term government debt that was granted so they could ‘recapitalize’ themselves, they will want zero or negative inflation! DUH. So they will lock us in a low-interest but NO LENDING cycle! Like in Japan.

Tudor’s $10 Billion BVI Suspends Withdrawals, Plans Split Into Two Funds

(Bloomberg) — Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended redemptions from the $10 billion BVI Global Fund Ltd. as it splits the hedge fund into two, according to a person familiar with the matter.

Another example in today’s news of the ‘bad bank/good bank’ way of eliminating losses or moving it to a secure place [the central banks and the government] so the speculators can create a new mess. The fact that the hedge fund fiends are now going into ’safe’ investments mean, they will want a depression so the earnings they get will ‘grow’ via dropping prices.

All of this will work only if there are no wars in the Middle East. The biggest generator of inflation, bar none, is wars in the oil pumping regions of the planet! Every burst of domestic inflation has its origins in sudden price hikes in oil due to wars. The US and Israel stopped menacing Iran last summer due to the high oil prices.

The more they harassed Iran, the higher the price of oil went. This dynamic was ridiculously obvious. Iran knew this and egged everyone into doing it. Now, the US has fallen silent…but not for long. As I will explain later. The dynamics driving the Middle East into wars are very powerful and getting worse, not better. We will have another disruption in global oil markets. This is 100% certain. In the next 10 years.

Yen Gains Against Dollar, Euro as Manufacturing Slump Weakens Yuan, Ruble

All systems are dynamic. The yen was riding a weak currency/depression dynamic that allowed the Bank of Japan to flood the planet with epic amounts of speculative funny money lent to pirates and gnomes of every breed and origin. Now, this is unwinding rapidly and very violently. The yen is now at 93 to the dollar. This is far too strong for the exporters of Japan to stomach for long. They are seeking every possible way to undo this and restart the status quo. But despite having the G7 and even G20 declare, they want this too, it won’t happen.

As I said in the past, when all nations are at 0% interest, Japan has nothing and can’t stop the yen from strengthening. For the strength of a currency is supposed, in the floating currency regime, strengthen. Japan and Germany both had the world’s biggest trade profits in 2007. Both are feeling the pain of a loss of sales power during the last year. This is inevitable. They can’t run their systems so they get all the profits, forever. Anymore than coupon clippers should get interest on 100 year old debts forever.

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ENGLAND

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England is still paying interest on ancient loans from WWI. These loans are INFINITE. They will never vanish. The interest paid has paid off the loans many times over. England has a long history of falling into depressions that sometimes last for more than a generation. Seems that Japan likes to do the same.

 

(Bloomberg) — Hugh Hendry, who oversees about $500 million as co-founder of Ecletica Asset Management in London, said he’s buying World War I debt on the bet the U.K. is due for its worst round of deflation since the Great Depression.

 

This is how welfare systems really work: coupon clippers who get their hands on government debt that is NEVER paid off! If one has enough of these debts, one can sit back and enjoy life….but ONLY if there is a depression! Here is an extremely old newspaper story from the beginning of the Long Depression:

 

 

 

Two years ago, I decided the key to understanding the present international collapse is to understand previous ones. Many people refer to the Great Depression. Some refer to the Panic of 1907. Fewer talk about the 19th century collapses. The post-Civil War collapse that enveloped all of Europe as well as the US and South America and even extended deep into Asia and Africa is of greatest interest to me. It was the first ‘developed capitalist nations’ collapsing and causing a cascade of monetary as well as trade woes.

 

What makes me sit back and laugh very hard is the last paragraph of this story: ‘Without going further back along the chain of causes, we find that prior to 1874, an era of SPECULATIVE ACTIVITY, DURING WHICH CONSUMPTION WAS ABNORMAL, both profits and wages correspondingly high. In other words, the business reporters over a century ago were quite clear about what was the cause of these crashes! WHAT THE HELL???

 

HAHAHAHA! Well! Haven’t we all matured over the centuries? Sad, isn’t it? Today, we have a parade of pirates and gnomes, none of whom want to be punished for creating and inflating one of the worst speculative bubbles in history, all of them claiming, ‘NO ONE KNEW THIS WOULD HAPPEN!’ All of these clowns are ‘geniuses’ yet a humble, ill-paid business reporter in 1878 could figure out what is obvious. This hyper-smart reporter is a million times smarter than today’s economic geniuses running our systems into the ground. He even figures out another obvious thing: the bubble that burst didn’t affect any one country nor industry: it was global. The entire article is a good read because it was written by an intelligent, now anonymous reporter who obviously had a better grounding in the dynamics of economic systems compared to the lunatic crew that is destroying us today.

 

England slid into this depression after the collapse of the 1878 speculative bubble. This was called ‘the Long Depression.’ Indeed, the Great Depression didn’t start in England in 1930. It began at the end of WWI. The debts from that war were supposed to be paid off by the Germans. So England felt certain, just like Germany in 1873, that war reparations would bring in wealth and it didn’t matter if the government handed out INFINITE debt notes in 1914.

 

The French ran a lottery/subscription to pay the war reparations to Germany [this whole business led to WWI, by the way]. This lottery was so popular [note how they used gambling tools to dig themselves out of difficulties!] it was grossly over-subscribed so there was two floods of money flowing suddenly in Europe. This, in turn, spurred speculative deals where people poured this loot into various industries, rail road building, etc across the planet.

 

Like all speculative bubbles, this was very delicate and when the US needs for more money for war ended with the surrender of the South, the whole system had one last run up to infinity and collapsed very suddenly in a matter of days, starting in Vienna and rapidly moving across the world as speculators were forced into default and banks closed their doors.

 

Back to the news about Britain STILL not paying off the 100 year old war debts: coupon clippers owning debt, especially government debts, like to do this to infinity. To passively sit there and wait for the money to pour in is paradise! But they hate inflation! Governments can’t sell debt unless they promise people they will get infinite returns over hundreds of years. This is why government debt goes so cheap: people figure, governments will be around a long, long time. Whereas, businesses go belly up.

 

Bloomberg.com:

The 1917 notes were first sold with a coupon of 5 percent, a rate Prime Minister Lloyd George regarded as “penal,” according to Johnston’s book, first published in 1934 and republished by Ossian Publishers Ltd. in 1994. Neville Chamberlain, then Chancellor of the Exchequer, cut the coupon payment to 3.5 percent in 1932, where it has remained ever since.

 

Savers love depressions and spenders love inflation. Systems waver between one or the other. If any one or the other gets their way, totally, we get to live with the terrors of either the Goddess of Inflation or the Goddess of Depression. Instead, we must strive to balance these forces. The entire excuse for a central bank was, they would do this service effortlessly via interest rate manipulations which controls the money supply.

 

One thing is absolutely certain: no one should ever be allowed to issue infinite debt. England has been politically paralyzed by the coupon clippers who want this ridiculous debt to go forwards, forever. This is like using a damn credit card! And never paying off any of the balance, ever! Credit card companies hate people who pay up. They love people who are deep in debt and keep paying over and over again, for years, for things that cost very little compared to the compounding payments that double, redouble and so on to infinity.

 

The more a system relies on these sorts of open-ended infinite loans [credit cards are infinite!] end up in depressions because people have to spend precious income on paying interest on things that dwindled in relation to the debts to nearly nothing. After paying interest for 100 years, the principal is not paid down even one penny! This is very destructive. This is why there has to be limits on debt issuance. The US, like England, is simply piling more new debts on old debts and turning the old ones over and over so they become a bigger and bigger dead weight on the present.

 

Yields `Next to Nothing’ Lure Treasury-Only Funds to Goldman, Morgan Bonds

(Bloomberg) — In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago….

 

This is the game today: have the government take all responsibility for insuring against losses so the guys whose over-speculation actions caused this mess can buy up each other’s profit making systems. The government is the bank. But we still don’t run the Federal Reserve which remains firmly in the hands and the control of….Morgan Stanely, JP Morgan, Chase, etc! They are selling to themselves the good stuff while sticking us with the crummy stuff. They get to be the ‘good bank’ and the taxpayers are the ‘crappy bank.’

 

This is a classic transfer of wealth. Via moving risks and losses off of the books of the speculators and onto the taxpayers.

 

Company Bonds Return Most Since ‘03 With Record Yields to Government Debt

 

As the spread between one month government bonds and 10 year bonds narrows to nothing, the spread between business and government bonds widens. This sets into motion the ‘depression’ cycle systems. I would suggest, since so many investment [I wrote 'infestment' :)] banks hold a lot of this stuff, they will want a depression cycle to enhance these bonds. If they hold mostly stocks, for example, they want inflation.

 

This is why, when systems reset, it is so hard to change them. The bankers and investment houses at the center of the messes they created in the past hang on for dear life to whatever new system they have created. For example, Japan could have ended its own ‘Long Depression’ easily when the rest of the world was going into a wild bubble/inflation cycle. But they didn’t because of political power in the upper reaches as well as an army of coupon clippers who loved the depression. Even as it kills off the next generation.

 

Last year, the financiers wanted to resume the inflation cycle systems. This year, now that they all hold a lot of long-term government debt that was granted so they could ‘recapitalize’ themselves, they will want zero or negative inflation! DUH. So they will lock us in a low-interest but NO LENDING cycle! Like in Japan.

 

Tudor’s $10 Billion BVI Suspends Withdrawals, Plans Split Into Two Funds

(Bloomberg) — Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended redemptions from the $10 billion BVI Global Fund Ltd. as it splits the hedge fund into two, according to a person familiar with the matter.

 

Another example in today’s news of the ‘bad bank/good bank’ way of eliminating losses or moving it to a secure place [the central banks and the government] so the speculators can create a new mess. The fact that the hedge fund fiends are now going into ’safe’ investments mean, they will want a depression so the earnings they get will ‘grow’ via dropping prices.

 

All of this will work only if there are no wars in the Middle East. The biggest generator of inflation, bar none, is wars in the oil pumping regions of the planet! Every burst of domestic inflation has its origins in sudden price hikes in oil due to wars. The US and Israel stopped menacing Iran last summer due to the high oil prices.

 

The more they harassed Iran, the higher the price of oil went. This dynamic was ridiculously obvious. Iran knew this and egged everyone into doing it. Now, the US has fallen silent…but not for long. As I will explain later. The dynamics driving the Middle East into wars are very powerful and getting worse, not better. We will have another disruption in global oil markets. This is 100% certain. In the next 10 years.

 

Yen Gains Against Dollar, Euro as Manufacturing Slump Weakens Yuan, Ruble

 

All systems are dynamic. The yen was riding a weak currency/depression dynamic that allowed the Bank of Japan to flood the planet with epic amounts of speculative funny money lent to pirates and gnomes of every breed and origin. Now, this is unwinding rapidly and very violently. The yen is now at 93 to the dollar. This is far too strong for the exporters of Japan to stomach for long. They are seeking every possible way to undo this and restart the status quo. But despite having the G7 and even G20 declare, they want this too, it won’t happen.

Fred Graph

 

As I said in the past, when all nations are at 0% interest, Japan has nothing and can’t stop the yen from strengthening. For the strength of a currency is supposed, in the floating currency regime, strengthen. Japan and Germany both had the world’s biggest trade profits in 2007. Both are feeling the pain of a loss of sales power during the last year. This is inevitable. They can’t run their systems so they get all the profits, forever. Anymore than coupon clippers should get interest on 100 year old debts forever.

 

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

CLICK HERE TO DONATE TO THIS WEBSITE

ENGLAND

England is still paying interest on ancient loans from WWI.  These loans are INFINITE.  They will never vanish.  The interest paid has paid off the loans many times over.  England has a long history of falling into depressions that sometimes last for more than a generation.  Seems that Japan likes to do the same.  

 

So today, we read very old newspapers and talk about very old debts.  And how depressions are beloved of coupon clippers and other people who rely on collecting rents and holding bonds.

 

 

Hedge Fund Manager Hendry Bets on British Deflation, Buys World War I Debt

(Bloomberg) – Hugh Hendry, who oversees about $500 million as co-founder of Ecletica Asset Management in London, said he’s buying World War I debt on the bet the U.K. is due for its worst round of deflation since the Great Depression.

 

This is how welfare systems really work: coupon clippers who get their hands on government debt that is NEVER paid off!  If one has enough of these debts, one can sit back and enjoy life….but ONLY if there is a depression!   Here is an extremely old newspaper story from the beginning of the Long Depression:

 

 

Two years ago, I decided the key to understanding the present international collapse is to understand previous ones.  Many people refer to the Great Depression.  Some refer to the Panic of 1907.  Fewer talk about the 19th century collapses.  The post-Civil War collapse that enveloped all of Europe as well as the US and South America and even extended deep into Asia and Africa is of greatest interest to me.  It was the first ‘developed capitalist nations’ collapsing and causing a cascade of monetary as well as trade woes.

 

What makes me sit back and laugh very hard is the last paragraph of this story:  ’Without going further back along the chain of causes, we find that prior to 1874, an era of SPECULATIVE ACTIVITY, DURING WHICH CONSUMPTION WAS ABNORMAL, both profits and wages correspondingly high.  In other words, the business reporters over a century ago were quite clear about what was the cause of these crashes!  WHAT THE HELL???

 

HAHAHAHA!  Well!  Haven’t we all matured over the centuries?  Sad, isn’t it?  Today, we have a parade of pirates and gnomes, none of whom want to be punished for creating and inflating one of the worst speculative bubbles in history, all of them claiming, ‘NO ONE KNEW THIS WOULD HAPPEN!’  All of these clowns are ‘geniuses’ yet a humble, ill-paid business reporter in 1878 could figure out what is obvious.    This hyper-smart reporter is a million times smarter than today’s economic geniuses running our systems into the ground.  He even figures out another obvious thing: the bubble that burst didn’t affect any one country nor industry: it was global.  The entire article is a good read because it was written by an intelligent, now anonymous reporter who obviously had a better grounding in the dynamics of economic systems compared to the lunatic crew that is destroying us today.

 

England slid into this depression after the collapse of the 1878 speculative bubble.  This was called ‘the Long Depression.’  Indeed, the Great Depression didn’t start in England in 1930.  It began at the end of WWI.  The debts from that war were supposed to be paid off by the Germans.  So England felt certain, just like Germany in 1873, that war reparations would bring in wealth and it didn’t matter if the government handed out INFINITE debt notes in 1914.  

 

The French ran a lottery/subscription to pay the war reparations to Germany [this whole business led to WWI, by the way].  This lottery was so popular [note how they used gambling tools to dig themselves out of difficulties!] it was grossly over-subscribed so there was two floods of money flowing suddenly in Europe.  This, in turn, spurred speculative deals where people poured this loot into various industries, rail road building, etc across the planet.  

 

Like all speculative bubbles, this was very delicate and when the US needs for more money for war ended with the surrender of the South, the whole system had one last run up to infinity and collapsed very suddenly in a matter of days, starting in Vienna and rapidly moving across the world as speculators were forced into default and banks closed their doors.

 

Back to the news about Britain STILL not paying off the 100 year old war debts: coupon clippers owning debt, especially government debts, like to do this to infinity.  To passively sit there and wait for the money to pour in is paradise!  But they hate inflation!  Governments can’t sell debt unless they promise people they will get infinite returns over hundreds of years.  This is why government debt goes so cheap: people figure, governments will be around a long, long time.  Whereas, businesses go belly up.

 

Bloomberg.com:

The 1917 notes were first sold with a coupon of 5 percent, a rate Prime Minister Lloyd George regarded as “penal,” according to Johnston’s book, first published in 1934 and republished by Ossian Publishers Ltd. in 1994. Neville Chamberlain, then Chancellor of the Exchequer, cut the coupon payment to 3.5 percent in 1932, where it has remained ever since.

 

Savers love depressions and spenders love inflation.  Systems waver between one or the other.  If any one or the other gets their way, totally, we get to live with the terrors of either the Goddess of Inflation or the Goddess of Depression.  Instead, we must strive to balance these forces.  The entire excuse for a central bank was, they would do this service effortlessly via interest rate manipulations which controls the money supply.

 

One thing is absolutely certain: no one should ever be allowed to issue infinite debt.  England has been politically paralyzed by the coupon clippers who want this ridiculous debt to go forwards, forever.  This is like using a damn credit card!  And never paying off any of the balance, ever!  Credit card companies hate people who pay up.  They love people who are deep in debt and keep paying over and over again, for years, for things that cost very little compared to the compounding payments that double, redouble and so on to infinity.

 

The more a system relies on these sorts of open-ended infinite loans [credit cards are infinite!] end up in depressions because people have to spend precious income on paying interest on things that dwindled in relation to the debts to nearly nothing.  After paying interest for 100 years, the principal is not paid down even one penny!  This is very destructive.  This is why there has to be limits on debt issuance.  The US, like England, is simply piling more new debts on old debts and turning the old ones over and over so they become a bigger and bigger dead weight on the present.

 

Yields `Next to Nothing’ Lure Treasury-Only Funds to Goldman, Morgan Bonds

(Bloomberg) — In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago….

 

This is the game today: have the government take all responsibility for insuring against losses so the guys whose over-speculation actions caused this mess can buy up each other’s profit making systems.  The government is the bank.  But we still don’t run the Federal Reserve which remains firmly in the hands and the control of….Morgan Stanely, JP Morgan, Chase, etc!  They are selling to themselves the good stuff while sticking us with the crummy stuff.  They get to be the ‘good bank’ and the taxpayers are the ‘crappy bank.’

 

This is a classic transfer of wealth.  Via moving risks and losses off of the books of the speculators and onto the taxpayers.  

 

Company Bonds Return Most Since ‘03 With Record Yields to Government Debt

Investment-grade U.S. bonds returned 3.6 percent this month, after losing 7.4 percent in October, as Treasury yields declined on concern the recession is deepening, according to Merrill Lynch & Co. indexes. European notes returned 1.5 percent, the most since September 2003. The positive returns were the first since August, before the collapse of Lehman Brothers Holdings Inc. sent company debt tumbling. Sales of new debt rose.

 

As the spread between one month government bonds and 10 year bonds narrows to nothing, the spread between business and government bonds widens.  This sets into motion the ‘depression’ cycle systems.  I would suggest, since so many investment [I wrote 'infestment' :)] banks hold a lot of this stuff, they will want a depression cycle to enhance these bonds.  If they hold mostly stocks, for example, they want inflation.  

 

This is why, when systems reset, it is so hard to change them.  The bankers and investment houses at the center of the messes they created in the past hang on for dear life to whatever new system they have created.  For example, Japan could have ended its own ‘Long Depression’ easily when the rest of the world was going into a wild bubble/inflation cycle.  But they didn’t because of political power in the upper reaches as well as an army of coupon clippers who loved the depression.  Even as it kills off the next generation.

 

Last year, the financiers wanted to resume the inflation cycle systems.  This year, now that they all hold a lot of long-term government debt that was granted so they could ‘recapitalize’ themselves, they will want zero or negative inflation!  DUH.  So they will lock us in a low-interest but NO LENDING cycle!  Like in Japan.

 

Tudor’s $10 Billion BVI Suspends Withdrawals, Plans Split Into Two Funds

(Bloomberg) — Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended redemptions from the $10 billion BVI Global Fund Ltd. as it splits the hedge fund into two, according to a person familiar with the matter.

 

Another example in today’s news of the ‘bad bank/good bank’ way of eliminating losses or moving it to a secure place [the central banks and the government] so the speculators can create a new mess.  The fact that the hedge fund fiends are now going into ’safe’ investments mean, they will want a depression so the earnings they get will ‘grow’ via dropping prices.

 

All of this will work only if there are no wars in the Middle East.  The biggest generator of inflation, bar none, is wars in the oil pumping regions of the planet!  Every burst of domestic inflation has its origins in sudden price hikes in oil due to wars.  The US and Israel stopped menacing Iran last summer due to the high oil prices.

 

The more they harassed Iran, the higher the price of oil went.  This dynamic was ridiculously obvious.  Iran knew this and egged everyone into doing it.  Now, the US has fallen silent…but not for long.  As I will explain later.  The dynamics driving the Middle East into wars are very powerful and getting worse, not better.  We will have another disruption in global oil markets.  This is 100% certain.  In the next 10 years.  

 

Yen Gains Against Dollar, Euro as Manufacturing Slump Weakens Yuan, Ruble

 

 

All systems are dynamic.  The yen was riding a weak currency/depression dynamic that allowed the Bank of Japan to flood the planet with epic amounts of speculative funny money lent to pirates and gnomes of every breed and origin.  Now, this is unwinding rapidly and very violently.  The yen is now at 93 to the dollar.  This is far too strong for the exporters of Japan to stomach for long.  They are seeking every possible way to undo this and restart the status quo.  But despite having the G7 and even G20 declare, they want this too, it won’t happen.  

As I said in the past, when all nations are at 0% interest, Japan has nothing and can’t stop the yen from strengthening.  For the strength of a currency is supposed, in the floating currency regime, strengthen.  Japan and Germany both had the world’s biggest trade profits in 2007.  Both are feeling the pain of a loss of sales power during the last year.  This is inevitable.  They can’t run their systems so they get all the profits, forever.  Anymore than coupon clippers should get interest on 100 year old debts forever.

 

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

CLICK HERE TO DONATE TO THIS WEBSITE

US savings adjustment will be the third leg of deleveraging.

id="desc">Forex, Stocks, Bonds, Credit Crisis…

CEOs “cashed out” prior to economic crisis

Balzac’s maxim that “behind every great fortune lies a great crime” may yet prove a fitting epitaph for American capitalism. A recent survey by the Wall Street Journal reveals that CEOs at major US financial and real estate firms converted tens of millions of dollars of overvalued stock into cash prior to the eruption of the current financial crisis, even as many of their corporations approached the precipice.

The Journal analyzed the fortunes of CEOs from 2003 to 2007 based on executive compensation and stock sale data. Fifteen of these CEOs took home more than $100 million in cash during this period. At the high end was Charles Schwab, who made over $816 million from his self-named accounting firm, almost all of it from stock sales.

Of the 120 publicly traded firms the Journal analyzed, CEOs cashed out a total of more than $21 billion. However, data was gathered only from publicly traded companies, and thus does not include similar fortunes that have been made by “hedge fund chiefs, Wall Street traders, and executives who sold their companies outright.” Nor did it include data related to exit packages, the multimillion-dollar “golden parachutes” awarded to retiring or fired executives.

Read more

What are synthetic CDOs?

Felix Salmon has written an excellent post on synthetic CDOs. It explains how they are created and how it could easily turnaround from a cool return to a hot hot loss. Thanks to Baseline Scenario for the pointer.

Actually Salmon post reminded me of a paper by Dean Foster and Peyton Young which was based on the same idea but had a different implication. The paper explains how the hedge fund manager can structure the derivative contracts which will make him appear as a skilled fund manager but in reality he is unskilled or even an ‘outright con artist’.

In another entry, Baseline Scenario explains a particular dealbetween five Schools in Wisconsin and Royal Bank of Canada involving synthetic CDOs. The Schools have lost a lot of money in the transaction. James Kwak, writer of the post says:

The question that comes to my mind is why should someone be selling/writing these options then? One could understand the need to take the risks if the extreme events in financial markets are very rare. This is clearly not the case and most of the time the crisis strikes unexpectedly and very close to good times. This derivatives writing  lead to a collapse of AIG and similar concerns are felt for other forms as well. And if there is a risk in writing/selling options and gets limited in time to come, whom will you buy these options from? Would we see a decline in derivative volumes in future?

Another thing which always interested me (and pointed by Tyler Cowen in his blog, I can’t locate the exact post) is the swap transactions. We are taught in text books that swaps help change the nature of inflows/outflows. Say you are receiving (or paying) fixed rate on a loan and want to change it to floating. Instead of asking the bank to change the loan you can swap it with someone who needs a fixed income loan. Likewise, if you are receiving in dollars and want to change it to Swiss Franc you can swap it with someone.

Now, there are 2 questions- 1) The change to floating or swiss franc should be based on some logic (say floating rates are lower or swiss franc is more stable). So, doesn’t that apply to all and wouldn’t most want to do the same? 2) I can understand if the swaps are done after some sudden changes in say interest rate outlook and currency outlook. Why sudden? Because one swaps after taking into account the most likely future developments. And sudden changes are rare but the swap markets are fairly large. Why would one take a loan in USD and swap it with Swiss Franc immediately when he can take the loan in Swiss Franc rightaway? Another thing is this market is largely institutional (with banks doing swaps with each other) and people are paid to have some futuristic outlook. IF the outlook changes suddenly fine swap it. But why this constant swapping of inflows and outflows?

Again, I don’t mean to say swap/derivative markets are useless. I just don’t understand the huge volumes in these markets.

Buffett to Disclose More on Derivatives; Tilson Ups Berkshire Stake

Warren Buffett says he will give more information on Berkshire Hathaway’s much discussed derivative bets in the company’s end-of-year-report, Reuters is reporting. The derivatives contracts call for the firm to pay out billions to purchasers if, by certain dates starting in 2019, four different market indices fall below agreed-upon levels. Rumors that Berkshire’s liabilities for the contracts could be more than previously thought caused the firm’s stock to plunge — and its credit default swap rates to surge — last month.

Buffett isn’t expressing worry about the deals, however, nor is hedge fund manager and Kiplinger’s columnist Whitney Tilson. Tilson tells Reuters that his fund (T2 Partners) doubled its stake in Berkshire as the company’s stock fell. “The market is so panicked that even the most respected investor in the world can see the stock in his company fall more than 30 percent on no news, other than on rumors that are clearly false based on the disclosures he’s made,” Tilson said.

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FALLING RATE OF PROFIT HITS WORKERS IN THE HEAD

The strike at Boeing Aircraft and other recent industrial actions show both the power of the working class, and the real value of our labor to the bosses. A four-week strike in 2005 probably cost Boeing at least $700 million in profit (Seattle Times, 9/29/08). An eight-week strike in 2008 ran Boeing over $2 billion in losses. Our ability to shut down production there gives us a small taste of the potential of the working class to lead society. However, strikes alone can never fulfill a vision of liberation from rule by a tiny minority of bankers, bosses, and investors.

Only through communist revolution can workers achieve an alternative to capitalism. The greatest limitations workers all over the world face today are political, the belief that we have no alternative to living under the bosses rule. However, more workers are looking for answers to the cause of the current economic crisis. Analyzing the political economy of capitalism, and connecting those ideas to specific events at the point of the class struggle, can move our class forward.

Productive labor creates all wealth in capitalist society. The bosses’ media and schools constantly prattle that advances in workers’ standard of living emanate from the “free market.” In reality, the free market today means bosses are gambling with riches they have stolen from us. During the last two “booms,” popular culture taught us to idolize and imitate speculators (Who Wants to Be a Millionaire; Deal or No Deal).

The current financial crisis is a product of basic laws of capitalist economics. Since the 1970s, instead of investing in more factories, U.S. banks have led the vastly increased speculation in stock and bond markets. Karl Marx discovered long ago that, as capitalism matures, the rate of profit, i.e. the amount of profit per dollar invested, tends to fall.

Because capitalism is a competitive system, each boss must try to produce things more cheaply than the next one. Individual capitalists save money by introducing more machinery into production, thereby reducing the number of workers. Other bosses in the same industry are then forced to automate in order to keep up. The result for all bosses and the investors who back them is a much higher amount of money sunk into technology, resulting in a lower rate of profit.

According to economist Robert Brenner, profit rates at U.S. non-financial corporations in 2000-2006 were one-third lower than in the 1950s and 1960s.  On a global scale, there were large drops in the rate of profit in industrial economies after the late 1960s through the early 1980s. The basic trend, with some minor upturns, has continued through the present. This has come as rivalries between major industrial powers have grown.

Capitalists typically use several methods to try to avoid the tendency of the rate of profit to fall: 1) In a crisis, more and more factories are closed; the weaker firms are taken over by the stronger ones, temporarily giving the bigger fish more of a global edge (e.g. GM taking over Chrysler); 2) increased exploitation of the whole working class (the decline in real wages in the U.S. since 1973 and increased cutbacks in benefits); and 3) greater use of racism, to super-exploit a section of the working class (e.g. increased use of immigrant labor in basic industry).

The bosses also try to counteract the falling rate of profit by investing in the “developing” world. They are able to do this because of uneven development under capitalism, i.e. the vast levels of inequality that exist. This allows them, for a time, to extract larger amounts of value from these more exploited workers. However, this only gets them so far. Class struggle is a given under capitalism-; workers always fight back, putting upward pressure on labor costs. Also, local bosses resist imperialist attempts to take over labor markets in “their” countries. For example, China recently required all foreign companies to allow Chinese“Communist” Party-led union organizing.

The main thing driving events in the world today is the fight between rival imperialist powers. For example, competition in the banking industry has been fierce. In 1999, Clinton signed the repeal of the Glass-Steagall Act, the Depression-era law that had separated investment banking, commercial banking and insurance business. U.S. banks saw this law as the last barrier to them expanding into areas of speculative investment that were wholly unregulated. Europe had already removed that separation for many of their banks. To maintain their competitive edge, U.S. bankers decided their government also had to get rid of it (Obama economic adviser Robert Rubin and McCain economic adviser Phil Gramm were key players calling for the repeal).

In the end, billionaire bankers and investors were forced to turn into players at a gigantic gambling casino. They turned to more and more exotic investments in order to try to maximize their rate of return. In the late ‘90s it was the “dot-com boom” and now it is “collateralized debt obligations” and “credit default swaps.” These latest attempts to profit off of an increase in paper wealth are far-removed from the value created (and stolen) through the production process. They are ultimately doomed to fail.

When that happens, the capitalists turn to their “final solution” to the falling rate of profit- -— war and world war. Wars destroy large amounts of productive capacity, allowing the capitalists to start the cycle of development all over again. They also settle, temporarily, the imperialist fight over markets, labor, and resources that led to the wars. However, new rivalries will always arise.

US, China manufacturing sectors are contracting, as NBER declares a recession.

id="desc">Forex, Stocks, Bonds, Credit Crisis…

Barack Obama

‘Why say you’re for a new tomorrow, then do old-style Chicago politics to remove legitimate candidates? He talks about honor and democracy, but what honor is there in getting rid of every other candidate so you can run scot-free? Why not let the people decide?’

Icahn: Some Stocks, Senior Debt Offer

Renowned corporate-raider-turned-sharholder-activist Carl Icahn tells Barron’s that there are great buying opportunities in this market, particularly in stocks and senior corporate debt. Icahn talks about the problems with corporate management in America, as well as the stake he has in Yahoo! (he owns around 5.4% of the firm) and his ideas on how to maximize shareholder value. Icahn — who stressed that the market could get worse despite the great values that exist — also thinks that many hedge funds are set to fail over the next few years, as managers deal with not making very much in fees due to the heavy recent losses and claw-back provisions.

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Sun-Tzu Described The US Iraq/Afghan War

Sun-Tzu Described The US Iraq/Afghan War

‘Why say you’re for a new tomorrow, then do old-style Chicago politics to remove legitimate candidates? He talks about honor and democracy, but what honor is there in getting rid of every other candidate so you can run scot-free? Why not let the people decide?’

Hedge funds hit by fresh wave of withdrawals

By James Mackintosh

Financial Times. November 29 2008 01:03

The suspension comes amid a rush for cash by investors, which has seen even funds with the strongest pedigree and solid performance hit by heavy withdrawals, while scores restricted redemptions. The combination of the worst year on record for hedge fund returns and the biggest withdrawals on record mean the industry’s assets will shrink 35-45 per cent from June to the end of December, according to analysis by Morgan Stanley.

The Tudor BVI fund is down only 5 per cent to the end of November, far ahead of the average 16 per cent drop of Hedge Fund Research’s HFRI index.

“I recognise that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI’s 22-year history of unbroken profitable years,” Mr Jones wrote. “I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors.”

Tudor is already in the process of splitting out the Raptor long/short equity fund, run by James Pallotta from Boston, which has been hit by heavy withdrawals. Raptor was down 16 per cent to the end of October, according to one investor.

Illiquid assets will be split from the BVI fund into a new Legacy fund, holding the fund’s $3.1bn of corporate credits in eastern Europe, Asia and Latin America, plus private equity and hedge fund investments.

Mr Jones said withdrawals were likely to be allowed again at the end of March, after toxic assets had been split out. The main fund will return to Mr Jones’s trading roots in highly liquid global macro, freewheeling bets on interest rates, stock market indices, commodities and currencies, which have done well this year. Systematic macro traders are doing particularly well. Tudor’s $1bn Tensor fund is up 34 per cent, while the $400m Tudor Futures managed futures fund is up 24 per cent.

By James Mackintosh

Financial Times. December 1 2008 21:12

Paul Tudor Jones, who shot to fame and made a fortune when he predicted the 1987 stock market crash, plans to split toxic assets out of his $10bn flagship hedge fund and has suspended redemptions until the restructuring is complete.

In a letter sent to clients on Friday, Mr Jones, who is based in Greenwich, Connecticut, said investors were trying to redeem 14 per cent of the Tudor BVI fund at the end of the year. This would have left the remaining investors holding too large a proportion of illiquid assets, particularly corporate credit in emerging markets, the letter said.

The suspension comes amid a rush for cash by investors, which has seen even funds with the strongest pedigree and solid performance hit by heavy withdrawals, while scores restricted redemptions. The combination of the worst year on record for hedge fund returns and the biggest withdrawals on record mean the industry’s assets will shrink 35-45 per cent from June to the end of December, according to analysis by Morgan Stanley.

The Tudor BVI fund is down only 5 per cent to the end of November, far ahead of the average 16 per cent drop of Hedge Fund Research’s HFRI index.

“I recognise that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI’s 22-year history of unbroken profitable years,” Mr Jones wrote. “I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors.”

Tudor is already in the process of splitting out the Raptor long/short equity fund, run by James Pallotta from Boston, which has been hit by heavy withdrawals. Raptor was down 16 per cent to the end of October, according to one investor.

Illiquid assets will be split from the BVI fund into a new Legacy fund, holding the fund’s $3.1bn of corporate credits in eastern Europe, Asia and Latin America, plus private equity and hedge fund investments.

Mr Jones said withdrawals were likely to be allowed again at the end of March, after toxic assets had been split out. The main fund will return to Mr Jones’s trading roots in highly liquid global macro, freewheeling bets on interest rates, stock market indices, commodities and currencies, which have done well this year. Systematic macro traders are doing particularly well. Tudor’s $1bn Tensor fund is up 34 per cent, while the $400m Tudor Futures managed futures fund is up 24 per cent.

How Bad Will December Be For Investors?

I have been debating with friends in the investing business how bad the month of December might be due to the gyrations in the hedge fund industry.  The tremendous amount of redemptions requested for year-end combined with the hedge funds’ desire to lower the bar for next year could really hurt commodities, fixed income and equities.  Our thoughts were that the markets could range from bad to horrendous. One said that the last 10 days of the year could be a total rout. A real lump of coal for Christmas.

As an example to illustrate redemptions, today it was reported that the hedge fund industry giant, Paul Tudor Jones, faced a large redemption call. The Independent reports with my notes in italics.

“Investors representing 14 per cent of the Tudor BVI Global fund’s assets demanded their money back as it fell 12 per cent from its high water mark in June, brought low by impossible-to-sell credit market investments. (If it were only the poorly performing stocks bringing down their results!)

Letting them go would mean BVI would have to sell a proportion of its best, liquid positions to raise cash, leaving the remaining investors with a portfolio of potentially toxic assets. (How do you give back the money - the funds were not set up for massive redemptions in bad markets, even though that is the only time when you would get the call.)

With a 31 December deadline looming for redemption requests across much of the hedge fund industry, many investors are expected to pull their money out. The industry is on course for its worst performance since at least 1990, and analysts, economists and market players have predicted that it could shrink by a half or more.”

From The Independent UK

Fasten your seatbelts, or better yet avoid all media during your holidays to enjoy the more important things. All that said, generally speaking the market anticipates everything, and a cataclysmic sell off would be a good buying opportunity.

tough times for the typing pool

the typing pool loves hedge fund guys. not because they can discuss literature or have good taste in music or restaurants or even because they are particularly attractive, dress well or know what to in bed. the typing pool loves hedge fund guys because they will take you anywhere you want to go. lacking any kind of imagination, they are too busy fingering their blackberries to know  friedman and bloomfield opened a new restaurant or that the New York Philharmonic is performing stravinsky’s firebird. what they lack in taste and time, they make up for with lots and lots of money. and since they don’t want to think about anything besides the stock market, they are open to suggestions. and since the typing pool’s extended studio apartment in Murray Hill eats up half her income and she spends most of her day reading new york magazine, hedge fund guys are just what the love doctor ordered. 

today, the national bureau of cconomic research declared that the economy has been in a recession since last December, making it the longest recession since world war ii. so naturally, the stock market plunged. the timing couldn’t have been worse. m. has been looking forward to a massage with her hedgie at the new spa in SOHO for nearly a month. she had presented it as a “couples massage” so that the thought of seeing her barely covered body would take the edge off of the finance man’s paranoia of doing anything that seems “gay.” the only risk: “i hope he doesn’t try to talk to me.”  

when the dow closed at 4:00 down 680 points, m. turned to me and said “i guess hot stones are out of the question.” 

this presents a legitimate concern:  if all the hedgies lose their jobs, who are we going to date? tough times are ahead for the typing pool.

-All the news I missed

Army Science Conference FCS video calls for cognitive computing

Microsoft Doles-out 5GB Free Online Storage

Stimulus Plan - and NASA

Nanotubes crank out tunes

Facial recognition systems for border security

Bruce Fein: Army to deal with potential domestic “civil unrest and crowd control”

Our Poor Soldiers - 1 in 3 Homeless Men is a Veteran

Vigilant Shield 09: A Cover for Illegal Domestic Operations?

Maryland city testing nightly police checkpoints into neighborhoods

So, um…Can you make me a Cyborg?

FDA sets “safe” levels for toxic melamine in baby formula

Researchers find new nanomaterial could be breakthrough for implantable medical devices

Poverty spreading in suburbs: study | Reuters

“Agricultural commodities will outperform the broad commodity indices in 2009,” Hitzfeld wrote in a research note this week. “If key crop-producing countries then impose export bans again and speculators drive up prices via physical stockpiling and futures contracts, new food unrest is even conceivable in the second half of 2009.”

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Seized: The 2008 landgrab for food and financial security

GRAIN

Today’s food and financial crises have, in tandem, triggered a new global land grab. On the one hand, “food insecure” governments that rely on imports to feed their people are snatching up vast areas of farmland abroad for their own offshore food production. On the other hand, food corporations and private investors, hungry for profits in the midst of the deepening financial crisis, see investment in foreign farmland as an important new source of revenue. As a result, fertile agricultural land is becoming increasingly privatised and concentrated. If left unchecked, this global land grab could spell the end of small-scale farming, and rural livelihoods, in numerous places around the world.

1. A summary and announcement

2. The full report is available on this page , also available in PDF format. PDF

3. The Annex to this briefing is a table with over 100 cases of land grabbing for offshore food production as presented in this report.

Introduction

Land grabbing has been going on for centuries. One has only to think of Columbus “discovering” America and the brutal expulsion of indigenous communities that this unleashed, or white colonialists taking over territories occupied by the Maori in New Zealand and by the Zulu in South Africa. It is a violent process very much alive today, from China to Peru. Hardly a day goes by without reports in the press about struggles over land, as mining companies such as Barrick Gold invade the highlands of South America or food corporations such as Dole or San Miguel swindle farmers out of their land entitlements in the Philippines. In many countries, private investors are buying up huge areas to be run as natural parks or conservation areas. And wherever you look, the new biofuels industry, promoted as an answer to climate change, seems to rely on throwing people off their land.

Something more peculiar is going on now, though. The two big global crises that have erupted over the last 15 months – the world food crisis and the broader financial crisis that the food crisis has been part of1 – are together spawning a new and disturbing trend towards buying up land for outsourced food production. There are two parallel agendas driving two kinds of land grabbers. But while their starting points may differ, the tracks eventually converge.

The first track is food security. A number of countries which rely on food imports and are worried about tightening markets, while they do have cash to throw around, are seeking to outsource their domestic food production by gaining control of farms in other countries. They see this as an innovative long-term strategy to feed their people at a good price and with far greater security than hitherto. Saudi Arabia, Japan, China, India, Korea, Libya and Egypt all fall into this basket. High-level officials from many of these nations have been on the road since March 2008 in a diplomatic treasure hunt for fertile farmland in places like Uganda, Brazil, Cambodia, Sudan and Pakistan. Given the continuing Darfur crisis, where the World Food Programme is trying to feed 5.6 million refugees, it might seem crazy that foreign governments are buying up farmland in Sudan to produce and export food for their own citizens. Ditto in Cambodia, where 100,000 families, or half a million people, currently lack food.2 Yet this is what is happening today. Convinced that farming opportunities are limited and the market can’t be relied upon, “food insecure” governments are shopping for land elsewhere to produce their own food. At the other end, those governments being courted for the use of their countries’ farmland are generally welcoming these offers of fresh foreign investment.

The second track is financial returns. Given the current financial meltdown, all sorts of players in the finance and food industries – the investment houses that manage workers’ pensions, private equity funds looking for a fast turnover, hedge funds driven off the now collapsed derivatives market, grain traders seeking new strategies for growth – are turning to land, for both food and fuel production, as a new source of profit. Land itself is not a typical investment for a lot of these transnational firms. Indeed, land is so fraught with political conflict that many countries don’t even allow foreigners to own it. And land doesn’t appreciate overnight, like pork bellies or gold. To get a return, investors need to raise the productive capacities of the land – and sometimes even get their hands dirty actually running a farm. But the food and financial crises combined have turned agricultural land into a new strategic asset. In many places around the world, food prices are high and land prices are low. And most of the “solutions” to the food crisis talk about pumping more food out of the land we have. So there is clearly money to be made by getting control of the best soils, near available water supplies, as fast as possible.

Where these tracks come together is that in both cases it is the private sector that will be in control. In the drive for food security, governments are the ones taking the lead through a public policy agenda. In the drive for financial returns, it is strictly investors out doing business as usual. But there is no room to be fooled. While public officials negotiate and make the deals for the “food security” land grab contracts, the private sector is explicitly expected to take over and deliver. So whichever of the two tracks you look at, they point in one direction: foreign private corporations getting new forms of control over farmland to produce food not for the local communities but for someone else. Did someone say colonialism was a thing of the past?

The food security seekers

The food security land grab is the one that most people have been hearing about, with newspapers reporting that Saudi Arabia and China are out buying farmland all over the world, from Somalia to Kazakhstan. But there are many more countries involved. A closer look reveals an impressive list of food security land grabbers: China, India, Japan, Malaysia and South Korea in Asia; Egypt and Libya in Africa; and Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates in the Middle East. A detailed picture of who is seeking land where, for what purpose and for how much money, is provided in the Annex.

The situation of these countries varies a great deal, of course. China is remarkably self-sufficient in food. But it has a huge population, its agricultural lands have been disappearing to industrial development, its water supplies are under serious stress and the Communist Party has a long-term future to think of. With 40% of the world’s farmers but only 9% of the world’s farmlands, it should surprise no one that food security is high on the Chinese government’s agenda. And with more than US$1.8 trillion in foreign exchange reserves, China has deep pockets from which to invest in its own food security abroad. As many farmers’ leaders and activists in south-east Asia know, Beijing has been gradually outsourcing part of its food production since well before the global food crisis broke out in 2007. Through China’s new geopolitical diplomacy, and the government’s aggressive “Go Abroad” outward investment strategy, some 30 agricultural cooperation deals have been sealed in recent years to give Chinese firms access to “friendly country” farmland in exchange for Chinese technologies, training and infrastructure development funds. This is happening not only in Asia but all over Africa3 as well, through a range of highly diverse and complex projects. From Kazakhstan to Queensland, and from Mozambique to the Philippines, a steady and familiar process is under way, with Chinese companies leasing or buying up land, setting up large farms, flying in farmers, scientists and extension workers, and getting down to the work of crop production. Most of China’s offshore farming is dedicated to the cultivation of rice, soya beans and maize, along with biofuel crops like sugar cane, cassava or sorghum.4 The rice produced abroad invariably means hybrid rice, grown from imported Chinese seeds, and Chinese farmers and scientists are enthusiastically teaching Africans and others to grow rice “the Chinese way”. However, local farmworkers hired to work the Chinese farms, in Africa for instance, often don’t know if the rice is to feed their own people or the Chinese. Given the hush-hush nature of a lot of the land deals, most people assume that the rice is to feed the Chinese, and a lot of resentment has been building up.5

In essence, China’s land grab strategy is a conservative one: the government is hedging its bets and maximising its options for the country’s long-term food supply. Indeed, the pressure from China’s own loss of agricultural land and water supplies is so great that “China has no other choice” than to go abroad, says one expert at the Chinese Academy of Agricultural Sciences.6 In fact, food is starting to rank pretty high, alongside energy and minerals, in China’s overall outward investment strategy. In the first half of 2008, the Ministry of Agriculture went so far as to draft a central government policy on outsourcing food production. The draft is not public,7 but it would surely give an indication of how far, or for how long, the government expects to underwrite such deals financially. There are, in the meantime, many indications that the private sector is expected to play a greater and greater role. After discussions in July, the policy was placed on the back burner, for the moment at least. “It’s too early”, one ministry official explained. “We need to wait and see how such investments mature.”8

The Gulf States – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – face a totally different reality. As nations built in the desert, they have scarce soil and water with which to grow crops or raise livestock. But they do possess enormous amounts of oil and money, which gives them powerful leverage to rely on foreign countries for their food. The current food crisis has hit the Gulf States exceptionally hard. Because they depend on food from abroad (especially from Europe) and their currencies are pegged to the US dollar (except for Kuwait, but only since last year), the simultaneous rise in food prices on the world market and the fall in the US dollar have meant that they have imported a lot of “extra inflation”. Their food import bill has ballooned in the last five years from US$8bn to US$20bn. And since their populations are largely made up of low-wage migrant workers9 who build their cities and staff their hospitals, it is absolutely necessary for the Gulf’s political dynasties that they provide food at reasonable prices. After all, they’re sitting on a class time bomb, while they expect to stay wealthy 20 years from now renting out prime real estate.

When the food crisis exploded, and rice supplies from Asia were cut off, Gulf leaders made fast calculations and came to hard conclusions. The Saudis decided that, given impending water shortages, it would make sense to stop producing wheat, their main food item, by 2016 and, instead, to grow and ship it over from elsewhere, provided that the whole process was firmly under their own control. The United Arab Emirates, 80% of whose population are migrant workers, most of them rice eaters from Asia, panicked. Under the aegis of the Gulf Cooperation Council (GCC), they banded together with Bahrain and the other Gulf nations to formulate a collective strategy of outsourcing food production. Their idea is to secure deals, particularly in sister Islamic countries, by which they will supply capital and oil contracts in exchange for guarantees that their corporations will have access to farmland and be able to export the produce back home. The most heavily targeted states are, by far, Sudan and Pakistan, followed by quite a number in south-east Asia (Burma, Cambodia, Indonesia, Laos, Philippines, Thailand and Vietnam), Turkey, Kazakhstan, Uganda, Ukraine, Georgia, Brazil … the list goes on.

The seriousness of the Gulf States’ drive should not be underestimated. Between March and August 2008, individual GCC countries or industrial consortia leased under contract millions of hectares of farmland, and harvests are expected to start as soon as 2009. Leaders of the GCC are planning important meetings in October 2008 and January 2009 where they will finalise official policy on this. While the visible components of the Gulf strategy are not controversial in themselves (see Box 1), global agencies like the United Nations Food and Agriculture Organisation (FAO) have felt it necessary to jump in and get directly involved in managing the public relations around the issue. “I have no problem in Arabs doing the investment”, exclaimed Jacques Diouf, director of FAO, but land, he says, is “a political hot potato”. He has several FAO staff stationed in the Gulf right now to avoid “unintended scandals” from the Gulf States’ manoeuvres.10

▪ governments priming the pump (organising the deals and working out specific bilateral policy arrangements, e.g. getting food export restrictions specially waived or opening embassies where the contracts will be carried out) but expecting, if not mandating, that private companies take over the projects for the long haul;

▪ upholding Islamic traditions of helping the poor and sharing with those who have less, which translates into a commitment to have some of the food go to communities in the producing country or to the domestic market, Sharia-based banks being set up to dispense the funds locally, or sweetening the projects with technology transfer, jobs and training, etc.;

▪ a truly long term approach;

▪ a strong rhetorical attachment to “win-win” outcomes;

While China and the Gulf states are the biggest players, other countries are also moving aggressively to find farmland abroad, with a new impetus as of this year. Japan and South Korea, for instance, are two rich countries whose governments have opted to rely on imports rather than self-sufficiency to feed their people. Both get around 60% of their food from abroad. (In Korea’s case, it’s over 90% if you exclude rice.) Early in 2008, the Korean government announced that it was formulating a national plan to facilitate land acquisitions abroad for Korean food production, with the private sector anointed as the main player. Indeed, Korean food corporations are already buying up land in Mongolia and eastern Russia to produce food for export back home. The government, meanwhile, is exploring various options itself in Sudan, Argentina and south-east Asia. Japan, on the other hand, seems to rely entirely on the private sector to organise food imports (see below) while the government juggles the political frame through its free trade agreements, bilateral investment treaties and development cooperation pacts. This is no passive role. Successive Japanese administrations have been resisting all pressure to restructure Japanese agriculture, where family farms reign and corporations are not allowed to own land. Now that Japanese firms are buying farmland in places like China and Brazil, the pressure may grow tougher.

India has also been bit by the land grab bug. Seen from the corporate boardrooms and government office buildings of New Delhi or Pune, Indian agriculture is in a mess. The country has major problems with costs of production (their biggest concern), declining soil fertility and long-term water supplies, to name just a few. In addition, struggles over access to land have become incredibly complicated, especially because of the widespread social resistance to Special Economic Zones. Spurred by the global food crisis, and probably not wanting to be left out, a number of Indian agribusiness chiefs as well as the government-owned State Trading Corporation (STC) now see a need to produce some of the country’s food abroad. They are singling out oilseed crops, pulses and cotton for offshore production, while they figure that it’s cheaper to keep producing wheat and rice at home.11 The new strategy is well under way in Burma, which supplies 1m of the 4m tonnes of lentils that India imports each year to supplement its domestic output of 15m tonnes. Rather than keep buying from Burma, Indian traders and processors now want to go in and grow the lentils there themselves. It works out cheaper, and they get more control over the entire process. With the government’s support, Indian corporations are getting leases to Burmese farmland to produce the crop for exclusive export to India. The Indian government is providing the Burmese military junta with special new funds to upgrade its port infrastructure, and is aggressively pushing a tailored bilateral free trade and investment agreement to iron out the policy wrinkles between the two states. But it doesn’t stop there. Indian CEOs are also buying up Indonesian palm-oil plantations, and are now boarding planes to Uruguay, Paraguay and Brazil to find land to grow pulses and soya beans for export to India. Meanwhile the nation’s central bank, the Reserve Bank of India, is quickly trying to change India’s laws so that it may issue Indian private companies, as well as the STC, with the loans they need to purchase farmland overseas. Such a possibility has never been contemplated before, so the rules don’t exist.

It may sound like a giant board-game, as diplomats and investors hop around from country to country searching for new farmland to can call their own. But the truth is that African and Asian governments being approached for their lands are readily accepting the proposals. After all, for them it means fresh inflows of foreign capital to build rural infrastructure, upgrade storage and shipping facilities, consolidate farms and industrialise operations. There are plenty of research and breeding programmes promised in several of these deals as well. Indeed, “invest in agriculture” has so much become the rallying cry of virtually all authorities and experts charged with solving the global food crisis that this, perhaps unintended, land grab boom fits in well. It should be abundantly clear, however, that behind the rhetoric of win–win deals the real aim of these contracts is not agricultural development, much less rural development, but simply agribusiness development. Perhaps only when that is understood do the contradictions underlying this land grab momentum make sense.

A few months ago, Cambodia’s Prime Minister, Hun Sen, publicly announced the leasing of Khmer paddy fields to Qatar and Kuwait, so that they can produce their own rice. Though the area involved was not specified, it must be fairly large, as the government is getting almost US$600m in loans in return. At the same time, however, the World Food Programme has had to start shipping US$35m-worth of food aid to relieve the hunger plaguing Cambodia’s countryside. In the Philippines, where many people have had to cut back on meals, delegations from Saudia Arabia, UAE and Bahrain have been repeatedly flying in and out of the country since March 2008 to secure land for their own food supplies, raising more than one eyebrow. As if to nip any controversy in the bud, President Gloria Macapagal Arroyo has managed to slip the land grab deal signed with the UAE (where many Filipinos work to keep the Philippine economy going) under her administration’s new halal industry policy. This way, the UAE project looks like an integral component of a government-funded programme to build a new national industry instead of what it really is: the siphoning of fertile and probably contested agricultural lands to rich foreigners. The various funds being sent to Burma in exchange for exclusive use of some of its farmland are even more problematic. Because Burma is a member of the ASEAN regional trade bloc, and ASEAN itself is now signing free trade agreements with rich economies like Australia, New Zealand and the European Union, social movements across the region are getting deeply worried about such under-the-radar support for Burma’s repressive military regime. The land grab deals follow precisely the same pattern. A huge public outcry recently erupted in Uganda when Reuters reported on the government’s talks with Egypt’s ministry of agriculture, detailing a lease for over 840,000 ha of Ugandan farmland (2.2% of Uganda’s total surface!) to Egyptian firms for the production of wheat and maize destined for Cairo. While government officials denied the deal, Uganda’s parliament called an emergency session to investigate the matter.

Unfortunately, precise details about a lot of these land grabs for overseas food production – how many hectares, for how much money, to do what exactly, with what conditions attached – are not easy to come by. Governments are no doubt fearful of a political backlash if the public were to know exactly what was going on.

Fresh magnet for private investors

While governments may have food security agendas, the private sector has a very different one: making money. The food crisis coupled with the broader financial crisis has turned control over land into an important new magnet for private investors. We’re not talking about typical transnational agribusiness operations, where Cargill might invest in a soya bean crushing plant in Mato Grosso in Brazil. We’re talking about a new interest in acquiring control over farmland itself. There are two main players here: the food industry and, much more significantly, the finance industry.

Within food industry circles, Japanese and Arab trading and processing corporations are perhaps the ones most involved in overseas farm acquisitions rights now. For the Japanese firms, this strategy is being woven into their organic growth (see Box 2). As for the Middle Eastern firms, they are riding on the wave of their governments going out and opening doors in the name of the food security paradigm.

Five trading conglomerates dominate Japan’s food and agribusiness market: Mitsubishi, Itochu, Mitsui, Marubeni and Sumitomo. They are involved in purchasing, processing, shipping, trading and retail. They mostly focus on serving the needs of the domestic Japanese market. But because that market is ageing and shrinking, growth has to be found elsewhere.

Japan’s food corporations are moving overseas (to capture new markets) and upstream (towards production). Marubeni and Mitsui, and to a lesser extent Mitsubishi, aim to join the ranks of the world’s top grain traders, on a par with Arthur Daniels Midland and Bunge. (Cargill, they reckon, is too far ahead.) They are buying up and building huge new facilities and operations in Europe, the US and Latin America. Marubeni recently bought eight grain-storage facilities and two warehouses in the US for US$48m. This way, it can bypass the market and buy soya beans and maize directly from US producers. Securing a foothold in China, where ADM, Bunge and Cargill are not that strong, is now a real strategic priority for these firms.

But managing warehouses and cargo containers is no longer enough for Japan’s top food traders. Moving upstream is also part of the agenda. According to several reports, Japanese firms already own 12m ha of farmland abroad for the production of food and fodder crops. Some of this is in China, where in 2006 Asahi, Itochu and Sumitomo began leasing hundreds of hectares of farmland for organic food production for the Chinese and Korean markets. In 2007, Asahi expanded from this initial project and developed the first Japanese dairy farm in China. One year later, in September 2008, Asahi took advantage of the melamine milk tragedy to launch its first liquid milk product at a 50% mark-up – disaster capitalism at its best! Meanwhile, Itochu has branched off to form an alliance with COFCO, China’s top agricultural trading and processing firm, which reportedly may involve farmland acquisitions.

The troubled finance industry is the one taking a bigger bite. For a lot of people in power, the global food crisis laid bare an overarching problem: that no matter where you look, climate change, soil destruction, the loss of water supplies and the plateauing of monocultured crop yields are bearing down as big threats to our planet’s future food supplies. This translates into forecasts of tight markets, high prices and pressure to get more from the land. At the same time, the finance industry, which has gambled so much on squeezing money from debt and lost, is looking for safe havens. All these factors make agricultural land a smart new toy to make profits with. Food has to be produced, prices will remain high, cheap land is available, it will pay off – that’s the formula. The result? Throughout 2008, an army of investment houses, private equity funds, hedge funds and the like have been snapping up farmlands throughout the world – with great help from agencies like the World Bank, its International Finance Corporation and the European Bank for Reconstruction and Development, who are all greasing the way for this investment flow and “persuading” governments to change land ownership laws so that it can succeed (see Box 3). As a result, land prices are starting to climb, creating even more pressure to move quickly.

The private sector rush into farmland acquisitions this year has been dizzying. Deutsche Bank and Goldman Sachs, for instance, are taking control of China’s livestock industry. While all eyes were focused nervously on Wall Street in late September 2008, these two were tucking their money away into China’s biggest piggeries, poultry farms and meat processing plants – including rights to the farmland. New York-based BlackRock Inc, one of the world’s largest money managers with nearly US$1.5 trillion on its books, has just set up a massive US$200m agricultural hedge fund, US$30m of which will be used to acquire farmland around the world. Morgan Stanley, which nearly joined the queue for a US Treasury Department bail-out, recently bought 40,000 ha of farmland in the Ukraine. This pales in comparison to the 300,000 ha of Ukrainian farmland that Renaissance Capital, a Russian investment house, has acquired rights to, but still. In fact, throughout the highly fertile belt from Ukraine across southern Russia, the competition is hot. Black Earth Farming, a Swedish investment group, has acquired control of 331,000 ha of farmland in the black earth region of Russia. Alpcot-Agro, another Swedish investment firm, has bought rights to 128,000 ha there. Landkom, the British investment group, has bought up 100,000 ha of agricultural land in Ukraine and vows to expand this to 350,000 ha by 2011. All of these land acquisitions are to produce grains, oils, meat and dairy for those in the hungry world market … that is, for those who can pay.

The speed and timing of this new investment trend is amazing. So is the list of targeted countries: Malawi, Senegal, Nigeria, Ukraine, Russia, Georgia, Kazakhstan, Uzbekistan, Brazil, Paraguay, even Australia. They have all been identified as offering fertile land, relative water availability and some level of potential farm productivity growth. The time horizon investors are talking about is, on average, 10 years – with a clear understanding that they have to make the land productive and to build marketing infrastructure, not sit back idly – with projected annual rates of return of 10–40% in Europe or up to 400% in Africa. Again, what is new and special here is that these financial groups are acquiring actual rights to the land, and many of these moves were made in only the past few months, when financial markets started collapsing. What they actually spell for the future of farming in these countries is a great unknown.

Many countries are changing their land ownership laws, policies and practices right now to deal with the current food and credit crises and the resulting pressure on land. China is pursuing a major reform to make it easier for peasants to trade their rights to use land, which is otherwise owned by the state in the name of the people. The reform would make it easier for individual farmers to sell or lease their land rights, and to use land titles as collateral for loans. Many foresee that this will facilitate a huge restructuring of farms in China from countless smallholdings – which have been unfairly blamed for China’s food safety crises of late – to fewer large holdings, which corporations will then be able to get stronger rights to. The Kazakh government, in its bid to attract foreign farmland investors, has implemented land share policies and permanent land use rights. Ukraine is expected to lift its ban on the sale of farmland to foreigners very soon. Sudan, where most land is owned by the government, is issuing 99-year leases for a very low cost, if not for free.

Brazil is moving in the other direction. Because the food crisis, coming hard on the heels of the biofuel frenzy, has many foreign investors interested in buying Brazilian farmland, Congress is considering a Bill to bring transparency into the process. The Bill would oblige Brazilian operators who purchase land to declare the amount of foreign participation in their ownership and set up a special registry for purchases involving foreign capital. (Since 1971, foreign corporations can buy land in Brazil only through Brazilian partners or by setting up residency. But this law has been poorly implemented.) While some investors shrug this off as mainly intended to crack down on speculators, the Bill has strong backing and may be adopted by the end of 2008. Paraguay is considering something similar: in October 2008, the government announced that it would start enforcing a long-standing law that prohibits foreigners from buying domestic farmland. Pakistan, on the other hand, has clear rules allowing foreign investors to own and operate what are classified as “corporate farms”, but the country’s labour laws don’t apply there. This is reportedly being looked into for possible change.

What does it all mean?

One thing that this boom in land grabbing shows is that governments have lost faith in the market. This faith had already been jolted by the world food crisis, when countries were suddenly thrown into a situation of false scarcity driven by speculation rather than supply and demand. The Gulf States, among other land grabbers, are quite lucid about their intention to (a) secure food supplies through direct ownership or control of foreign farmland, and (b) exclude traders and other middlemen as much as possible in order to cut their food import bills by 20–25%. Indeed, they have been forced to go to places like Islamabad and Bangkok and ask the governments there to lift their export bans on rice just for their special farms. The underlying contempt that all of this shows for open markets and free trade, so much lauded by Western advisers over the last four decades, is glaring.

Another fundamental issue is that workers, farmers and local communities will inevitably lose access to land for local food production. The very basis on which to build food sovereignty is simply being bartered away. The governments, the investors and the development agencies that are being drawn into these projects will argue that jobs will be created and some food will be left behind. But these don’t replace land and the possibility of working and living off the land. In fact, what should be obvious is that the real problem with the current land grab is not simply the matter of giving foreigners control of domestic farmlands. It’s the restructuring. For these lands will be transformed from smallholdings or forests, whatever they may be, into large industrial estates connected to large far-off markets. Farmers will never be real farmers again, job or no job. This will probably be the biggest consequence.

A third message that is important to draw out stems from the fact that investment in agriculture is good and that the so-called South–South momentum behind these overseas farming deals is good. We do need to invest more in agriculture. And South–South solidarity and cooperative economy-building, outside the reach of (Western or Southern) imperialism, can be a good way to do it. But what agriculture? And what kinds of economies? Who will control these investments and who will benefit from them? The risk of seeing not just the food but the profits generated from these offshore farming operations being siphoned off to other countries, to other consumers who can pay or simply to foreign elites is quite real. These operations won’t necessarily dent the food crisis at all. Nor will they necessarily bring “development” to local communities. And we must not forget that many of these offshore farming investments will be facilitated through broader bilateral investment treaties and free trade agreements, making future problems more difficult to resolve. While the ideology in which the Gulf States package their projects is somewhat more people-friendly than the ideology of Chinese capitalism – and these investments are drenched in ideology and geopolitical design – it is window-dressing. After all, through these deals, the Gulf States are supporting the regime in Khartoum, just as India is supporting Burma’s military dictatorship. Beijing brings its own workforce and technologies when it goes farming abroad, displacing native biodiversity and bypassing local trade unions. So despite the needed investment and the South–South politics, who will really benefit is a formidable and unanswered concern.

What about land reform? It’s hard to imagine how conceding farmland to other countries, or to private investors, so that they can produce food to be shipped off to other people, can do anything but take us in the opposite direction and strike a blow at so many movements’ struggles for genuine agrarian reform and indigenous peoples’ rights. This is especially so since many of the target countries are net food importers themselves with extremely serious conflicts around land. In Pakistan, farmers’ movements are already raising the alarm about 25,000 villages that are bound to be displaced if the Qataris’ proposal to outsource part of their food production to Punjab province is accepted.16 In Egypt, small farmers in the Qena district have been fighting tooth and nail to get back 1,600 ha that were recently granted to Kobebussan, a Japanese agribusiness conglomerate, to produce food for export to Japan.17 In Indonesia, activists expect that the planned Saudi rice estate in Merauke, where 1.6m ha will be handed over to a consortium of 15 firms to produce rice for export to Riyadh, will bypass local Papuans’ right to veto the project.18 Given the tenacity of the drive by the World Bank and others to make farmland control by hungry foreign investors much easier, as some twisted solution to the food crisis, this could end in explosive conflict.

Another big issue that cannot be ignored is that these deals will further entrench export-oriented agriculture. This is simply not appropriate in most of the countries being targeted. The heavy push over recent decades towards producing food for external markets rather than internal ones is what has made the impact of the 2007–8 food crisis so hard on so many people, particularly in Asia and Africa. Not everyone can afford to purchase food from the world market – especially since real wages and incomes for most people have not been rising over recent years. In so far as most of these land acquisitions are meant to set up large corporate farms – whether in Laos, Pakistan or Nigeria – to produce food for export, it is reinforcing the problem. It is true that some of the deals reserve some of the food for either local communities in the area or for the domestic market. Some even include social agendas such as building hospitals or schools. They nevertheless promote an industrial model of agriculture that has been creating poverty and environmental destruction, and exacerbating loss of biodiversity, pollution from farm chemicals and crop contamination from genetically modified organisms. A whole range of statistics, if sheer observation weren’t enough, attests to the growing gap between the rich and the poor, the well-fed and the hungry, that is emerging as a result.

Finally, the most obvious question of all: what happens over the long term when you grant control over your country’s farmland to foreign nations and investors?

The Annex to this briefing is a table with over 100 cases of land grabbing for offshore food production as presented in this report. It is available in a separate PDF file. PDF

GRAIN has released a Google Notebook with full-text news clippings collected during the research for this briefing as a support to those who want to read more. The notebook is only available online, and the news clippings are not in any order, but it can easily be searched. We are doing this because this is not always an easy subject to research on the internet, if you want a broad picture. People may add further clippings to the notebook as they wish, to further build this collective resource - if you would like to participate, please send an email to landgrab@grain.org . GRAIN will not be maintaining nor be responsible for it. Most of the articles are at present in English. (A backup copy is available in PDF format from here. PDF )

1 See GRAIN, “Making a killing from hunger”, Against the grain, Barcelona, April 2008, http://www.grain.org/articles/?id=39.

2 “World No-Food Day: CEDAC said that around 100,000 families in Cambodia lack sufficient food”, The Mirror, Phnom Penh, 18 October 2008. http://tinyurl.com/58xxgg

3 The Chinese government recently announced a commitment of US$5bn for Chinese corporations to invest in African agriculture over the next 50 years through the new China–Africa Development Fund. The CADF is a private equity fund whose shareholder is the China Development Bank. See T. Michael Johnny, “China earmarks US$5 billion for food production on continent”, The News, Monrovia, 23 April 2008. http://allafrica.com/stories/200804230844.html

4 China is the birthplace of the soya bean and the world’s largest consumer of it, but today the country imports 60% of its needs. As for maize, China will soon be a net importer. Both of these crops are essential to China’s growing meat and dairy industries.

5 See “Oryza hybrida”, GRAIN’s blog on hybrid rice, for many accounts of China’s hybrid rice takeover in foreign lands: http://www.grain.org/hybridrice/ . An investigative French television report on how this is playing out in Cameroon was produced in May 2008 for TF1: http://tinyurl.com/6ful9s (video and text, French only).

6 Quoted in Li Ping, “Hopes and strains in China’s overseas farming plan”, Economic Observer, Beijing, 3 July 2008. http://tinyurl.com/5hkzb6

7 The most detailed report is given by Li Ping, in ibid.

8 “Chinese debate pros and cons of overseas farming investments”, Guardian, 11 May 2008. http://tinyurl.com/66zhq4

9 In 2007, foreigners represented 63% of the population in the Gulf States as a whole. In

The Lawsuits Begin

What happened to the global economy and what we can do about it

OK, there are probably other lawsuits already. But now a hedge fund is suing Countrywide (Bank of America), claiming that its loan modification program violates contract law and that if Countrywide wants to modify any mortgages it must buy out the existing investors at face value.

This is one aspect of the “securitization problem” that got a lot of air time on this blog a few weeks ago.

December 1, 2008 at 11:49 pm

G7 to buy stocks?

As usual, the Government health warning.

The following post has nothing to do about UMNO, MCA, DAP, ISA, KJ, DM, TUN, GGMP, Anwar, Pak Lah, the country of Malaysia, Ali, Ah Kau or Ramasamy!

If you seek to read some hot issue that make you get very exicited (either for or against) please visit http://graduanmelayumuda.blogspot.com/.

 

 

Aha so I find you here.  Well I am feeling a pit pissed off with Uncle Sam and the G7 - as a bona fide short seller, yesterday’s sell off was good news, but now I am begining to worry. Worry that Uncle Sam will deny me the right to naked short Merrill Lynch out of its existence and save the Bank of America shareholders from what could be their worst nightmare.

You see I’m getting increasingly afraid that the US of A may actually buy the common equity in banks and other favourite targets of hedge funds like WJK-REMBAU-NO MONEY, NO HONEY Fund. Now, if you ask me - I’m with Jim Rogers on the value of stock in US banks which is 0.

But there is something about seing Citi drop to a 10-yr low of 3.05 that made me wanna jump in. Its Uncle Sam and his bag of billion dollar bailouts. Next in line is the automakers, making their case in Capitol Hill, whats USD 25 billion for some old friends. The last time they said ‘no’ - the markets responded very badly losing more than 1,000 points.

My guess is they will get their fair share of cash, and that will cause a mini-rally, and after it rallies, people will sell into the rally and we will be back here at the Dow below 8,000 in a couple of days time.

In the mean time, I’ll have to hedge my massive short against Merrill with some call action on BAC. I’d think if they are gonna do national service, the Fed’s gonna pick up the tab.

Tajuddin Ramli, anyone?

For the Record: December 2, 2008, Ignazio Visco, Deputy Director General of the Bank of Italy, Statement regarding Retirement saving and the payout phase – how to get there and how to get the most out of it, at the OECD conference “The payout phase of pensions, annuities and financial markets”, Paris, November 12, 2008

Release here.

The implications of population ageing for financial markets have long been a subject of discussion for public authorities, financial intermediaries and academics. Over time we have become aware that ageing has a deep impact on the structure of financial markets and, at the same time, that this structure strongly affects the way in which demographic trends spread through the real economy. A leading role in this process has been played by the OECD.

1. Times are changing for pension funds

Retirement-related saving schemes offered by pension funds and other intermediaries have developed considerably during the 1990s, as workers have relied increasingly on capital markets to sustain their consumption in old age. By the early years of the current decade some issues had reached the forefront of the policy debate, notably the importance of aggregate longevity risk, the transfer of risk from governments and corporations to households, the impact on financial markets of current and prospective reallocations of pension fund portfolios, and the ability of the regulatory and supervisory framework to adapt to the rapid changes in the supply of retirement saving schemes. These issues were comprehensively analysed in a G10 Report on the implications of pension system reform for financial markets, published in 2005.[Footnote 1 -See Group of Ten (2005)].

A wide range of policy options were drawn, along the three directions of strengthening the risk management practices of providers of retirement saving, promoting the supply of suitable financial instruments, and raising the standards of investor protection and financial education.

Today, those policy conclusions are all the more significant. If anything, the current financial crisis reinforces the need to develop effective ways of protecting retirement saving. However, it may make it harder to adopt appropriate instruments to hedge the risks that may in the long term affect the payout of pension benefits.

The severity of recent financial market developments certainly justifies the tendency to concentrate on the short term. The crisis is especially costly for senior workers, whose pension wealth, both inside and outside pension plans, has been dented by the sharp decrease in asset prices. As in previous financial markets downturns, some of these workers may react by postponing retirement. In certain cases this might not be enough, and an argument could be made for public intervention (for instance, in the case of workers near to retirement whose pension benefits would mostly derive from mandatory private pension schemes). This situation also calls, however, for measures to improve the future working of pension systems. The current crisis has only highlighted the urgent need for better-functioning markets and better retirement products, if future retirees are to be guaranteed adequate living standards.

We cannot regard the current events as just one more protracted period of high financial market volatility, to be followed sooner or later by a return of investors’ expectations and risk premia to more comfortable levels. The financial crisis has already proved to be a watershed for the international financial system and it is changing the attitude of public authorities towards banking and capital market regulation. It might also deeply affect the propensity of private investors to take risks. It will not be business as usual anymore.

The pension fund industry has already been hit very badly by the crisis. In the four quarters ending in June 2008, in the United States the pool of assets managed by funded private and public pension schemes has declined by more than 9 percentage points, or almost 900 billion dollars. Since then losses have probably doubled, given the collapse of bond and stock prices. Pension funds have also invested a huge amount of resources in troubled assets: according to IMF estimates, potential write downs on US loans and securities range between 125 and 250 billion dollars. [Footnote 2 - The importance of pension funds has continued to grow In this decade the pension fund industry has continued to expand relative to the size of the economy, although at a slower pace than in the 1990s (Table 1). At the end of 2006 total OECD funded pension assets (including occupational and personal arrangements) amounted to about 24.6 trillion dollars, or 76 percent of GDP. Asset growth has differed considerably - Table 1.1 in IMF (2008).]

Source: Group of Ten (2005) and OECD (Global Pension Statistics).

(1) Reported assets refer to the category “autonomous pension funds”. They may not include all forms of retirement savings plans, in particular those provided by insurance companies.

(2) Data on Japan for 2003 and 2006 are estimated.

The current financial crisis raises several questions about the established practices of the retirement saving industry. Consider, for instance, the major changes concerning credit rating systems, which play a key role in the portfolio management of pension funds in every country; or the uncertain perspectives of the investment banking industry, which provides companies and investors with such essential services as securities underwriting and trading, asset management, and M&A advice; or again the upsurge of counterparty risk on OTC derivatives, which pension fund managers have used increasingly to try to improve portfolio risk management. It is now difficult to figure out how financial intermediaries and markets will adjust to these structural changes.

There has also been a further move from defined benefit (DB) to DC schemes. Generally, the latter have been adopted in countries where private pension schemes have been introduced to complement and compensate the prospective downsizing of public pension systems. However, available data also show that, in countries where DB and DC schemes coexist, the latter have increased further as a share of total assets (Table 2).[Footnote 3 - This indicator may be partly affected by the higher incidence of risky assets in DC schemes, mainly targeted at young workers.]

Table 2. Proportion of DC pension plans in selected countries (% share of DC pension plans in autonomous pension funds’ total assets)

Sources: OECD (Global Pension Statistics); OECD, Pension Markets in Focus.

In particular, DB occupational plans have continued to lose ground in the United States, where they have a long tradition. According to the Employee Benefits Survey of the Department of Labor, the percentage of private industry workers participating in defined contribution plans has increased from 36 percent in 2000 to 43 percent in 2006. In the United Kingdom, too, there is evidence of a further shift from DB to DC schemes, in line with the findings of the Turner Report.[Footnote 4 See Pensions Commission (2005) and OECD (2007).]

Underlying these trends there are well-known structural factors, such as those reviewed in the G10 Report. Ageing populations and the shrinking coverage provided by public pension systems call for an increase in the pool of resources channelled to capital markets to provide for retirement. In several countries changes in labour markets and concerns about future pension liabilities are prompting employers to close DB plans and offer DC plans instead.

These profound structural changes in pension systems imply that the sources of retirement income in the future will differ considerably from those of current retirees. This is highlighted by a recent survey of US working-age and retired citizens (Table 3). While only one third of retirees report that they also depend on some kind of retirement savings plan, workers’ expectations regarding the future sources of retirement income show a much greater role of both funded pension schemes (such as 401(k) plans and Individual Retirement Accounts) and other forms of personal saving. This evidence provides further indication that future retirees will depend heavily on savings as a source of retirement income, and specifically on DC pension schemes.

Table 3. Current and expected sources of income in retirement (percent)

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2008 Retirement Confidence Survey.

3. Retirement saving should increase further

The present crisis creates problems for DB pension plan sponsors (which are the residual risk bearers of the plan) as falling asset prices reduce asset/liability ratios and might ultimately require higher contributions. Partial relief is provided by the increase in yields on corporate bonds, which are used in several countries to discount pension fund liabilities. Several observers have raised concerns about the generalized adoption of market-based, fair value accounting principles. The new accounting standards undoubtedly improve balance sheet transparency and comparability by limiting sponsor companies’ discretion in pension fund accounting practices. However, this may well have intensified the pro-cyclicality of financial market trends, given the importance of pension funds in many countries and their unique role as long-term investors, and may have encouraged pension fund managers to focus on short-term trading.[Footnote 5 - See also Annex II.1 in Group of Ten (2005).]

Even more importantly, the crisis may make DC plan members less confident about taking complex decisions. DC plans require workers to make a number of difficult choices, such as whether or not to enrol, how much money to contribute, how to invest it and when to rebalance the portfolio. A serious risk that DC plan members face is not saving enough for their old age. Contributions to DC plans tend to be low.[Footnote 6 - See, for instance, Choi et al (2004), Pensions Commission (2005), Olsen and Whitman (2007) and Blake, Cairns and Dowd (2008).]

Many factors may account for workers’ tendency to under-save:

• Left alone to decide how much to contribute, people seem short-sighted and may lack willpower. Recent survey evidence on a representative sample of 51-years old or older US citizens has shown that almost 30 percent of respondents have never thought about a saving plan for retirement. Moreover, only 60 percent of the “planners” were able to stick to the plan.[Footnote 7 -Lusardi and Mitchell (2006).]

• Workers are also very poorly aware of the degree of coverage provided by their retirement income sources. In Italy, for instance, ten years after three reforms that dramatically reduced the prospective replacement rates of public pension (i.e. the ratio between pension benefit and last pay at retirement) for many workers, adjustment to the new conditions is far from complete and is proving slower for the cohorts and employment groups most affected by the reforms. For example, middle-aged and young self-employed workers expect a replacement rate of about 60 percent, which is 20 percentage points higher than the rate consistent with current legislation. [Footnote 9 - 8 The level of awareness about public pension provision is low, especially among the self-employed, public sector employees, and younger workers. Presumably this information shortfall also reflects the general uncertainty caused by the protracted reform process, which has made more difficult and burdensome for savers to obtain information on how the new pension system works. See Cesari, Grande and Panetta (2008), updating the estimates in Bottazzi, Jappelli and Padula (2006).]

This is also true for the funded component of pension wealth, as US surveys tend to find that employees are very poorly aware of the characteristics of the plan they are enrolled in (e.g. whether it is DB, DC, or mixed).[Footnote 9 - Gustman and Steinmeier (2004).]

• What is worse is the fact that DC plan members are likely not even to consider the problem of setting a target replacement rate for their accumulation plan. This is especially worrying as decisions about contribution rates and asset allocation depend very much on key forward-looking parameters, such as the foreseeable trend of labour income, the planned retirement date, the target pattern of retirement income, and the intensity of the bequest motive. Without a target replacement rate, workers might become aware they have saved too little only when they retire and are no longer in a position to increase the pool of assets available to fund their consumption in old age. The lack of retirement goals may also reflect the poor incentives of selling agents, who have no contractual obligation to deliver any particular fund size on the retirement date [Footnote 10 - Blake, Cairns and Dowd (2008)]. in order to persuade workers to enrol they may allow them to choose contribution rates that are too low.

• Finally, it is often argued that another reason why the risk of inadequate savings is serious is that DC plan members tend to choose a fairly conservative asset allocation. In order to accumulate a sufficient pool of funds, they should save relatively more compared with more equity-oriented long-term investors.[Footnote 11 - Choi et al (2004).] At the same time equity-oriented portfolios may expose investors to huge investment risks (see below).

Two widely used instruments to increase pension fund enrolments and contributions are fiscal incentives and employer-matching contributions. Both are effective means of boosting pension fund returns and greatly increase the convenience of joining a funded retirement scheme.[Footnote 12 According to simulations carried out by Cesari, Grande and Panetta (2008) for Italian DC pension funds, the benefit of the employer’s contribution provided by the recent pension fund law is substantial: over a 30-year accumulation period, even on the most unfavourable assumptions, the return obtained by a pension fund member each year is at least 0.6 percentage points higher, and his final accrued balance more than 6 percent higher, than that obtained by a non-member. Tax advantages are also very large: after 30 contribution years the final balance accrued to a younger worker joining a pension fund would be almost 24 percent greater than that accrued to a worker who invests directly in financial assets; more than half of the advantage would be due to the deductibility of contributions and another third to the preferential taxation of benefits.]

Both have drawbacks, however. Fiscal incentives are usually expensive, regressive, and possibly prone to time inconsistency, especially when tax advantages apply to the payout phase. Employers’ contributions might be offset by a reduction in net wages and not necessarily produce an increase in the worker’s total wealth. Moreover, as they are typically the result of agreements between employers and trade unions, their portability across different retirement schemes may be far from seamless. In any case, workers seem to exploit fiscal incentives and employers’ contributions only partially. For example, a recent study of a sample of DC plan members in the United States finds that each year between 20 and 60 percent of these workers contribute below the threshold (even if they could make penalty-free withdrawals), losing as much as 6 percent of their annual pay – a free lunch left on the table.[Footnote 13 - Choi, Laibson and Madrian (2005).]

I wanted to be a quant

id="blog-title">TeamLRAM’s Blog

id="tagline">Contrary to what the name suggests, I'm just one guy

Dec 3 - Hedge Fund Time For the US

Okay, it’s time for direction again as I didn’t post here for quite a long while

Most dying hedge funds already used up their bullet by bringing the market up last week I guess, and the rally did make history as it was the best week in 75 years…  Okay this was the glory side, however think about it again, they are buying all-in to give you a chance to sell, not a chance.  Yesterday drop was just a beginning (almost 700 pts shed for the DOW)  This is their last chance and will decide will they survive or not by year’s end.  Looking forward they will complete the process next week or by mid month.

Target from now to mid month (Dec 15)

DOW: 6800 - 8400

YEN: 88.5 - 93.75

Gold: near 700 to 785

Pound: 1.43 - 1.52

Euro: 1.225 - 1.3

Credit Crisis 2008

Offshore Library Offers Whopping 50-Percent Discount to Celebrate its Re-Launch Campaign

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Heading for depression- America suddenly in deep recession? - Goldman heading for its first but not last loss

Excerpt Bloomberg

‘Bernanke-san’ Signals Policy Shift, Evoking Japan Comparison

Recession in U.S. May Be Just Beginning as Job Losses Mount

Will be interesting to see if Goldman will survive as they have plenty things in there balance sheets which will be worthless at some point. almost all big shot investment banks have closed there prop trading units which produced the majority of goldman profits in recent years. Hedge Funds are in a deep contraction and in my opinion less then 25% of Hedge funds will survive but it could come down to even 5% in 2 years from here - banks will basically be state owned - but Goldman might turn out a bit different but to realy have a grip on that one needs to take a deep look at their real balance sheet - which I could not in order to evaluate the loss potential.

Excerpt from WSJ

known for avoiding many of the blowups that have battered its Wall Street rivals, now is likely to report a net loss of as much as $2 billion for its quarter ended Nov. 28, according to industry insiders.

Noam Chomsky on it all

I am honestly not that huge of a fan of Chomsky, I found this to be a really interesting read though…

 

Noam Chomsky on Obama’s cabinet choices, etc.

Let’s begin with the elections. The word that the rolls off of everyone’s tongue is historic. Historic election. And I agree with it. It was a historic election. To have a black family in the white house is a momentous achievement. In fact, it’s historic in a broader sense. The two Democratic candidates were an African-American and a woman. Both remarkable achievements. We go back say 40 years, it would have been unthinkable. So something’s happened to the country in 40 years. And what’s happened to the country — which is we’re not supposed to mention — is that there was extensive and very constructive activism in the 1960s, which had an aftermath. So the feminist movement, mostly developed in the 70s — the solidarity movements of the 80’s and on till today. And the activism did civilize the country. The country’s a lot more civilized than it was 40 years ago and the historic achievements illustrate it. That’s also a lesson for what’s next.

What’s next will depend on whether the same thing happens. Changes and progress very rarely are gifts from above. They come out of struggles from below. And the answer to what’s next depends on people like you. Nobody else can answer it. It’s not predictable. In some ways, the election — the election was surprising in some respects.

Going back to my bad prediction, If the financial crisis hadn’t taken place at the moment that it did, if it had been delayed a couple of months, I suspect that prediction would have been correct. But not speculating, one thing surprising about the election was that it wasn’t a landslide. By the usual criteria, you would expect the opposition party to win in a landslide under conditions like the ones that exist today. The incumbent president for eight years was so unpopular that his own party couldn’t mention his name and had to pretend to be opposing his policies. He presided over the worst record for ordinary people in post-war history, in terms of job growth, real wealth and so on. Just about everything the administration was touched just turned into a disaster. [The] country has reached the lowest level of standing in the world that it’s ever had. The economy was tanking. Several recessions are going on. Not just the ones on the front pages, the financial recession. There’s also a recession in the real economy. The productive economy, under circumstances and people know it. So 80% of the population say that the country’s going in the wrong direction. About 80% say the government doesn’t work to the benefit of the people, it works for the few and the special interests. A startling 94% complain that the government doesn’t pay any attention to the public will, and on like that. Under conditions like that, you would expect a landslide to a opposition almost whoever they are. And there wasn’t one.

So one might ask why wasn’t there a landslide? That goes off in an interesting direction. And other respects the outcome was pretty familiar. So once again, the election was essentially bought. 9 out of 10 of the victors outspent their opponents. Obama of course outspent McCain. If you look at the — and we don’t have final records yet from the final results, but they’re probably going to be pretty much like the preliminaries a couple of months ago. Which showed that both Obama and McCain were getting the bulk of their financing from the financial institutions and for Obama, law firms which means essentially lobbyists. That was about over a third a few months ago. But the final results will probably be the same. And there is a — the distribution of funding has over time been a pretty good predictor of what policies will be like for those of you who are interested, there’s very good scholarly work on this by Tom Ferguson in Umass Boston, what he calls the investment theory of politics. Which argues essentially that elections are moments when groups of investors coalesce and invest to control the state and has quite the substantial predictive success. Gives some suggestion as to what’s likely to happen. So that part’s familiar. The — what the future is as I say, depends on people like you.

The response for the election was interesting and instructive. It kept pretty much to the soaring rhetoric, to borrow the cliche, that was the major theme of the election. The election was described as an extraordinary display of democracy, a miracle that could only happen in America and on and on. Much more extreme than [what] Europe [could accomplish]. There’s some accuracy in that if we keep to the West. That couldn’t have happened anywhere else. Europe was much more racist than the United States and you wouldn’t expect anything like that to happen.

On the other hand, if you look at the world, it’s not that remarkable. So let’s take the poorest countries in the Western Hemisphere. Haiti and Bolivia. In Haiti, there was an election in 1990 which really was an extraordinary display of democracy much more so than this.

In Haiti, there were grassroots movements, popular movements that developed in the slums and the hills, which nobody was paying any attention to. And they managed, even without any resources, to sweep into power their own candidate. A populist priest, Jean-Bertrand Aristide. That’s a victory for democracy when popular movements can organize and set programs and pick their candidate and put them into office, which is not what happened here, of course.

I mean, Obama did organize a large number of people and many enthusiastic people in what’s called in the press, Obama’s Army. But the army is supposed to take instructions, not to implement, introduce, develop programs and call on its own candidate to implement them. That’s critical. If the army keeps to that condition, nothing much will change. If it on the other hand goes away activists did in the sixties, a lot can change. That’s one of the choices that has to be made. That’s Haiti. Of course that didn’t last very long. A couple of months later, there was military coup, a period of terror, we won’t go through the whole record. Up the present, the traditional torturers of Haiti, France, and the United States have made sure that there won’t be a victory for democracy there. It’s a miserable story. Contrary to many illusions.

Take the second poorest country, Bolivia. They had an election in 2005 that’s almost unimaginable in the West. Certainly here, anywhere. The person elected into office was indigenous. That’s the most oppressed population in the hemisphere, those who survived. He’s is a poor peasant. How did he get in? Well, he got in because there were again, a mass popular movement, which elected their own representative. And they are the source of the programs, which are serious ones. There’s real issues, And people know them. Control over resources, cultural rights, social justice and so on.

Furthermore, the election was just an event that was particular stage in a long continuing struggle, a lot before and a lot after. There was day when people pushed the levers but that’s just an event in ongoing popular struggles, very serious ones. A couple of years ago, there was a major struggle over privatization of water. An effort which it would in effect deprive a good part of the population of water to drink. And it was a bitter struggle. A lot of people were killed, but they won it. Through international solidarity, in fact, which helped. And it continues. Now that’s a real election. Again, the plans, the programs are being developed, acted on constantly by mass popular movements, which then select their own representatives from their own ranks to carry out their programs. And that’s quite different from what happened here.

Actually what happened here is understood by elite elements. The public relations industry which runs elections here — quadrennial extravaganzas essentially — makes sure to keep issues in the margins and focus on personalities and character and so on-and-so forth. They do that for good reasons. They know — they look at public opinion studies and they know perfectly well that on a host of major issues both parties are well to the right of the population. That’s one good reason to keep issues off the table. And they recognize the success.

So, every year, the advertising industry gives a prize to, you know, to the best marketing campaign of the year. This year, Obama won the prize. Beat out Apple company. The best marketing campaign of 2008. Which is correct, it is essentially what happened. Now that’s quite different from what happens in a functioning democracy like say Bolivia or Haiti, except for the fact that it was crushed. And in the South, it’s not all that uncommon. Notice that each of these cases, there’s a much more extraordinary display of democracy in action than what we’ve seen-important as it was-here. And so the rhetoric, especially in Europe is correct if we maintain our own narrow racist perspective and say yeah, what happened was in the South didn’t happen or doesn’t matter. The only matters is what we do and by our standards, it was extraordinary miracle, but not by the standards of functioning democracy. In fact, there’s a distinction in democratic theory, which does separate say the United States from Bolivia or Haiti.

Question is what is a democracy supposed to be? That’s exactly a debate that goes back to the constitutional convention. But in recent years in the 20th century, it’s been pretty well articulated by important figures. So at the liberal end the progressive end, the leading public intellectual of the 20th century was Walter Lippman. A Wilson, Roosevelt, Kennedy progressive. And a lot of his work was on a democratic theory and he was pretty frank about it. If you took a position not all that different from James Madison’s. He said that in a democracy, the population has a function. Its function is to be spectators, not participants. He didn’t call it the population. He called it the ignorant and meddlesome outsiders. The ignorant and meddlesome outsiders have a function and namely to watch what’s going on. And to push a lever every once in a while and then go home. But, the participants are us, us privileged, smart guys. Well that’s one conception of democracy. And you know essentially we’ve seen an episode of it. The population very often doesn’t accept this. As I mentioned, just very recent polls, people overwhelmingly oppose it. But they’re atomized, separated. Many of them feel hopeless, unorganized, and don’t feel they can do anything about it. So they dislike it. But that’s where it ends.

In a functioning democracy like say Bolivia or the United States in earlier stages, they did something about it. That’s why we have the New Deal measures, the Great Society measures. In fact just about any step, you know, women’s rights, end of slavery, go back as far as you like, it doesn’t happen as a gift. And it’s not going to happen in the future. The commentators are pretty well aware of this. They don’t put it the way I’m going to, but if you read the press, it does come out. So take our local newspaper at the liberal end of the spectrum, Boston Globe, you probably saw right after the election, a front page story, the lead front page story was on how Obama developed this wonderful grassroots army but he doesn’t have any debts. Which supposed to be a good thing. So he’s free to do what he likes. Because he has no debts, the normal democratic constituency, labor, women, minorities and so on, they didn’t bring him into office. So he owes them nothing.

What he had was an army that he organized of people who got out the vote for Obama. For what the press calls, Brand Obama. They essentially agree with the advertisers, it’s brand Obama. That his army was mobilized to bring him to office. They regard that as a good thing, accepting the Lippman conception of democracy, the ignorant and meddlesome outsiders are supposed to do what they’re told and then go home. The Wall Street Journal, at the opposite end of the spectrum, also had an article about the same thing at roughly the same time. Talked about the tremendous grassroots army that has been developed, which is now waiting for instructions. What should they do next to press forward Obama’s agenda? Whatever that is. But whatever it is, the army’s supposed to be out there taking instructions, and press work. Los Angeles Times had similar articles, and there are others. What they don’t seem to realize is what they’re describing, the ideal of what they’re describing, is dictatorship, not democracy. Democracy, at least not in the Lippman sense, it proved — I pick him out because he’s so famous, but it’s a standard position. But in the sense of say, much of the south, where mass popular movements developed programs; organize to take part in elections but that’s one part of an ongoing process. And brings somebody from their own ranks to implement the programs that they develop, and if the person doesn’t they’re out. Ok, that’s another kind of democracy. So it’s up to us to choose which kind of democracy we want. And again, that will determine what comes next.

Well, what can we anticipate if the popular army, the grassroots army, decides to accept the function of spectators of action rather than participants? There’s two kinds of evidence. There’s rhetoric and there’s action. The rhetoric, you know, is very uplifting: change, hope, and so on. Change was kind of reflective any party manager this year who read the polls, including the ones I cited, would instantly conclude that our theme in the election has to be change. Because people hate what’s going on for good reasons. So the theme is change. In fact, both parties put both of them, the theme was change. So the theme is change. In fact both parties, both of them the theme was change. You know, break from the past, none of old politics, new things are going to happen. The Obama campaign did better so they won the marketing award, not the McCain campaign.

And notice incidentally on the side that the institutions that run the elections, public relations industry, advertisers, they have a role — their major role is commercial advertising. I mean, selling a candidate is kind of a side rule. In commercial advertising as everybody knows, everybody who has ever looked at a television program, the advertising is not intended to provide information about the product, all right? I don’t have to go on about that. It’s obvious. The point of the advertising is to delude people with the imagery and, you know, tales of a football player, sexy actress, who you know, drives to the moon in a car or something like that. But, that’s certainly not to inform people. In fact, it’s to keep people uninformed.

The goal of advertising is to create uninformed consumers who will make irrational choices. Those of you who suffered through an economics course know that markets are supposed to be based on informed consumers making rational choices. But industry spends hundreds of millions of dollars a year to undermine markets and to ensure, you know, to get uninformed consumers making irrational choices.

And when they turn to selling a candidate they do the same thing. They want uninformed consumers, you know, uninformed voters to make irrational choices based on the success of illusion, slander, and effective body language or whatever else is supposed to be significant. So you undermine democracy pretty much the same way you undermine markets. Well, that’s the nature of an election when it’s run by the business world, and you’d expect it to be like that. There should be no surprise there. And it should also turn out the elected candidate didn’t have any debts. So you can follow Brand Obama can be whatever they decide it to be, not what the population decides that it should be, as in the south, let’s say. I’m going to say on the side, this may be an actual instance of a familiar and unusually vacuous slogan about the clash of civilization. Maybe there really is one, but not the kind that’s usually touted.

So let’s go back to the evidence that we have, rhetoric and actions. Rhetoric we know, but what are the actions? So far the major actions are selections, in fact the only action, of personnel to implement Brand Obama. The first choice was the Vice President, Joe Biden, one of the strongest supporters of the war in Iraq in the Senate, a long time Washington insider rarely deviates from the party vote. In cases where he does deviate they’re not very uplifting. He did break from the party and voting for a Senate resolution that prevented people from getting rid of their debts by, individuals, that is, from getting rid of their debts by going into bankruptcy. It’s a blow against poor people who’ve caught in this immense debt that’s a large part of the basis for the economy these days. But usually, he’s a, kind of, straight party-liner with the democrats on the sort of ultra naturalist side. The choice of Biden was a, must have been a conscious attempt to show contempt for the base of people who were voting for Obama, or organizing for him as an anti-war candidate.

Well, the first post-election appointment was for Chief of Staff, which is a crucial appointment; determines a large part of the president’s agenda. That was Rahm Emanuel, one of the strongest supporters of the war in Iraq in the House. In fact, he was the only member of the Illinois delegation who voted for Bush’s effective declaration of war. And, again, a longtime Washington insider. Also, one of the leading recipients in congress of funding from the financial institutions hedge funds and so on. He himself was an investment banker. That’s his background. So, that’s the Chief of Staff.

The next group of appointments were the main problem, the primary issue that the governments’ going to have to face is what to do about the financial crisis. Obama’s choices to more or less run this were Robert Rubin and Larry Summers from the Clinton — Secretaries of Treasury under Clinton. They are among the people who are substantially responsible for the crisis. One leading economist, one of the few economists who has been right all along in predicting what’s happening, Dean Baker, pointed out that selecting them is like selecting Osama Bin Laden to run the war on terror.

Yeah, I’ll finish. This saves me the problem of what’s coming next, so I’ll finish with the elections. Let me make one final comment on this. There was meeting on November 7, I think of a group of couple, of a dozen advisers to deal with the financial crisis. Their careers were, records were reviewed in the business press, and Bloomberg News had an article reviewing their records and concluded that these people, most of these people shouldn’t be giving advice about the economy. They should be given subpoenas.

One Fifth Avenue

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“Bushnell…broadens her scope in her latest ode to New York strivers and sophisticates…The fun lies in the author’s acute observations about everything from real estate envy to midlife crises.”
–More

“Where [Bushnell] goes, her army of stilletoed fans follow. You gotta love it: the conflict, the secrets-telling, the peek into the world of the rich and valueless. It all adds up to a juicy summer read.”
New York Post

One Fifth Avenue is all things an escapist read she be: quick and wicked and wry. There’s a blown-out bitch to root against, a star-crossed couple to root for, and a Tim Gunn-style best friend who deserves his own book. Great, guiltless fun.”
Entertainment Weekly

From one of the most consistently astute and engaging social commentators of our day comes another look at the tough and tender women of New York City–this time, through the lens of where they live.

One Fifth Avenue, the Art Deco beauty towering over one of Manhattan’s oldest and most historically hip neighborhoods, is a one-of-a-kind address, the sort of building you have to earn your way into–one way or another. For the women in Candace Bushnell’s new novel, One Fifth Avenue, this edifice is essential to the lives they’ve carefully established–or hope to establish. From the hedge fund king’s wife to the aging gossip columnist to the free-spirited actress (a recent refugee from L.A.), each person’s game plan for a rich life comes together under the soaring roof of this landmark building.

Acutely observed and mercilessly witty, One Fifth Avenue is a modern-day story of old and new money, that same combustible mix that Edith Wharton mastered in her novels about New York’s Gilded Age and F. Scott Fitzgerald illuminated in his Jazz Age tales. Many decades later, Bushnell’s New Yorkers suffer the same passions as those fictional Manhattanites from eras past: They thirst for power, for social prominence, and for marriages that are successful–at least to the public eye. But Bushnell is an original, and One Fifth Avenue is so fresh that it reads as if sexual politics, real estate theft, and fortunes lost in a day have never happened before.

From Sex and the City through four successive novels, Bushnell has revealed a gift for tapping into the zeitgeist of any New York minute and, as one critic put it, staying uncannily “just the slightest bit ahead of the curve.” And with each book, she has deepened her range, but with a light touch that makes her complex literary accomplishments look easy. Her stories progress so nimbly and ring so true that it can seem as if anyone might write them–when, in fact, no one writes novels quite like Candace Bushnell. Fortunately for us, with One Fifth Avenue, she has done it again.

Other Products of Interest

High Wire Act: Ted Rogers and the Empire that Debt Built

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High Wire Act is a fascinating and one-of-a-kind look into one of Canada�s most audacious and visionary business figures of the past fifty years. Every Canadian business reader will be enthralled by this enduring success story of Canada�s only true telecommunications mogul.

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“What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup

More about the Obama Administration’s team, whose motto seems to be “You cannot believe in Change.”  I recommend reading the full article.

Here is their conclusion:

By embracing Geithner {as Treasury Secretary}, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.

Here is an excerpt from their article that explains how they got to this important and (in my opinion) essential conclusion:

The resolution of Downey illustrates both the best and the worst aspects of the government’s remediation efforts. On the one hand, we have argued that the government should be pushing bad banks into the arms of stronger banks to improve the overall condition of the system. The good people at the FDIC do that very well - when politics does not intervene.

In the case of {Downey Savings and Loan} and {PFF Bank and Trust}, it appears that the OTS {Office of Thrift Supervision} and FDIC projected forward from the current above-peer loss rates and concluded that a prompt resolution was required. Reasonable people can argue whether this is the right call. But when we see the equity and debt holders of DSL, Washington Mutual or Lehman Brothers taking a total loss, we have to ask a basic question: why is it that the debt holders of Bear Stearns and AIG are granted salvation by the Federal Reserve Board and the US Treasury, but other investors are not?

… a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.

Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts (CDS) insurance written by AIG against senior traunches of collateralized debt obligations (CDO). The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG’s CDS book.

The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced - CDS.

President-elect Obama and the American people have a choice:

And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.

On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, “Lehman”) filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman’s motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation.

The bankruptcy court process also allows for parties to terminate or “rip up” CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.

… The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC’s treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.

By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Analysis of our government’s solutions to date:

About Christian Kacher!

Christian Casher was born Christian Kacher, and is a gifted musician whose work has attracted international attention and acclaim. A classically trained pianist, Christian Casher performs original piano compositions and improvisational pieces for audiences in South Africa, the United Kingdom, Europe and the United States. His music has received television and radio play in numerous markets from London to South Africa and Casher’s song ‘Bittersweet’ was featured in a documentary that aired in the United Kingdom. Additionally, his song ‘Mourning Rain’ was used in a video chronicling the life and work of artist Anthony Christian. Casher’s debut album, containing 21 original piano compositions, will be released soon. Christian Casher’s website features four of these tracks at www.teardroprain.com.

Chris Newman, vice-president at William Morris, and John Drinkwater, a principal behind the hit show Murphy Brown, have both taken an interest in launching an international reality show, the first of its kind, that centers around Christian Casher’s well-travelled life as a hedge fund manager, a musician, a composer, a former scientist, and his broad spectrum of unique friends.  One executive at ICM talent agency dubbed Dr. Kacher a ‘reality House MD’ after Hugh Laurie’s character in the popular show.

Christian Casher’s powerful and evocative melodies have been called “love affairs of the 21st century” and listeners often connect with his emotive and distinctive sound.

A humanitarian with a global perspective, Christian Casher uses his music to promote positive change in the world. The exiled Crown Prince of Burma has requested ‘Burma Teardrop Rain’ to raise awareness of the suffering and oppression of the Burmese. Casher is no stranger to social injustices having experienced one first-hand.   In an interview by Bay Reporter, Casher appeared as Dr. Christian Kacher, his God-given name, to take a stand against any injustices done by any government on its people.  Dr. Christian Kacher who experienced an extortion attempt several years ago said, “I have learned how deep the rabbit hole goes in the United States. I learned this the hard way. After my great success and published accounts in a book called ‘Conversations With Top Traders’ of my record returns in the stock market, I became a target, a sitting duck, if you will. Certain experiences have made me a much wiser person.”  Casher has dedicated his song Teardrop Rain to the people of Burma to end their oppression.

Christian Casher began his musical development at The Suzuki Institute when he was 3 years old. An adept student from an early age, Casher’s first song, ‘Night Fog’ was composed when the artist was 5. For the next seven years, the Institute sent Casher to high profile venues in Japan and the United States to give performances in front of live audiences. To this day, Dr. Casher enjoys composing and performing music for others.

In addition to his burgeoning music career, Dr. Christian Kacher (Casher is his stage name) is also a noted investment expert and money manager. His stock market timing site can be found at www.markettimingwizard.com. He attained his Ph.D. in Nuclear Physics from the University of California at Berkeley where he helped discover several elements on the Periodic Table and published over 50 scientific articles in peer reviewed journals. He has a wide array of interests and hobbies that include art, fashion, charity and photography.

Dr. Christian Casher resides in London, Los Angeles and Geneva and performs his music to audiences worldwide.

The Bane of Success: Withdrawal from everyone

Performing well is preferred to performing poorly but there are some downsides to being the best performing money manager in the middle of a financial crisis.  I want to point out that the withdrawals you are hearing about from hedge funds are not all due to dying funds. 

We are in a massive stampede away from risk but it is fair to say that many hedge funds have outperformed (at least on a relative basis).  I understand that many marketed themselves as total return vehicles and you feel lied to but at the end of the day you will likely go back to them because they did outperform (although you might demand a cheaper fee structure).  Due to this out performance, the hedge fund portion of portfolios has grown (in some cases significantly) and in order to get back to a desired allocation you need to withdraw from hedge funds. 

Typically this type of re-weighting is not significant but consider the John Paulson (extreme) case.  If you had 10% of your wealth with him (congratulations on that 1000% return) and given that the the S&P 500 fell by 40+% it is possible that you now have about 67% of your wealth with him because of his relative out-performance.  Even if you now idolize him and put his picture above your mantel, you may be uncomfortable with that amount of concentrated exposure (as you should) and thus desire to withdraw some money.

If you return the Paulson weight back to 10%, you’ll need to withdraw over 60% of your portfolio from a risky strategy (note: not risky assets).  Does this mean that you are contributing to the deleveraging cycle?  Not if the Paulson portfolio is a net supplier of risky assets which given the shorts in mortgages (and financial) a supplier status could be expected.  If on the other hand Paulson has turned a new leaf and is using capital (balance sheet capacity) to buy risky assets then a withdraw would contribute to the deleveraging process (one part of which is forced selling contributing to broken markets). 

Now your portfolio decision should not be a function of what is good for the system, but policy makers should be aware that capital is leaving the hand of robust capital allocators - like Paulson - and they may want to consider to what degree they wish to allow a run on the most robust portion of the capital allocation system (the players that make markets work).

[Note: I'll admit that there are a lot of conceptual problems with the comparison done in the chart above but it is done to illustrate a simple point]

With recession looming, be prepared for a layoff

Foreign nationals have most to lose from a layoff. It’s tough all over. Tougher for some than others.

Foreign nationals, for instance, caught in the crosshairs of a layoff face not only losing their jobs but their legal status &mash; and possibly their adopted homes. ”Once they are laid off, they are here unlawfully. They have to depart the United States,” said Ira Kurzban, a Miami immigration attorney with Kurzban Kurzban Weinger & Tetzeli.

These workers are categorized as non-immigrants because they are in the United States for a specific activity or purpose, such as work, study or travel. For many non-immigrant workers, their immigration status is tied to their jobs. Those with H-1B visas received them in lottery. Foreign workers must have a college degree or an equivalent license to qualify for an H-1B visa. They tend to be doctors, teachers, accountants and stockbrokers &mash; some of the professions hardest hit by the financial crisis.

Though some of these workers never intend to stay permanently in the United States, others have made a life here. Their children are in school, and they consider America their new home. H-1B visas can be renewed after three years, and many who intend to stay will apply for a green card while being sponsored by their employer.

But that’s hard to do without a job. Hector A. Chichoni, an immigration attorney with Epstein Becker & Green in Miami, said a layoff can be horrendous for a nonimmigrant worker aiming to become a permanent resident. ”It can be a difficult situation,” he said. “It could mean the end of a green card.”

This is why Memphis, Tenn., immigration attorney Greg Siskind of Siskind Susser wrote a primer to alert non-immigrants being downsized that they face much more serious consequences than their American counterparts.

Employers conducting a round of layoffs often overlook the repercussions, and Siskind said he has spent a lot of time in recent weeks informing businesses of the nuances of immigration law in a downturn.

“I don’t think a lot of employers think about it,” he said. “Most employers feel bad, though. They don’t want to put somebody deliberately in a position where they become an illegal alien.”

Foreign nationals who are laid off need to act quickly because falling out of legal status, even for a short time, could affect their quest for citizenship, Siskind said. For instance, if they become an illegal alien, they might have to return to their home country to complete their green card application.

And there is no grace period. ”If they are terminated, shown the door immediately, they have become illegal,” Siskind said.

The best thing to do is contact an immigration attorney immediately, he said. One solution is to change to a visitor visa that will allow the worker to remain legally in the United States while searching for employment.

It’s a bit of a ruse. If the application is made to U.S. Citizenship and Immigration Services while the worker is still employed, the non-immigrant can stay in the country while the request is pending & mdash; a good period of time to find employment.

The difficulty comes three months later. ”The problem here is that those [visitor visas] are not easily granted,” Chichoni said. ”Sometimes you have to truly demonstrate intent to be a tourist and not to work. But if they think you are using the visa as a sort of way to buy time, they might not be so

inclined.” Employers are obliged to notify immigration authorities when they lay off immigrants so

visas can be pulled. Employers also must pay for an H-1B worker’s trip home. Businesses in the know sometimes keep these workers on the payroll for a short period of time so they can apply for a visitor visa.

That’s what happened to one of Siskind’s clients, who asked that his name not be published. The Beijing native came to the United States as a student 12 years ago and earned two degrees from Columbia University, an Ivy League school in New York. He got a job as a quantitative analyst at a small hedge fund in New York but was laid off last month when the bottom fell out of the investment business.

“I’ve never even been back to China since I’ve come here,” he said. “It’s going to be difficult if I have to go back.” In the meantime, he is thinking of leaving the investment industry to work for a credit

card company to “weather the storm.” The hedge fund company kept him on the payroll until the end of October, allowing him to apply for a visitor visa, and he feels confident he can find a new job in three months. Siskind said finding work for laid off non-immigrants all depends on their job skills and

the market. Two clients who came to him last month were physicians who were fired because the health care industry is suffering as patients cut back their medical care. ”This is not the first time we have gone through this. This is the third recession since I’ve been practicing,” he said. Kurzban said many non-immigrant professionals aren’t on track to become citizens.

Often, he said companies don’t want these workers becoming citizens and going to work for the competition. And in this economic climate, there may be better opportunities elsewhere. ”Particularly in the high-tech field, things have changed. There are a lot of jobs in India and Pakistan,” he said. “Many of them feel they will be better off going back home.”

For more information on this or any other topics contact the offices of David Peña at 305.373.5550 or info@myvisausa.com

You’re currently reading “With recession looming, be prepared for a layoff,” an entry on Myvisausa’s Blog

资讯中心 - Bailout turning tables on Russia’s oligarchs

http://www.businessweek.com/1999/99_17/art17/17covet.jpg

Mikhail Fridman, one of the original oligarchs of the 1990s, was the first to come forward. His Alfa Bank said yesterday it was seeking US$400 million (RM1,400 million) in government loans to stave off foreign creditors.

The cash would allow the bank to avoid handing over its 44 per cent stake in the major Russian mobile phone company VimpelCom, which it pledged to a group of foreign banks led by Deutsche Bank as collateral for a US$2 billion loan.

But to get the money, Fridman and the other oligarchs lining up for government loans are expected to have to hand over to the state as collateral the stakes in their companies that they used to secure the foreign loans.

And they may find the Kremlin attaching other strings as well.

Such moves could clear the way for the Kremlin to reclaim some of the prize assets it lost in the 1990s and further tighten its hold on Russia’s economy — or simply tighten its embrace of the business moguls.

It would be a reverse of the controversial privatisation deals that gave the oligarchs their start. In the deals, known as “loans for shares,” the oligarchs took major stakes in state-owned oil and metals companies as collateral for loans to the government. The loans were never paid back.

In recent years, many of the wealthy businessmen borrowed heavily abroad, often using their firms’ stock as collateral. When Russian stocks plunged over the past few weeks, their creditors began demanding that they put up more collateral or risk losing their shares.

To prevent the shares from falling into foreign hands, the government offered a total of US$50 billion through state-owned bank VEB to help refinance the foreign debts. VEB, which said it has received applications for double that amount, announced on Wednesday that it had approved the first loans, totalling nearly US$10 billion.

Alfa Bank’s Fridman, who is also a co-owner of the British-Russian oil company TNK-BP, is considered among the best positioned and financially secure of Russia’s oligarchs, and thus at little risk in seeking government help.

However, James Fenkner, director of Red Star Asset Management, noted that if the problems continue and Alfa is unable to pay back the loan, “the collateral has nowhere to go but back to the state.”

Peter Halloran, CEO of the hedge fund Pharos Fund, said he was unable to predict the outcome of the government bailout deals, but he expressed confidence the oligarchs would rather start pumping oil with their own hands than lose their assets. “It will be the No. 1 priority for them to avoid losing their stakes,” he said.

No recipients have been identified, but among those bidding for state financing is metals magnate Oleg Deripaska. His aluminium company, Rusal, is reported to have been given a US$4.5 billion loan.

Russia’s Audit Chamber said yesterday it would check how Rusal uses the VEB loan. VEB, however, still could not confirm whether Rusal had secured one.

Russian officials have denied any plans to take over private assets. Prime Minister Vladimir Putin said on Wednesday that “the expansion of the government’s presence in the economy is a forced measure that is of a temporary nature.”

Ronald Nash, chief strategist at Renaissance Capital, said he was taking the government’s statements at face value.

“I don’t think what the government wants from companies that go to VEB is more than for these companies to continue to grow and help the Russian economy grow,” Nash said.

Russian companies have been forced to borrow abroad because of an absence of sufficient savings at home, he said, and “what the government is doing now is a very positive reaction.”

“They are re-liquifying the domestic economy, whether that’s depositing money directly with state banks, or whether that’s making it that much easier for domestic banks to borrow against their assets, or whether it’s pumping money into VEB to roll over the outstanding foreign debt of the Russian companies,” Nash said.

But in the process, the government may get the power to decide whom to save — and on what terms. Fenkner said this could radically change Russia’s corporate landscape.

“The state will end up owning big chunks of Russian industries” if commodity prices — a key source of Russian oligarchs’ wealth — do not go up again, Fenkner said.

Dependence on state funds is not likely to make the oligarchs any more complaisant, he said. Their loyalty was secured long ago with the jailing of Yukos oil chief Mikhail Khodorkovsky. — AP

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Roger Biduk - Wall Street Higher After Yesterday

Roger Biduk writes:

Alan Greenspan

Testimony of Dr. Alan Greenspan

Committee of Government Oversight and Reform

October 23, 2008

As of 10/23/2008 10:01:54 AM

Committee of Government Oversight and Reform

For Download this testimony from the Committe’s website, click here

Saving the Green

If you’re looking for creative ways to save money this month. Check out the tips that Ramit Sethi suggested:

AJC Feed: Thursday @ 8pm CST (9pm EST / 6pm PST)!!

______

I’m seriously considering going for my MBA. It would mean a career switch after I finish, it would cost about $70,000 over the course of three years which would come out of pocket while I continue working at my present job. I’m considering this options because I would eventually like to start my own hedge fund, with a focus on biotech stocks. By the time I complete the degree I will have 5 years experience in this field (biotech) as a scientist, and an MBA from a top tier business university. I’m thinking these credentials will at least aid in landing me an analysts position, something I would love to do and think I would be great at. Never mind the pay would be substantially more?

Join AJC as he answers this question - and, more - as he shows how he went from ($30k) in debt to over $7 million in the bank in just 7 years … no scams, no schemes … just good-old-fashioned free advice … LIVE THURSDAY @ 8pm CST (6pm PST / 9pm EST)!

Click on the link below to see AJC live and to chat with him and ask him questions (no webcam required!)

If you would like to ask AJC a question

… during the show, AJC loves to chat, so why don’t you create a login to the chat room now (if you haven’t already created your login) it’s free, and takes just a few seconds!

AJC Live Thursday @ 8pm CST (9pm EST / 6pm PST)!!

I’m seriously considering going for my MBA. It would mean a career switch after I finish, it would cost about $70,000 over the course of three years which would come out of pocket while I continue working at my present job. I’m considering this options because I would eventually like to start my own hedge fund, with a focus on biotech stocks. By the time I complete the degree I will have 5 years experience in this field (biotech) as a scientist, and an MBA from a top tier business university. I’m thinking these credentials will at least aid in landing me an analysts position, something I would love to do and think I would be great at. Never mind the pay would be substantially more?

Join AJC as answers this question - and, more - as he shows how he went from ($30k) in debt to over $7 million in the bank in just 7 years … no scams, no schemes … just good-old-fashioned free advice … LIVE THURSDAY @ 8pm CST (6pm PST / 9pm EST)!

Click on the link below to see AJC live and to chat with him and ask him questions (no webcam required!)

… during the show, AJC loves to chat, so why don’t you create a login to the chat room now (if you haven’t already created your login) it’s free, and takes just a few seconds!

If you would prefer to e-mail your question to AJC for an upcoming show (it’s too late to e-mail for tonight’s show, sorry), please see http://7million7year.com/live and scroll down until you see the contact form - type in your question and name/e-mail address and that’s it!

Due to the volume of e-mails he receives, AJC cannot reply to all e-mails or cover them on his show, but he will TRY to get to yours!

Easy To Get, Hard To Let Go

Regulation of the Financial Market Is Important

Reinhard Selten, 78: I would like to remind people that the financial market crisis had its roots in a bubble in the American real estate market. The problem is not just a question of the financial markets, but is generally tied to markets for assets. These markets are far less stable than other markets for goods. False expectations often arise in these markets.

Many expected the rise in real estate prices in America to continue indefinitely. People believed that because of rising affluence, population growth and the scarcity of land, house prices could only increase. This expectation has since been thoroughly dashed.

Because of the lack of stability in the markets for assets, regulation of the financial market is important. We must ensure that speculative investments are secured by sufficient equity. This also applies to mortgages. In the United States, mortgages were approved for up to 110 percent of market value. In addition, these mortgages came with variable interest rates and a limitation of the mortgage holder’s liability with respect to the value of the house.

When the US central bank, the Federal Reserve Bank, constantly increased the prime rates at frequent intervals by 0.25 percent at a time, mortgage interest rates eventually doubled and many mortgage borrowers chose to turn over their keys to the bank and rent someplace else for less. This, of course, led to a decline in real estate prices, causing difficulties for banks.

In the last 10 years, a revolution has taken place in the banking industry. Banks sold more and more of a new type of security in which hundreds of mortgage receivables with roughly the same risk were combined into a single security. The loan securitizations, known as subprimes, were bundles of especially high-risk loans. It was not expected that borrowers would default on many of these mortgages at the same time. For this reason German banks sold large numbers of the securities, which were highly profitable, as investments. The rating agencies gave these securities AAA ratings.

Apparently the market does not value new types of complex securities correctly. For this reason, it is necessary to establish rules for the registration of new types of securities. Securities, not unlike food, should be given risk-related labels.

The prevailing portrayal of economic behavior in economic theory is based on very strong assumptions of rationality, which are not fulfilled in reality. If economic subjects were completely rational, as defined in economic theory, the markets could be left to their own devices without the risk of development of serious and long-lasting imbalances.

But such optimism about stability is unjustified. Economic theory must progress to form a more realistic picture of human behavior. A lot of empirical and experimental research is needed for this purpose.

And the rules of the financial markets must not just affect banks, but also other institutions that are active in financial markets, like hedge funds. Under no circumstances should it be possible for banks to spin off highly speculative deals into special purpose entities, as was the case with a few state-owned banks in Germany. These special purpose entities are not subject to the strict rules that are imposed on banks.

We must take steps to ensure that proposed regulations are, on the one hand, as straightforward as possible and, on the other hand, cannot be circumvented. Of course, detailed institutional and legal knowledge is necessary to construct such rules. As is so often the case, the devil is in the details.

What Has Gone Wrong up until Now

Edmund S. Phelps, 75: It is preposterous to speak, as some Europeans have, of the “end of capitalism.” A good life requires a rewarding workplace — one of change and challenge — and that requires some sort of well-functioning capitalism.

There is no question that the banking industry in the United States has gone awry. In buying mortgages for packaging in mortgage-backed securities, the banks exported to the rest of the world a profusion of assets that were overvalued by the financial companies that purchased them.

The ratings agencies, which made their calculations based only on rosy scenarios, and never on a worst-case basis, were complicit in this overvaluation.

In selling derivatives, such as default insurance and other collateralized debt obligations, the banks were selling assets that were too complex for a great many investors to understand.

Finally, the banks were their own worst enemies. The level of their loans and their borrowings to make those loans reached so high a level in relation to their capital, or equity, that any serious disturbance to asset prices — a default shock or a shock to liquidity premia — could have devastating effects on the equity of any bank and thus on its ability to function and to survive. At some banks, measured leverage was not extraordinarily high but the opacity of the assets and the resulting uncertainty over their future returns was very high.

That the banks chose to take on ever-greater levels of risk, with no end in sight until the collapse, was an effect of employee compensation: Fortunes could be made for each additional day that the bank could operate. There was no claw-back provision that would pay bonuses only for performance over the long term.

Is regulation required here? Undoubtedly some new regulations are required here and there.

Yet, many observers have argued the lack of restraints on the banking industry was more a failure of the regulatory authorities to exercise their powers than it was an absence of regulatory authority to act. A new mindset is required, above all.

A fundamental issue that regulatory discussions must confront, however, is what function society needs the banking industry to perform. Increasingly over the past two decades, the banks have tried to make money with mortgages, residential and commercial. As this has proved difficult, the banks will either have to shrink their supply of credit to the economy as a whole or else redirect some their credit to the business sector.

Unfortunately, the banks for the most part appear to have lost the expertise to make business loans and investments, which they once had in the fabulous years of investment banks such as Deutsche Bank and J.P. Morgan.

Wíll the big banks in the US be able to regain such expertise?

It seems likely that highly regulated banks are not the ideal sources of finance for business investment, particularly for innovative business investments. A natural source of finance for new startup firms are the rich uncles, called “angel investors,” who know more about the startup entrepreneur than a banker would be in a position to know. Another natural source of finance is the venture capitalists, who also have the entrepreneurial background to be able to mentor as well as finance the young firms. Some of the hedge funds are also doing creative work in financing various innovative projects.

Clearly it is not in society’s interests to regulate rich uncles, venture capitalists and hedge funds investing or lending to small or new businesses. If society makes the mistake of doing so, innovation will suffer. So will the rewards of work. And the supply of jobs.

An address in Mayfair - The hedge fund story

Daily musings about finance and the financial markets

Apologies for the stagnation in updates as of late - have been swamped with a collaboration on a research project here. Still managed to squeeze in a brilliant read on the secretive world of hedge funds.

You could walk around Mayfair all day and not notice them. Hedge funds don’t – can’t – advertise. The most you’ll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you’re serious, and have the money and confidence to pay the world’s most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more.

A must read.

via FT Alphaville

3 December 2008 at 10:28 am

2009 Cleantech Predictions

Lightspeed has invested across several cleantech areas, including solar (Stion), biofuels (LS9, Solazyme), clean coal (Coaltek), LED lighting (Exclara), and energy storage (Mobius Power). Here are some of our cleantech predictions for 2009 (see our prior year predictions here):

1. Cleantech funding will slow significantly, forcing startups to seek alternative growth strategies

The level of cleantech VC investment reached its highest levels ever in recent years. With the market downturn, however, many of the key players in the recent wave – private equity funds, hedge funds, project financiers, and debt providers – have slowed or halted their funding pace, and the IPO window is effectively closed. VC firms will continue to invest, but at a more modest pace.

As a result, we expect many startups to delay their timing for achieving commercial production. Startups will need to rethink their scale-up strategies and sacrifice growth in favor of reaching breakeven earlier. Hardest hit will be the companies that need to make significant capital expenditures to prepare for commercialization, but still have substantial technology and scale-up risk.

As companies find it more difficult to attract funding and drive down costs, expect some to seek more creative solutions. For example, biofuel startups will increasingly leverage underutilized production assets owned by distressed corn ethanol companies for commercial production capability. Meanwhile, expect large, established energy enterprises to play an increasingly vital role in helping to support startups as a development partner, funding source, customer, distribution partner or acquirer.

2. Companies will come under increased pressure to achieve competitive cost economics

With oil and energy prices falling significantly from last summer’s historical peaks, cleantech startups have stiffer requirements for the cost economics needed to compete with traditional energy sources. Companies with technologies that enable disruptive cost economics and can target higher-value market segments will be best positioned to stay competitive. For example, biofuel companies that can produce higher-value specialty chemicals can thrive even with oil at $40 per barrel. In solar, even with polysilicon prices falling due to the impending supply glut, high-efficiency thin-film solar panel providers will have the potential to exploit an intrinsic cost advantage. Conversely, companies that do not provide compelling cost economics will find it tough to contend.

The downturn has also made consumers and enterprises increasingly price sensitive and less willing to choose products at a price premium for the sake of “going green.” As such, sustainability-oriented green building products without an inherent cost advantage will be a tougher sell with more cost-conscious building owners.

3. Investor interest in energy storage, especially for automotive and grid-scale applications, to grow strongly

VCs will continue to invest in areas with large market opportunities, significant headroom for innovation, and more capital-efficient expansion models. We expect energy storage to be one of these areas. In the automotive sector, batteries with improved safety, performance, and cost parameters will be crucial to the broader adoption of electric vehicles (EV’s) and plug-in hybrid electric vehicles (PHEV’s). In the utility sector, the dramatic increase in distributed generation expected in the next decade from wind, solar, geothermal, and other sources will continue to adversely impact grid stability. We believe that economical grid-scale storage will be a critical part of the solution.

4. Government will play larger role in cleantech, as policymakers around the country increase their support

With passage of the solar investment tax credit and the Obama Administration’s stated support for a $100B+ energy plan, we expect the seeds of key U.S. energy policies for the next decade being planted in 2009. Although policy enactment may not happen in the coming year, expect topics like carbon cap-and-trade/taxation, national Renewable Portfolio Standards (RPS) and Renewable Fuel Standards (RFS), biofuel incentives, EV infrastructure, and grid-scale storage to be hotly debated. We expect that the federal government will move to formalize a venture capital-like arm to invest in promising cleantech startups, with particular emphasis on commercialization as opposed to research & development. State governments will continue to drive cleantech policy, with more states establishing or tightening RPS and RFS, reducing permitting requirements involved in consumer renewables adoption, and offering tax breaks for startups.

Importantly, policymakers at all levels will continue to consult the private sector to understand benefits and risks of emerging technologies that could benefit from regulatory support to avoid legislation that could potentially be detrimental to the cause (see Lightspeed’s presentation to California’s Lt. Governor and the Commission for Economic Development).

5. Cleantech comes of age in China

During the middle of last year, China passed the U.S. as the world’s largest producer of greenhouse gas emissions (GHG). 300 million people in the country have no access to potable drinking water; over a million people each year die from air pollution-related disorders, with new coal-fired plants going into operation on a weekly basis.

The Chinese government has put its might behind increased support for cleantech, enabling viable technologies to achieve distribution more rapidly. After the Olympics ended, the national leadership passed the Circular Economy Law to stimulate cleantech spending through energy efficiency, water conservation, and tighter regulation of GHG emissions. Further, the government has committed to a renewable energy budget of ~$300 billion over the next 12 years, a ~15% renewables target by 2020, and a ~$200 billion environmental protection budget through 2010.

VCs have already responded to this building momentum, as local investment in cleantech rose from $550 million last year to an expected $720 million this year, according to Cleantech China Research. Sectors that look poised to attract VC investor attention in 2009 include wind, clean coal, waste-to-fuel technologies, and energy-efficient building materials.

For the Record: December 2, 2008, Axel A Weber, Professor

Release here.

1 Introduction

Mr Ackermann, Ladies and gentlemen

The decision to run this panel under the title “finance after the turmoil” proves that the organisers belong to the more optimistic camp. And like most optimists over the past months, they have been proven wrong. Of course, for a forward-looking policy process it is essential to learn from current events to build a sustainable future. This work on lessons learnt is ongoing in several international and national fora.

The Bundesbank is making every effort to play a constructive role in these processes, and, thus, it is a pleasure and an honour to share with you some thoughts on finance after the turmoil, even though times are still turbulent.

Current challenges are twofold. The first aspect is crisis management and focuses on the resolution of institution-specific problems as regards liquidity and solvency. Moreover, it also concerns financial system rescue packages, their implementation, application and international coordination.

The second challenge is to use the current window of opportunity to bring about lasting structural changes regarding the regulation of financial markets. The aim of such changes ought to be a financial system that is more resilient to the kind of disruptions that we are currently observing.

I would like to share with you some thoughts on crisis management – especially from a German point of view – and on crisis prevention – the latter, of course, in a more international context.

2 Crisis management

As you all know, it was the insolvency of Lehman Brothers that led to the dramatic intensification of the financial turmoil. As an aside, there seems to be a broad consensus that allowing this bank to go bankrupt was a mistake in view of the ensuing heavy losses.

Owing to a rapid rise in counterparty risks following the Lehman insolvency, wholesale funding markets almost completely dried up causing a number of financial institutions that relied heavily on wholesale funding to run into serious difficulties. Furthermore, financial market participants were forced to fire-sell assets thus amplifying market losses.

After taking emergency rescue action for single institutions and in light of escalating worries among depositors, it became apparent that this systemic crisis needed a more systemic response. Many countries implemented financial market rescue plans and comprehensive deposit guarantees – after some initial stand-alone initiatives such moves were coordinated internationally. While the specifics of these packages may differ, they often share a common feature – their dual approach of promoting liquidity and solvency.

The German rescue package is also aimed at these two goals. Its core instrument is a Financial Market Stabilisation Fund.

In order to eliminate liquidity shortages and to support refinancing in the capital markets, the Fund is authorised to guarantee, for a suitable fee, newly issued refinancing instruments with maturities of up to 36 months. The Fund may also purchase shares or dormant equity holdings of financial institutions in order to recapitalise them. Finally, with the option of acquiring problematic assets, it can improve capital ratios too.

The authority that administers the Fund has been set up at and by the Bundesbank, although it is organisationally totally separated from us. It is now fully operational.

After initial reluctance, a growing number of banks, both from the private and the public sector, have asked the Fund for help. An important feature of the Fund is that it is voluntary. Private banks, in particular, obviously feared being stigmatised after engaging the Fund. However, market reactions have shown that such fears were not justified.

Another important feature is its package character. Using only the guarantee scheme is generally not intended.

It is of the essence that banks raise their capital buffers in order to improve their resilience against further downward pressure and to regain confidence. In the current situation, capital adequacy certainly requires more than just compliance with Basel rules. Internationally competitive levels should be targeted, while it does not matter how this will be achieved, whether by means of private or public funds.

Making of public funds, however, should be as temporary as possible. Having said this, it is obvious that every single public capital injection should not only imply suitable compensation but clear exit procedures as well. While such far-reaching intervention by the state in the economic system was unavoidable, it is not a permanent solution.

3 Crisis prevention

There has been a lot of talk about the causes of the current crisis and I do not want to delve into this discussion for the moment. In a nutshell, the current crisis is the result of both market failure and regulatory failure.

Intensive root cause analysis for more than a year has revealed numerous shortcomings in the financial system signalling a comprehensive need for action. As regards regulation, there is presently major political pressure “to do something” in order to reduce the probability of similar disruptions in the future.

However, rather than more regulation we should aim at better regulation. Self-regulation, anyway, has proven insufficient.

A lot of thought has been given to necessary consequences. Considerable efforts have already been made. Last weekend’s Washington summit on Financial Markets and the World Economy has certainly taken another important step forward in this respect.

The Financial Stability Forum – being key in this regard – had submitted a comprehensive list of recommendations for strengthening the financial system. Much progress has already been made in this respect.

Instead of analysing the details, I would rather give some general remarks as regards the future shape of regulation.

The first is, we need more transparency concerning unregulated business areas and markets, including hedge funds, OTC traded derivatives or off-balance-sheet vehicles. Gaps on the world map of regulation should be filled.

On the other hand, we should not throw out the baby with the bathwater! We should especially refrain from blanket judgements on discredited financial instruments. To mention just one example, securitisation can be essentially a useful financial technique. Another important issue regarding the future shape of regulation that I would like to mention is mitigating the procyclicality of financial regulation.

Procyclicality means the reinforcement of the natural cyclicality of the financial system, thereby – in the least favourable case – encouraging boom and bust cycles. Capital requirement rules under Basel II, for example, are supposed to be procyclical owing to accelerating capital requirements in case of rising borrower’s default risk. To the extent that banks change their lending behaviour in reaction to this, economic cycles can be amplified.

Another case in point is management remuneration, in particular, schemes that reward quick success with annual bonuses without penalising long-term adverse consequences of decisions that had been taken.

Furthermore, accounting rules have come under scrutiny as regards procyclicality. While fair value accounting certainly has its merits, it amplifies the cyclicality of leverage. Recent amendments in international accounting rules are useful in order to protect banks’ current results from further crisis-driven exaggerations. One-sided easing of accounting rules, however, entails the risk of sowing the seeds of a growing risk appetite in the future. As an economist, I suppose, it has become obvious that accounting is too important to leave it to the accountants.

Future regulation of financial markets will significantly curtail too risky business behaviour. Taking recent rises of financial market participants’ risk aversion into account, a more stable financial system can thus be expected. Banking in the future might be more boring and less sophisticated, however, it will be more sustainable.

What we should refrain from is

a) creating new international institutions. Instead we should promote essential improvements of cooperation among existing ones, and – if warranted – assign new tasks to them.

b) Invest too much hope into crisis prevention by means of an institutionalised early warning system as its utility seems to be overestimated. As you know, there were plenty of warnings concerning unsustainably low levels of risk premiums, sent by central banks and other organisations, but these fell on deaf ears,

c) Measures of protectionism. Fortunately, the heads of state of the G 20 have declared that they will resist the temptation to protect their national economies at the expense of other nations. However, I hope that these are not just empty promises.

4 Central banks

Before I conclude, I would like to add some final remarks on central banks and their future role as to financial stability.

Central banks are affected in many ways by the current crisis. Three issues are of major importance in this respect. Firstly, in many countries, central banks are responsible for banking supervision and therefore concerned with the liquidity and solvency problems of individual financial institutions. Even during a systemic crisis, the close connection between central banks and banking supervision has proven to be advantageous owing to synergy effects of micro and macro-prudential analysis.

The Great Crash of 2008

The signs are everywhere if you just care to seek them out. The Kuala Lumpur Composite Index or KLCI has lost more than 45% of it’s value. Just look at the graph below which represents the performance of the KLCI over the last year.

The Malaysian Stock exchange closed today with the index at 847, down from a high of ovr 1500 points just early this year. The New York Stock Exchange has taken a similiar beating loosing some 47% of its value.

Just today I read this report on almost all the news portals. The following is an excerpt taken from Yahoo.

The Architects of Destruction, Part 1

A Current Affair………

They took greed and incompetence to all-new levels…

 

In the end, Cayne is largely blamed for two things: NOT selling the firm when he had the chance, and NOT pursuing the cash injection it desperately needed in the aftermath of the firm’s collapsed hedge funds, and its “in-the-dark” liquidity.

Meantime, Richard Fuld and Erin Callan, along with 10 other Lehman executives, are facing subpoenas as federal prosecutors investigate whether the bank misled investors in the run-up to bankruptcy filing.

Golden Parachute: Despite horrific company losses under his leadership, Sullivan managed a cool $19 million safe landing, including a $5 million “performance bonus,” plus a new contract with a $15 million parachute… all after misleading shareholders on the stability of AIG’s finances. Sullivan’s parachute has since been frozen by AIG in an agreement with New York Attorney General Andrew Cuomo. (At present time, Cuomo is investigating AIG for “unwarranted and outrageous” executive payouts after the company pocketed billions in taxpayer rescue money.)

Franklin Raines, former Chairman/CEO, Fannie Mae

 

 

Here’s what some of our “convinced” members have passed on to us lately…

 

Commercial mortgages defaults continue to rise.

id="desc">Forex, Stocks, Bonds, Credit Crisis…

Consider In-Service Distribution to an IRA

This is a great article. An unknown legal option for 401(k) holders is an in-service distribution. This allows a greater flexibility for investments, especially in trying economic times. It is not allowed by all third party administrators of company plans, but for those who are eligible it can be a phenomenal hedge against loss in the traditional markets.

By Jim Lentini - The Signal, Santa Clarita Valley

If you are a participant in a company sponsored 401(k) plan, there may be some benefit for you to consider an in-service distribution to an IRA. While it is important to save as much as possible for your retirement, it is also important to make your retirement dollars work as hard as possible; so an in-service withdrawal might make sense for you.

Employees may roll over their retirement plan accounts to an IRA when they retire or quit. However, many people do not realize that certain retirement plans assets can be rolled over to an IRA even while they are still “in-service.” Many retirement plans offer the opportunity for in-service withdrawals.

* You need the assistance of a financial adviser. Most retirement plans don’t offer participants personal advice based upon them as individuals. By moving your assets into an IRA, you could work with a financial professional of your choice on a customized solution for your overall retirement plans and goals.

* You are unhappy with the range of investment options. Some plans offer too few investment choices, others offer far too many. You might prefer fund options not offered through your company plan. Or, you want to consider a plan that offers guarantee options not offered in company sponsored plans. Guarantees are important anytime in retirement planning, but especially in times of volatility, like now!

* You want to be able to stretch your distributions. Most retirement plans like 401(k)s require a lump sum distribution upon the death of the participant. That means beneficiaries have to receive the money and pay taxes on it almost immediately. If those assets were in a IRA instead, your heirs would be able to stretch their receipt of money over a much longer time, thereby maximizing the tax deferral, and minimizing the income taxes owed. Also, working with a professional adviser will offer more tax advantage options for your consideration.

* You are planning a home purchase and might need money. IRAs offer greater flexibility for home purchase. A distribution from an IRA used for the down payment of a home would not have the 10 percent penalty assessed in a 401(k), if you are over 59. This also applies to withdrawing funds from an IRA for college education.

* You have doubts about the financial health or longevity of your company. While not common, there have been well publicized instances of corporate plans being frozen or lacking funds in their accounts (remember Enron?).

Qualifying Qualified Intermediaries - The LandAmerica Lesson

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Breakdown of the Global Monetary System by summer 2009

Four key-factors are now pushing the Bretton Woods II (2) system to collapse in the course of the year 2009:

LEAP/E2020 already extensively described factors 1 and 4 in previous editions of the GEAB. Therefore we will concentrate on factors 2 and 3 in the present edition (GEAB N°29).

The agitation that has seized global leaders since the end of September 2008 indicates that panic has struck at the highest level. Worldwide political leaders have now understood that the house is on fire. But they have not yet perceived something obvious: that the very structure of the building is involved. Improving fire-regulations or reorganizing emergency services will not be sufficient. To use a strong symbolic image, the World Trade Center’s twin towers did not collapse because firemen were late or because water was missing in the automatic fire-system, they collapsed because their structure was not meant to support the shock of two airliners hitting them in just a few minutes.

Today’s global monetary system is in a similar situation: the twin-towers are the Bretton Woods system, and the airliners are called « subprime crisis », « banking failures », « economic recession », « Very Great US Depression », « US deficits », … a whole squadron.

According to LEAP/E2020, if global leaders fail to realize that in the next three months and to take actions in the next six months, as explained in GEAB N°28, the US debt will « implode » by summer 2009 under the shape of the country’s defaulting or the Dollar’s dramatic devaluation. This implosion will follow closely a number of similar episodes affecting less central countries (see GEAB N°28), including the United Kingdom whose already huge debt is ballooning at the same pace as Washington’s (7). In the same way as the US Federal Reserve saw, month after month, its « Primary Dealers » (8) being swept away by the crisis before it was itself confronted to a real problem of capitalization and therefore survival, the United States in the coming year will witness the implosion of all countries too-closely integrated to their economy and finance, and of their allies financially too-dependent on them (9).

Sign of the times, the Financial Times has started to list the US federal state’s tangible assets: military bases, national parks, public buildings, museums, etc… everything has been evaluated for a total amount of approximately 1,500-billion USD, i.e. more or less the probable amount of the budget deficit in 2009 (see the detail of these assets in the chart below). No wonder why Taiwan, despite its dependence on the security provided by Washington, decided to stop buying one of the three great components of the US public deficit, the Fannie Mae and Freddy Mac securities (despite the fact that they were « rescued » by the government (14)); or why Japan is now a net-seller of US T-Bonds.

All those who, despite our advice in the past two years, invested in Fannie and Freddy securities or in stock markets or in large US private equity banks or in the banking sector in general, have no reason to worry: it will not happen because « they » will prevent it! A problem remains however: “they” are now panic stricken and “they” understand nothing to this situation “they” were never prepared to face. Like we explained in the GEAB N°28, 2008 was only the detonator of the global systemic crisis. Now comes Phase IV, phase of the aftermath!

Notes:

(3) The future president of the United States seems to have for sole aim the implementation of his campaign program (social security, infrastructure, middle-class tax reduction,…), listed before the crisis, and requiring major expenses, when the US federal state is already over-indebted. It was a perfect program… for an America that no longer exists except in electoral speeches.

(4) On this subject, read our anticipations in GEAB N°17 and N°18.

(5) This goes for the USD-reserves of many countries such as China, Japan and the Gulf oil-monarchies. Today’s leaders are not able to imagine that the hundreds of billions of USD piled up in their reserves are only worth 50 or 30 percent of their face value. It will belong to their successors to make rational conclusions and invent a different global system.

(6) That is to say conceptually relevant and efficiently implemented.

(7) As a matter of fact, because of its strong recession, the United Kingdom is already accounting for a large part of the EU’s slowdown in 2009. Great-Britain will be the « sickman » of the EU in the years to come.

(9) Talking about dependent allies, Pakistan and Ukraine are already under IMF perfusion, and Turkey’s credit rating is about to be downgraded. Egypt, Israel and Colombia should soon join the list.

(11) Our team is far from believing that the Eurozone is not confronted to severe difficulties as well (on the economic outlook, see GEAB N°28 in particular), but in a historic crisis such as the one currently unfolding, these problems are minor compared to those the US, the UK or even Asia will face in the next year.

(12) For instance Latvia has just nationalized as a matter of urgency the country’s second largest bank, Hungary is under ECB and IMF perfusion, Polish growth is collapsing, Denmark and Sweden will join the Eurozone in the couple of years, UK is in distress…

Pay it Forward

Can your cash flow catch up with receivables?

A late payment worth hundreds of thousands of dollars isn’t something Jim Colson is keen on. But after a number of related lumberyards started to slow in payments, something had to be done.

“Our credit department contacted them, one of their senior managers came out and we worked out a plan for monitoring total balance and amount past due. We had flexibility in what we required from them and weekly communication. That process took about 75 days, but that account has recently become current,” says Colson, chief financial officer of Galt-based Building Material Distributors Inc., or BMD.

As the CFO for a company with 10 distribution centers in five states, Colson has his collections work cut out for him. And he’s not the only one. Across California business owners and their collections teams are trying to find bottom-line balance in an unstable economy. As Colson will point out, money tied up in working capital is money not available to invest in the business, fund an acquisition or pay a dividend.

“These are businesses with a lot of long-term management, and the downturn has taken them by surprise,” Colson says. “They’re not deadbeats who don’t want to pay their bills. These are businesses who take pride in themselves and want to work it out.”

In today’s volatile economy, businesses are weakening, and it’s more important than ever for CFOs and accounting departments to have their eyes on the health of their customers and collections practices. And they should — as of June, troubled companies made up 13.2 percent of the “global public company universe,” according to a report by Kamakura Corp., the Honolulu-based risk management information provider. While such statistics aren’t available for private companies, one cannot assume they’re doing much better.

Process and consistency are first and foremost for business owners looking for an efficient and professional collections process, according to Charles Eason, director of the Solano College Small Business Development Center. The center offers training, counseling and mentoring to small-business owners who need assistance in areas such as recordkeeping, financial projections and development strategies.

It’s important to have a credit policy in place, he says. Get invoices out on time, and have incentives for customers to pay on time. “Build incentives into the cost of products, and make sure there is enough to cover gross profit margins,” Eason says.

Most small businesses don’t have a collections department, so owners need to keep on top of invoice aging. “I think a lot of times they assume the company has written it off or that it’s not an impending thing. That’s why we’ve got to catch it early, so we have leverage,” says Kim Thayer, controller for Levin’s Automotive Supply, a $16 million distribution business in Sacramento.

By effectively managing receivables, a struggling business can bring in a significant amount of needed capital. By putting $20,000 in for an accounts receivable administrator, the initial cost would more than pay for itself over time, according to Mark Beil of Beil Accountancy Corp. If, on the other hand, a company sees reason not to implement an internal collections department, another option could be to pay for the services of a third-party accounts receivable company.

“You would better know your customers, but sometimes people are limited on time and money, and if you have a third party administrator who is good and gets to know your customers, they could just as easily represent you as your company could,” Beil says.

At Levin’s, collections are handled internally and discounts are offered to customers who pay by the 10th when invoices are typically due by the 25th. Service charges are applied to any outstanding debts, which Thayer says should be standard practice at just about every business.

“In general, we start talking to customers about things before they get to be past due. We do that with our special needs accounts,” says Tina Trahan, the company’s collections manager. “Usually, if you sit down and discuss it with somebody, you can feel it out. Right now it’s really hard for some companies. We have a couple companies just paying $100 a week or $250. And one of them is a big company that’s been with us for a long time, and we’re not just going to cut them off.”

If the truant customer is a large account, there is often plenty of value in offering them maximum assistance. Assisting a financially distressed customer can build stronger business relationships, says Earl Clark, manager of corporate treasury services for Pacific Coast Companies Inc. in Rancho Cordova.

“That said, a company selling only to gilt-edged customers is cutting out a very profitable business sector — those marginal accounts that, although they may be a higher credit risk, have the potential to provide nice profit margins,” says Clark. “A business should clearly understand that its survival is dependent upon its customer base, its ability to generate a profit and its ability to collect its account receivable in a timely manner.”

The impact of the housing downturn has had particular implications for businesses tied to the construction industry. Until recently, business owners were reporting an ability to adapt to the changing economy, but as the gas crunch has continued, more dramatic financial impacts have surfaced.

“In the past 90 days, we’ve spent a lot more time interacting with customers. We’ve kept things about the same as far as the total amount of credit we grant, but with customers who are a little bit more strapped, we’ve brought down the credit, whether it be through collections or slowing down shipments,” says Colson.

Colson says BMD is trying to lengthen payables and shorten receivables, but the main implication for the company, is that the business lets up on previous goals.

“We’ve had to settle for more of a flattening of [days sales outstanding]. We haven’t lengthened payments to suppliers substantially or shortened payment terms. We know our suppliers are struggling, but we’ve held firm on our current position.”

With a weakening dollar and opportunities in expanded markets, more business is going overseas. But international sales present a whole slew of new issues.

“Overseas sales are more difficult than local sales because you may not be able to determine the reputation of the payer,” says Doug Tow, chief credit officer for American River Bank. “If they don’t pay you, the option is to institute a lawsuit in a foreign country, which is complicated and expensive. Many exporters will require buyers to write a bank letter of credit or have the receivable guaranteed by an import-export bank.”

International companies don’t have to worry as much about foreign companies because they often have the resources to bring collection action, says Tow. “But if you’re a small business in California exporting machine tools, you wouldn’t have much ability to really chase down something. You’re putting your tools in a crate and sending it out with the hope that you’ll get paid. That is why a businessperson needs a good professional group.”

Even the best customers, domestic and international, can fall behind, so it’s important for businesses to hedge exposure, says Clark, who manages risk at Pacific Coast through mechanic leans and surety bonds. “It’s not insurance, but it’s a guarantee,” he says.

At BMD, guarantees come in the form of personal guarantees. “Especially if it’s an organization that isn’t large or doesn’t have a lengthy track record, a lot of times the owner or major shareholders will have to step up,” Colson says.

But while a credit department’s staff can perform credit negotiations and manage risk, personal relationships between supplier and buyer remain a critical component in the health of a company’s bottom line.

“It’s a two-way deal,” Thayer says. “If someone owes you money and they actually know you, they’re going to be more apt to take care of you over someone they have never seen face to face.”

On top of consistent supplier-buyer meetings, keeping up with counterparty risk has proven beneficial to BMD, says Colson. His electronic systems generate information about trends from invoices and payments. “We’ll look on that customer-by-customer to measure changes in activity, and any dramatic changes will raise a flag.”

At Pacific Coast, each of the company’s subsidiaries has its own corporate credit department. Biweekly, the businesses have a teleconference to discuss credit matters among other topics. “The reason we do that is because one subsidiary might be doing business with an account who is also doing business elsewhere in our family. It might be having credit problems with one subsidiary and not the other, and we need to know that. There is direct effort by upper management to stay in tune, and the presidents are also very actively involved in their larger accounts.”

Startups are also particularly vulnerable to the pains of delinquent payments, especially in the current economic environment. So it is imperative that businesses first decide whether to offer lines of credit at all. Depending on the business, cash-only deals might be of greatest benefit to start.

“Cash flow is critical when you are starting off a business. You can be profitable and still go bankrupt if you’re not getting your money on time. It’s difficult, and you need to collect your money as soon as possible,” says Eason.

Virtually 100 percent of new businesses lose money for a period of time, and owners need to understand that it’s going to take real money to pull through, says Tow. A major mistake is underestimating the losses it would take to build a business to a profitable state, he says.

“They end up with a cash flow situation, which gets them into a Catch-22. They don’t have cash flow, and they don’t have money to hire the resources in order to better manage and collect the monies that are outstanding,” Beil says. “They begin to look for additional capital to remedy the problem, or they look at last resort financing: factoring.”

Factoring — selling invoices to a third party for immediate upfront payment — is an option for select businesses (generally those lacking capital) but should be approached judiciously by all.

“It’s a comparatively expensive option compared to open-line financing and is not appropriate for business with small profit margins. You might pay 1 to 5 percent to pay back an invoice, and if your profit margin is only 6 percent, it’s not suitable,” says Tow.

Factoring companies typically shy away from contractors, schools and other business that has receivable payments that are not assured. Most experts concur that factoring should not be used as a long-term option for securing capital. However, if a company is growing quickly and has large, stable customers that will end up providing sustainable revenue, factoring might be a great one-time option.

“It’s better than turning down the job,” Eason says. “You can get the money upfront; you just have to have enough profit to pay it back. And [factorers] don’t care about your credit; they care about your customer’s credit.”

For businesses established on a failing home equity line, access to working capital might be dwindling, or worse — severed. Eason says try going cash-only.

“If you can take a look at collecting money upfront, it will certainly help. And you might have to cut your inventory to just what you need because you finance all that as well,” he says. “The smaller your day’s inventory, the less credit you need. Another thing is to look at the type of inventory. You might want to liquidate old inventory to get some cash, and again that’s also less you need to finance.”

This option could be particularly helpful for businesses fed with capital from a home equity line that’s been cut. Businesses have to be smart about their inventory, and there are always certain inventory items that a business simply must carry and cannot run out of, but there are also slow-selling and discontinued items that can go on sale.

“If you’re operating a nursery with $200,000 worth of plants, your supplier is granting you $100,000 on open credit, and you’re borrowing to pay for the remainder, your only interest is on the bank loan. So if you are able to lower your inventory by $50,000 and still serve your customers, then you can lower your borrowing costs, Tow says.

“Talking to an experienced community business banker is probably the best thing a new business can do,” he says. “You have great allies in your attorney, your CPA and your bank. Every business has needs that are vital. That is why a businessperson needs a good professional group.”

*This story was first published in the August issue of Comstock’s magazine. http://comstocksbusiness.com/

Unintentional Hedge Fund humor

When a hedge fund blocks withdrawals by its customers it’s known as “closing the gates”. Hence we love this story that Fortress is closing the gates on its Drawbridge fund.

Dec. 3 (Bloomberg) – Fortress Investment Group LLC fell 25 percent to a record low after the private-equity and hedge-fund manager halted redemptions from its Drawbridge Global Macro fund, which had lost value this year.

Thistle

I’ve been a little worried about this store on Dekalb and the lack of glass up front for window shoppers so it’s nice to see it get some good press.  That being said, one of the founders,  Rand Niederhoffer, is the daughter of Victor Niederhoffer (a somewhat famous hedge fund manager) so I think Dad can help out with any cash flow problems for the foreseeable future.  I love my parents but sometimes I really wish I had been born with a silver spoon…  Oh well.  At least I share Dad’s appreciation for Ayn Rand (The Fountainhead was a biggie for me in high school).  And the daughter, Rand, seems to have an eye for fashion.  When are we going to see some stuff for men?  I’m not talking about $70 white t-shirts either we’re in a recession here.

Who creates CDOs today?

An entrepreneurial teacher, advice from a hedge fund manager, and how kids don

Atlas Sports Genetics is playing into the obsessions of parents by offering a $149 test that aims to predict a child’s natural athletic strengths. The process is simple. Swab inside the child’s cheek and along the gums to collect DNA and return it to a lab for analysis of ACTN3, one gene among more than 20,000 in the human genome.

TRIPLE TEAMED - Congress, the Big Three and the United Auto Workers leadership vs the American auto worker

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In the runup to this week’s appearance by auto industry executives and the president of the United Auto Workers union before the US Congress, the real issues in the official debate over a bridge loan for the auto makers have become clear.

Following the Democratic congressional leadership’s initial rejection of the bailout on November 20, intensive talks were held between Congress, the auto companies, the UAW and officials from the Obama transition team over the best way to use the crisis to extract massive concessions from auto workers.

It is no accident that the UAW has scheduled an emergency meeting of local union presidents and bargaining officials for Wednesday in Detroit to discuss reopening labor agreements covering 150,000 workers at General Motors, Ford and Chrysler. The UAW intends to have an agreement in hand to impose further concessions on their members when auto executives return to testify before Congress on Thursday.

Acknowledging that the union had been in talks with the auto companies, UAW President Ron Gettelfinger told a local radio station “we recognize that there may be additional sacrifices required.”

The UAW is reportedly offering to eliminate what remains of the Jobs Bank program, which subsidizes the income of laid off workers during the life of the four-year agreement. The program has already been largely gutted and its elimination is chiefly symbolic and a down payment for far more sweeping concessions.

The union is also considering allowing the deferral or reduction in the $45 billion the companies owe for retiree health care benefits. Last summer, the UAW allowed GM to delay a $1.7 billion payment into newly established union-controlled trust fund and any further reductions could threaten the entire scheme and medical care for more than a million retirees and their dependents.

On Tuesday, the auto makers submitted plans to Congress outlining how they intended to return to profitability. After their commitments for “equal sacrifice” through largely worthless promises to limit executive pay, the companies spelled out plans to accelerate downsizing and the reduction of labor costs to the level of non-union factories operated in the US by their Asian and European competitors.

According to the Detroit News, General Motors will ask Congress for as much as $18 billion in emergency financial aid, pledging in return to ax 30,000 jobs, shut down nine plants and reopen the UAW contract. In a public statement, the company promised a “reduction in brands, nameplates and retail outlets,” full “labor cost competitiveness with foreign manufacturers in the U.S.” and “further manufacturing and structural cost reductions through increased productivity and employment reductions.” While the company said it remained “committed to fulfilling its obligations to its employees and retirees related to pension and healthcare,” it ominously warned that, “the specifics of these obligations change over time due to competitive realities.”

In its plan Ford wrote, “We are acutely aware that our supply base, our labor structure, and our dealer network, among other factors, are sized for an industry and a market share that the domestic companies can no longer support.” The company, which has closed 17 plants since 2003 and wiped out 45,000 hourly and 12,000 salaried workers in North America over the last three years, promised to shrink its operations further, sell off divisions like Volvo and push through other cost-cutting measures.

The companies praised the UAW for signing a “transformational agreement” in 2007, which reduced the wages for new hires and so-called non-core workers by half and excluded them from the traditional retiree health care and defined benefit pension plans. In addition, setting up the union-controlled trust fund had reduced their liabilities for retiree health care by 50 percent.

The concessions have largely been discounted as inadequate by the financial and political establishment. Over the past few weeks, there has been a non-stop media campaign demanding that auto workers be stripped of the gains they have won over generations of struggle either by using the bankruptcy courts to tear up the existing agreements or through a government bailout, which would make any loan contingent on sweeping concessions.

Typical was a column in the Wall Street Journal Tuesday by William McGurn, a former speechwriter for President Bush, who called on GM CEO Richard Wagoner to exploit the potential collapse of the company to slash the “overly generous health-care” benefits, not only of retirees but, current workers. “[W]hatever the old-health care plans might say on paper,” he said, “you know the reality is a future where the Big Three’s auto workers will be renegotiating givebacks with a gun pointed at their heads (the threat of their company going bankrupt).”

In a repeat—albeit in a much larger scale—of the 1979-80 Chrysler bailout the threat of mass unemployment and financial ruin is being used to blackmail workers into accepting massive concessions. That government bailout did nothing to secure the long-term health of the industry, let alone the jobs and living standards of Chrysler workers. Instead it marked the beginning of a decades-long attack on the working class, which produced a massive transfer of wealth from working people into the pockets of corporate executives and hedge fund managers.

In the same way, the current assault on auto workers will be used as a benchmark for a wave of attacks on jobs and living standards as the corporate and financial elite, with the full support of the Obama administration, seeks to impose the breakdown of American capitalism on the backs of working people.

The collaboration of the UAW in this conspiracy will be cited by the Democratic Party and the media to claim that there is overwhelming support for auto workers to sacrifice. This is a lie. The UAW does not speak in the name or in the interests of ordinary working people. On the contrary, it is a corrupt apparatus whose income and privileges are derived from the services it provides to corporate management.

Workers bear no responsibility for the decisions made by the auto bosses, let alone the avarice and recklessness of Wall Street, which has brought the entire economy to the brink of collapse.

Auto workers must reject the whole framework of the debate over the bailout and intervene independently to defend their interests and those of the entire working class. This includes the preparation to reject any concessions brought back by the UAW and the launching of a national strike to defend jobs and living standards.

The most fundamental question, however, is how are the vast industrial resources, built up by generations of workers, going to be preserved and used? The auto industry, upon which millions of working people depend, can not be left in the hands of corporate executives and big investors who have driven it into the ground in order to amass huge personal fortunes.

State intervention and public planning are needed, but this will not be done by the Democrats and Republicans who are only interested in returning the companies to profitability to benefit the financial and corporate interests they represent.

The working class must assert its own interests. This means the fight for the nationalization of the auto industry and its transformation into a public utility under the democratic control of working people. To achieve this, workers must break with the Democratic Party and build a mass political party of the working class that will fight for a workers’ government to nationalize the banks and reorganize the entire economy based on the principle of production for human need, not private profit.

Auto workers in the US cannot succeed, however, outside of developing an international strategy. Automotive manufacturing is the most globally integrated industry in the world, coordinating vast human, natural and technological resources. In recent weeks auto workers in Canada, Japan and Europe have faced layoffs, and the demands for concessions in the US will be followed by similar demands throughout the world.

American workers must reject economic nationalism—long the stock in trade of the UAW and the Democratic Party to divide the international working class—and fight to unite with workers in every country based on the perspective of the socialist transformation of the global auto industry.

Report from Art Basel Miami Beach

id="blog-title">Slow Painting

id="tagline">Gleaning for meaning in art and life

Big Fan: Bull

Great book that I read back in 2004. Given what we are currently experiencing in the stock market, I pulled it out of the archives, dusted it off, and began going through it again.

It validates a lot of what I do as it relates to running money for my clients. If your advisor is not utilizing dynamic asset allocation, long-short strategies, and market neutral strategies…FIND A NEW ADVISOR.

Every hunter knows that you don’t shoot where the duck is, but where the duck is going to be. You’ve got to “lead the duck.” If you aim where the duck is at the moment you shoot, you will miss your target (unless the duck is flying very slowly or is very close!).

Bull’s Eye Investing simply attempts to apply that same principle to investing. In this book, I hope to give you an idea of the broad trends that will be evident for the remainder of the decade and help you target your investments to take advantage of these trends. Successful investing for the period 2004 through 2010 will require you to do things differently than you did in the 1980s and 1990s. We started the last bull market with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.

Now we’re in the opposite environment. The stock market has high valuations, interest rates have nowhere to go but up, the dollar is dropping, and the twin deficits of trade imbalance and government debt stare us in the face.

Which way is the stock market going? Which way are bonds going? Gold? Real estate? Where should I invest?

Wall Street and the mutual fund industry say, “The market is going up; you should buy stocks and now is the time to buy. You can’t time the markets, so you should buy and hold for the long term. Don’t worry about the short-term drops. And my best advice is to buy my fund.”

The folks on Wall Street are in the business of selling stocks because that is how they make their real money. Whether the shares are sold directly or are packaged in mutual funds or as initial public offerings (IPOs) or in wrap accounts or in variable annuities or in derivatives, these folks primarily want to sell you some type of equity (stock), preferably today. Unfortunately, the vast majority of investors believe these pitches and don’t know there are better investment alternatives.

Their advice–buy what they sell–has been the same every year for a century. And it has been wrong about half the time. There are long periods of time when stock markets go up or sideways and long periods of time when markets go down or sideways.

These cycles are called secular bull and bear markets. (”Secular” as used in this sense is from the Latin word saeculum, which means a long period of time.) Each cycle has different types of good investment opportunities. We are currently in just the first few innings of a secular bear market. The problem for Wall Street is that the products brokers primarily sell do not do well in secular bear markets. So they have to tell you that things will get better so you should buy now. Or they advise you to “have patience, and please give us more of your money.”

In secular bull markets investors should focus on investments that offer relative returns. By that I mean we should look for stocks and funds that will perform better than the market averages. The benchmark by which you measure your investment strategy is the broad stock market. If you “beat the market,” you are doing well. Even though there will be losing years, staying invested in quality stocks will be a long-term winner.

In secular bear markets, that strategy is a prescription for disaster. If the market goes down 20 percent and you go down only 15 percent, Wall Street proclaims your performance to be “winning.” But you are still down 15 percent.

In markets like those we face today, the essence of Bull’s Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured in terms of how much you make above Treasury bills. In secular bear markets, success is all about controlling risk and carefully and methodically compounding your assets.

Some will say, as they say each year, that the bear market is over: that this book is writing about ancient history. But history teaches us that is not the case. Secular bear markets can have drops much bigger than we have already seen, and last for up to 17 years. The shortest has been eight years. They have never been over when valuations have been as high as they are today.

Investors who continue to listen to the siren song of Wall Street will be frustrated at best, in my opinion, as the research I present clearly shows we have a long way to go in this bear market cycle. For those who plan to depend on their stock market investments for retirement within a decade, the results could be particularly devastating.

Bull’s Eye Investing is not, however, some gloom and doom book. Despite what Wall Street wants you to believe, there is no connection between how the economy will do and how the stock market will perform. As we will see, the economy should be fine, with just the usual corrections sandwiched between periods of growth. The world as we know it is not coming to an end. It is merely changing, as it always has. There are numerous possibilities for investment growth in a secular bear market. They just don’t happen to be in the standard Wall Street fare.

What I hope to do is give you a road map to the future by looking at how and why markets have behaved in the past. We will debunk many of the myths and “scientific studies” used by Wall Street to entice investors into putting their money into buy-and-hold, relative return investments. The Wall Street insiders, not surprisingly, use theories, statistics, and so-called facts that are blatantly biased and in many cases just plain wrong. When the market goes down, they just shrug their shoulders like Chicago Cubs (or my own Texas Rangers) fans and say, “Wait till next year. And buy some more, please.”

Basically, in the first half of the book I am going to teach you how to fish, and in the second half I am going to tell you where the fish are. I would politely suggest that you not skip the first half of the book–do not turn to the last part simply looking for the quick investment fix. If you don’t understand what is happening in the economy and world markets, you will not have confidence in your investment strategy and you’ll end up chasing the latest hot investment, which is usually a prescription for pain in any type of market.

Here’s how this book is organized:

First, we look at what history teaches us about the potential for stock market returns over the rest of this decade. We examine six major (and very different) ways to look at the stock market. As a quick preview, the evidence is heavily weighted to suggest that at the end of this cycle the stock market will not be too far from where it is today. The historical and mathematical analysis of bubbles also suggests that we could see the stock market drop much further before beginning the next bull market. We examine several of Wall Street’s favorite sales tools, the famous Ibbotson study (Roger G. Ibbotson and Rex A. Singuefield, “Stocks, Bonds, Bills, and Inflation: Simulations of the Future (1976-2000),” Journal of Business, Vol. 49, Issue 3 (1976), pp. 313-338.), Jeremy Siegel’s Stocks for the Long Run, and Modern Portfolio Theory (MPT), and see why you should exercise extreme caution when they are used in a sales presentation.

We then look at why the economy can do just fine and stock markets still can fall: It all has to do with the expectation for earnings and the value investors put on those future earnings.

Most analysts track a simple bear market from peak to trough (top to bottom). Bear markets (or 20 percent plus corrections) can happen in secular bull periods (think 1987 or 1998), just as bull markets (20 percent plus up reversals) can happen in secular bear markets (think 2000, 2001, 2002, 2003). Analysts also view a secular bear market as the lengthy period over which the market makes a top, enters into a decisive down phase, and then once again returns to the old high.

I suggest that we view a secular bear market a little differently, as the period in which the price-earnings (P/E) ratio goes from very high to quite low. It is in these periods of low valuation that we can once again begin to confidently put our money back into stocks, as the rubber band is getting ready to snap back. Of course, Wall Street folks will trot out all sorts of studies that show that stocks are always undervalued and you should buy today. They did so in 2000, 2001, and 2002, and 2003. They are doing so as this book is written and published. They are wrong, and we will examine why they’re wrong.

That means earnings are important, and thus a few chapters focus on earnings. We see why Wall Street analysts are so consistently wrong (by about 50 percent per year too much), what the prospects for real earnings growth are, and how to put it all into perspective.

Next, we look at risk. As I’ve said, investing in secular bear markets is all about controlling risk. I believe this chapter is one of the most important in the book, but it may also be the most fun.

We discuss the most common mistakes investors make and how to avoid them. Statistics show that investors do not do as well as the funds or stocks they invest in, and we look at the causes. We examine why today’s hot fund is likely to be tomorrow’s loser, and what types of funds you should be looking for in this market.

We look at the future, including the demographics of the baby boomer generation, and how it will impact our investment potential. We analyze the direction of interest rates, deflation, and inflation. Then we examine the world economy and the dollar and see if we can find a potential winning theme (we do!).

The consequences of these economic problems will require some painful adjustments from those who do not make the effort to protect themselves. I show you where and how to turn problems into opportunities by seeking absolute returns in turbulent markets.

After the first section, the book focuses on specific types of investments. After telling you why we are in a secular bear market for stocks, Chapters 16 through 18 explain precisely how to invest in stocks today. Ironically, in a secular bear market, the little guy has a big advantage over the larger institutions and funds. There are great opportunities in the stock market if you know where to look. During the last secular bear market, companies like Microsoft and Intel were launched. I show you a simple way to find the hidden gems sought after by the savviest investors.

Then we look at the world of fixed income investments. The rules are changing, and what worked in the 1980s and 1990s will in all likelihood be a losing proposition for the remainder of this decade.

We then analyze what are, in my opinion, some of the better potential sources of absolute returns: certain types of hedge fund styles. We look at how Wall Street has rigged the market against small investors getting the best deals. The richest investors and largest institutions with the best-paid advisors choose these high-fee, unregulated private investments because they deliver better risk-adjusted performance than one-way buy-and-hold mutual funds. We show you how to find and gain access to these private funds, and how to use some of their strategies in your own portfolios.

Finally, we take a more thorough look at the future, and why you should be optimistic. In 1974, only a few people saw the changes and opportunities that computers, telecommunications, and the Internet would bring. The world was bemoaning the losses of basic American industry as jobs were being lost to world competition.

Today, we find ourselves once again faced with serious competition for American jobs. Our core seems to be slipping away, as the market doesn’t respond. The world sees us in a much different light than just a few years ago. Few notice the new revolutions that are happening in small firms and research departments that will form the basis for the next wave of American prosperity because we haven’t even begun to imagine the ways in which the next waves of change will affect us.

Will there be winners and losers in this process? Of course. Anytime there are periods of upheaval and great change, there are always those who benefit from the change and those who suffer. I will try to show you how you can position yourself to be a winner.

There is a centuries-long, if not millennia-long, pattern to these cycles. Good markets are followed by bad markets, which are again followed by good markets. They are as predictable as winter and summer. These cycles have been happening since the Medes were trading with the Persians. While no one can predict the exact day winter weather will arrive, it is a pretty good bet that winter will come. You can prepare for winter just as you plan for summer. As investors, you can be successful if you understand the economic and investment seasons we are in and plan your investments accordingly.

So, let’s get you started on your way to successful Bull’s Eye Investing.

Hedge funds: Revenge of the CTAs

Euromoney Magazine - london, UK

Amid all the gloom in recent weeks about the apparent inability of hedge funds to cope with a collapsing world economy, there has been one subset of the industry that has stood out as a beacon - an eception, where returns have continued to be very positive, and of course non-correlated with plunging equity markets.  The exception has been those that apply trading strategies in futures markets - collectively known as managed futures traders or as commodity trading advisers (CTAs).

http://www.euromoney.com/Article/2059850/CurrentIssue/65745/Hedge-funds-Revenge-of-the-CTAs.html

Dr. Nouriel Roubini

Posted here is the text of Dr. Nouriel Roubini’s Financial Times article “How to Avoid the Horrors of ‘Stag-Deflation’” written for the December 2, 2008 edition….  Comments to follow in the next posting.

 

How to avoid the horrors of ‘stag-deflation’

 

By Nouriel Roubini

 

Published: December 2 2008 19:53 | Last updated: December 2 2008 19:53

 

The US and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation.

 

A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labour costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.

Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero – leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors’ problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions.

 

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary to reduce the rising spread between long-term interest rates on government bonds and policy rates and the high spread of short-term and long-term market rates (mortgage rates, commercial paper, consumer credit) relative to short-term and long-term government bonds.

 

To reduce the former spread the central bank needs to commit to maintain policy rates close to zero for a long time and/or start outright purchases of government bonds; to reduce the latter it needs to spread massive liquidity, such as by direct purchases of commercial paper, mortgages, mortgage-backed securities (MBS) and other asset-backed securities. The Fed has already crossed that bridge with facilities that are aimed at reducing short-term market rates, such as Libor spreads; it has now moved to influence long-term mortgage rates by buying MBSs.

 

Traditionally, central banks are the lenders of last resort but they are becoming the lenders of first and only resort, as banks are not lending. Central banks are becoming the only lenders in the land. With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge.

 

The financial crisis has already become global as financial links transmitted US shocks globally. The overall credit losses are likely to be close to a staggering $2,000bn. Thus, unless financial institutions are rapidly recapitalised by governments the credit crunch will become even more severe as losses mount faster than recapitalisation.

 

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government.

 

In the next few months, the flow of macroeconomic and earnings news will be much worse than expected. The credit crunch will get worse, with de­leveraging continuing as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, leading to further cascading falls in prices, other insolvent financial institutions going bust and a few emerging market economies entering a full-blown financial crisis.

 

The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and co-ordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

 

The writer is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor, an economic consultancy

 

Copyright The Financial Times Limited 2008

BoA

In early 2001, BoA released her first mini-album Jumping into the World. After its release, she took a hiatus from the Korean music industry to focus on the Japanese market. During this time she struggled to solidify her skills in Japanese.

After the release of Don’t Start Now and Jumping into the World. BoA released her seventh single “Valenti”. Valenti became a Top Five single for the artist, peaking at the number-two position on the Oricon. BoA released two more singles “Kiseki / No.1″ and “Jewel Song / Beside You -Boku wo Yobu Koe-”, both which also peaked at the number-three position. At the end of the year, BoA released her second Korean mini-album Miracle.

In 2006, BoA was mostly inactive in South Korea as she focused her attention on Japan; however, on September 21, 2006, she released her first digital single in Korea, a Korean version of “Key of Heart”. Her fourth Japanese studio album Outgrow was released on February 15, 2006. The limited CD+DVD edition of the album contained music videos of the album’s singles and a secret password to unlock a special version of the official website. The album reached the number-one spot on the Oricon chart for its first week of release, making it her fourth consecutive Japanese album to do so. It had low debut sales, however; with 220,000 copies sold, it became her lowest-selling first-week debut for a studio album at that point. “Do the Motion,” the first single from the album, reached the top spot on the Oricon, making her the fifth non-Japanese singer to have #1 single, the first in over twenty-one years. “Merry Christmas from BoA”, the last single from the album, was the singer’s first digital single. In support of Outgrow, BoA launched a special Zepp tour, B0A The Live, on September 29, 2006. The tour, which lasted until October 29, started from Nagoya and contained twelve shows, two in each of the following cities: Nagoya, Fukuoka, Osaka, Tokyo, Sendai, and Sapporo. She staged her first Christmas concert on December 7, 2006.

Layoffs, Layoffs, Layoffs

In the last 24 hours, these layoffs were announced:

These don’t include massive recent cuts at Citigroup, Bank of America/Merrill Lynch, Goldman Sachs, Morgan Stanley, and dozens of other smaller banks, hedge funds, and private equity groups.

Plus, another 509,000 new jobless claims last week. Highest level in 26 years.

Thursday - 26-year High for Jobless Benefits

Mike: Thursday is showing a wide range of jobless news, but unfortunately most of that news showing continuing deterioration in the job market. Let’s see what the big numbers show:

The number of workers on jobless benefits rolls hit a 26-year high last month, although initial claims dipped last week, data showed on Thursday, underscoring the rapid deterioration in the labor market.

http://finance.yahoo.com/news/Number-of-workers-on-jobless-rb-13745901.html

Pressured by the economic turmoil and the mounting loss of traditional phone customers, AT&T Inc. is cutting 12,000 jobs, about 4 percent of its work force.

http://biz.yahoo.com/ap/081204/at_t_jobs.html

Mike: Unfortunately, tech companies are going to layoff more as the dismal holiday selling season comes to a close:

Adobe Systems Inc. is not making the expected revenues for their fourth-quarter earnings, which has prompted the corporation to plan an 8 percent reduction in their workforce. That is the equivalent of 600 employees that will be losing their jobs.

http://www.bestsyndication.com/?q=20081203_adobe_and_other_companies_announce_more_job_cuts_employee_layoffs.htm

The Delaware-based industrial packager said it will close a 41-employee plant in Culloden, W.Va., and a 26-employee plant in Kansas City, Kan., by the end of January. 

http://www.bizjournals.com/columbus/stories/2008/12/01/daily20.html

One of Wytheville’s oldest manufacturing businesses is closing next year. The 170 employees of Acument Global Technologies were notified at a 7 a.m. meeting Wednesday.

http://www.swvatoday.com/comments/wytheville_plant_to_close/news/4131/

A company that manufactures automotive fastener parts plans to close its Wytheville plant next year, eliminating about 160 jobs.

A spokesman for Acument Global Technologies said Wednesday the closing is due to “very difficult automotive industry conditions.” Timothy Weir says sales and use of plant capacity are down, and employment has declined steadily from 200 jobs last year to 162.

http://www.wvec.com/sharedcontent/APStories/stories/D94RBE402.html

SHERMAN — The planned February closing of the Bauhaus USA Inc. upholstered furniture plant here will cost 139 jobs, the latest setback for the area’s troubled furniture industry.

http://www.clarionledger.com/article/20081203/BIZ/81203010

TERRE HAUTE — Tough economic times are forcing another Valley business to cut its workforce.

Hoosier Handpak, a contract packager since 1995, expects to layoff 55 of its 60 employees by the end of January.

http://www.tribstar.com/local/local_story_338233805.html

The Bakersfield Californian will layoff 25 staffers as it tries to balance its budget amid shrinking advertising revenue and an unstable economy, the newspaper announced Wednesday.

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/12/03/state/n180946S47.DTL

U.S. Steel Corporation (USS) has announced the layoff of approximately 3,500 employees at three facilities over the next several weeks.

http://chestertontribune.com/Business/12389%20us_steel_to_idle_three_facilitie.htm

A major layoff announcement from a New England jet-engine manufacturer. Pratt and Whitney will lay off 350 salaried employees, most of the cuts happening in Connecticut.

http://www.necn.com/Boston/Business/2008/12/03/Pratt-Whitney-to-layoff-350/1228349789.html

Mike: The following is from the The Docket - Massacheutts Lawyers Weekly’s news blog. You may want to put this in your favs to keep track of this layoff information:

Rumors are swirling as the clock ticks down to Jan. 1, the day many legal insiders expect law firms large and small in Massachusetts to announce layoffs.

http://blogs.masslawyersweekly.com/news/2008/12/03/law-firm-layoff-watch/

A new round of layoffs began Wednesday at the Arizona Republicas the newspaper’s parent company Gannett Inc. looks to trim 10 percent from its daily newspapers across the U.S.

Sources said 68 employees were laid off today, including 25 from the Republic’s newsroom. The cuts could continue tomorrow.

Hedge funds, which have long attracted Wall Street professionals with the promise of hefty salaries and bonuses, are now cutting staff in an effort to reduce expenses.

Much of the overhead a hedge fund has is related to salaries. So, if assets under management drop 50% due to a combination of redemptions and negative returns, these firms cannot support the same overhead

http://www.iddmagazine.com/issues/2008_46/187885-1.html?partner=fierce_finance

Mike: United really knows how to motivate employees to put out their best effort for the holiday rush:

 

 

 

 

 

 

Market down

Unhedged: Fortress, the Hedge Fund, Is CrumblingD.E. Shaw and Farallon Also Block the Exits. Maybe the physicists and statisticians can go back to doing real work? 

Harvard Endowment Falls 22%, Poised for Worst Return. Credit Suisse to Eliminate 5300 Jobs After Losses This Quarter. Sticking one’s neck out: Miller Says Stock Market Has Bottomed (not buying it). Also, give Bill Gross a buzz to discuss Dow 5,000 call.

OH NO: Judge says Mattel rival can’t sell Bratz dolls. Damn you, Mr. Burns: Italy confronts puppy smugglers.

Hmm, gee, I wonder if this will be good for consumers: Insurers propose universal, centralized healthcare. I am sure its ’cause they care, just as they have all these years.

Maybe Citi needs some sleep: Capital One to Buy Chevy Chase Bank. Probably a good idea: Citigroup Top Execs Ready to Forego Bonuses.

Brave move: S.E.C. Issues Rules on Conflicts in Credit Rating. Only 17 years late.

More layoffs in more places called Layofsylversica: AT&T Plans to Cut 12000 Jobs, Citing Economic SlumpDuPont to cut 2500 jobs, trim 4000 contractors. Others follow suitViacom to cut 7% of workforce; MTV division takes biggest hit. I wasn’t even aware that MTV still exists. I bet the music videos still rock like they did in the 80’s.

No bailouts for you: Nissan to recall nearly 430,000 vehicles worldwide.

Good is bad:  The number of Americans filing new unemployment insurance claims decreased last week, but the number of people continuing to collect benefits hit a 26-year high.

Commies know best about capitalism. Capitalists know best about socialism (for banks): Chinese officials are now lecturing the United States about the need to stabilize the U.S. economy.

Hedge Fund Suspends Redemption

Fortress suspends Drawbridge redemptions

Fortress Investment Group, the listed private equity and hedge fund group, has ­suspended redemptions at its flagship Drawbridge Global Macro Fund after investors sought to withdraw more than $3.5bn in funds, ­according to a regulatory ­filing on Wednesday.

Fortress took the action, at least in part, because the fund - which had $8bn under management as recently as September - has to keep a minimum level of assets or risk having to unwind ­derivatives trades, a person familiar with the matter said.

Forty Six Days to Go. No Bush Word Used.

There’s more - but this is enough today  What do you think?.

No comments yet — be the first.

économétrie_05/12/2008

Source : NEP (New Economics Papers) | RePEc

Is this the new elite you were talking about?

Here is an excerpt from BusinessWeek’s article titled “Meet Your New Recruits: They Want to Eat Your Lunch”:

…”We are followers of Warren Buffett,” explains Greene, who says he studies the famed Omaha investor’s letters to shareholders as if they were sacred texts.

High-revving students scoff at advice they sometimes hear about intellectually browsing before settling on a narrow employment path. “Many of my fellow classmates have been planning out their college choices since middle school, so to tell them not to plan for a future career during freshman year is illogical,” says Janet Xu, 22, a senior at Yale and editor of the undergraduate magazine Yale Entrepreneur. She is heading off soon to be an analyst for Sears Holdings (SHLD) in Chicago….

The article talks about a new group of elite college graduates emerging from top American universities who are aiming for the top jobs. At first, I got excited about this phenomenon. After reading the article, I have to tell you that I’m not as optimistic as I was about this new group. It seems like they all want to go to finance and consulting. In my opinion, for a healthy economy, we do need financiers and consultants, but they are one piece of the big picture and they are not the ones creating “value”. I believe “economic value” is created mostly by entrepreneurs, innovators, designers and manufacturers. Let me define what I mean by value (and this is my definition): true economic value is something for which people would pay voluntarily and with adequate relevant information. For example, when you pay $300 to buy a digital camera and you have done research on it before, you have read customer and analyst reviews and you know all the functions of the camera, that must have some true value to you. Value is not equivalent to cash. A pyramid scheme may generate cash for some people but doesn’t create any real value. A hedge fund may make some people richer, but it doesn’t necessarily create economic value. What an economy needs is a lot of value creators and some financiers.

Financial Crisis: December 4, 2008 G8 Business Summit - Ready for the Future. (Full document)

Release here.

The world is currently facing an unprecedented financial and economic crisis that is spreading through every facet of the global economy. This crisis calls for increased consultation and collaboration amongst all nations and for immediate actions to be taken to reverse the decline and restore long-term economic and job growth.

The G-20 Communiqué, released at the conclusion of the Washington summit, recognized the gravity of the situation and the necessity for strong and decisive action. This summit represents a start in the world’s response to the unfolding turmoil but we consider there is much to do to complete this response and get back on a path to growth.

Through their national associations, business leaders have been providing advice to our governments on how to move on the need for quick action. We can now present a set of proposals aimed at reestablishing stability and confidence in financial markets, and ensuring future economic stability and growth. By following these plans and principles, policy makers will restore confidence and help companies create jobs and prosperity throughout the globe.

I. A CRISIS WHICH CALLS FOR OPEN ECONOMY POLICY, INNOVATIVE SOLUTIONS AND SOLIDARITY

.. Four core values for further actions:

The leaders of the G-20 nations recognized that the proposed reforms will only be successful if grounded in a commitment to free market principles: rule of law, respect for private property, freedom of trade and investment, and competitive markets. While we support the basic principles outlined in the G-20 Communiqué, we would respectfully recommend that further actions be galvanized around four core values: free market economy, transparency, responsibility and open trade and investment.

.. First, governments should ensure the effectiveness of economic recovery plans to enable a return to normal bank lending and capital market operations:

Despite the implementation of economic recovery and bank rescue plans, many companies throughout our different countries face difficult problems with access both to short term financing and medium term bonds market. Should such a situation continue, it would have a significant adverse effect on the economy at large. We ask governments and central banks to study all measures that could revive the financial markets and ensure appropriate credit is available for business, especially for SME’s.

.. Governments’ macro economic policies must be both daring and carefully tailored, with regard to the public deficit, and attention must be paid to cross-border spilllovers:

First of all, we support the need for monetary and fiscal stimulus measures to fend off major downturn forces. However, given the interdependences between economies and the global nature of the slowdown, there are certain essential conditions to shoring up the world economy effectively:

.. We are looking forward to a prompt, ambitious and balanced conclusion to the Doha Development Agenda

Business leaders welcome the statement forestalling protectionist policies for the next 12 months, in line with the WTO rules. Learning from the mistakes of the past, we know that part of the solution to today’s crisis must be a commitment to an open global economy and international cooperation. We believe that this commitment should be confirmed and implemented as a long term international policy.

The business community fully supports all of the efforts that will result in a prompt, ambitious and balanced conclusion to the Doha Development Agenda. This is necessary to ensure the world’s economic growth in the coming years. We do hope that agreement on modalities for achieving this will be reached at the forthcoming WTO ministerial meeting in Geneva. In this regard, we expect all WTO members to make a positive contribution to conclusion of the negotiations by recognizing their responsibilities to deliver binding commitments that reflect those of others.

.. We support a reform of financial markets based on coordination, a global approach and adequate regulation:

Getting back to well functioning financial markets is a priority to provide enterprises with the liquidity they need to face the economic crisis. Additionally, G-20 nations have all agreed that one of the major underlying factors contributing in the current crisis is inconsistent and insufficiently coordinated macroeconomic policies.

In this regard, we would like to reaffirm our strong support for the development of a more coherent and efficient system of financial sector cooperation and regulation. However we believe that over-regulation must be avoided.

Regarding the surveillance of economic and financial stability to be organised at the international level, we believe that the IMF is the right institution and should work in tighter collaboration with the FSF to reinforce early warning mechanisms.

.. Recovery will come from enterprises

The crisis will be severe but enterprises are fully aware that economies run in cycles, and that upturns follow downturns. Governments need to set up the appropriate market regulation, to help restart financial markets and to implement some general measures aimed at restoring companies’ financial capacities. But sustainable creation of jobs and wealth will come from companies’ investments and innovations. As soon as enterprises and entrepreneurs have access to both short term and medium/long term finance they need to face up to the financial and economic crisis, and as long as governments have put in place efficient plans for recovery, they will invest for the future.

.. Solidarity will be needed to overcome the crisis

Companies are aware that the more fragile a country, a population or a company is, the more it will suffer from the crisis. They are ready for solidarity, which will be needed anyway to avoid a “domino effect” which would worsen the situation.

II. OUR RECOMMENDATIONS FOR FINANCIAL MARKET REFORM

Resolution of this crisis starts with the need to reform the financial markets. This reform can only be meaningful, if it allows the financial markets to become, once again, the centres for capital formation needed to drive sustainable economic growth. Such an effort requires enhanced international coordination and cooperation, a balance between, reasonable regulation and innovation, sound evaluation of systemic risk, and appropriate investor and consumer protection.

1. CROSS-BORDER CONSULTATION AND COOPERATION IN THE REGULATION OF FINANCIAL MARKETS

Markets are intrinsically global, yet each national economy has differing forms of capital formation and delivery systems requiring differing forms of regulation. Many of the existing financial regulations have proved inadequate and are one reason for the current situation. Accordingly, adjustments to the regulatory framework are necessary. There is a need for cooperation and consultation so that the national regulators may consult and work together to ascertain systemic risk and ensure the international flows of capital necessary to provide for sustainable world wide growth.

.. Principles for reform

Cross-border consultation and cooperation must:

.. Adjustment of the regulatory framework

.. Organisation of Consultation and Collaboration:

2. THE STANDARDISATION OF INTERNATIONAL ACCOUNTING AND AUDITING PRACTICE

The current crisis demonstrates the true global nature of the world economy. Since accounting is the language of business, it is important that businesses and investors speak in the same language to provide a transparent exchange of information using the highest quality standards. A 21st century system of financial reporting policy must allow accounting and auditing rules to be centred around:

Conduct a comprehensive study of market valuations

The business community welcomes the IASB’s responses to the financial crisis and the mark to market accounting study launched by the SEC. When fair value accounting for financial instruments is applied it should allow for reasonable judgments and estimates in inactive markets.

Development of standards should allow for testing and intensive reviews both before and after the implementation of the new standards to minimize unintended consequences. It should also allow stress testing by regulators before implementation from a regulatory standpoint.

.. Scrutinize the existing standards to ensure that financial reporting policy reflects economic activity and does not drive it

The purpose of accounting and auditing is to provide management, investors and regulators with the information needed to determine the viability and wellness of a business. While accounting rules cannot cause the crisis, the implementation of some standards may have exacerbated it and delayed the stabilisation of financial markets. Therefore, standards must be scrutinized to ensure that they merely reflect activity and serve the common goal of transparency.

Inhibitors of sound financial reporting policy must be removed. Finally, accounting standard setters, bank regulators, central banks and appropriate financial regulators need to collaborate in studying the interconnection between accounting rules and capital adequacy requirements to understand their role in the current crisis.

.. The appropriate national authorities need to launch an international convergence of standards for auditing of accounts

While there has been the establishment and growing acceptance of a global accounting standard, this represents only one part of financial reporting policy. There is a similar need to ensure that a global standard for auditing of accounts in order to guarantee an appropriate level of scrutiny and thoroughness to ensure transparent high-quality information for investors and preparers alike. Such a system will also aid cross-border consultation and collaboration amongst appropriate regulators.

3. THE OVERSIGHT OF RATING AGENCY

The role of the ratings agencies in the development of the financial crisis has created a number of reactions and initiatives on the part of the regulatory authorities, internationally, in the United States and in Europe. Businesses wish to draw the attention of the G8 countries governments to the aspects which they consider to be a priority. When the governments take necessary steps to do the following, negative impacts on corporate finance and additional burdens on private companies may be avoided.

.. Create a distinction between the rating of issuer debt (known as a financial rating) and the rating of structured products

The quality of the information given by ratings agencies when assessing structured products is an important factor in the debate about the number of defaults and downgrades on these markets. The complexity of structured products, the opaqueness of the markets on which they are traded and the reliance on ratings by users/investors have each played a significant role in the current crisis.

Therefore, in order to address investors’ objectives of precisely identifying market risks, the G8 Business members approve the direction taken by the regulators internationally to demand from the rating agencies different ratings “grades” to be applied to structured credit transactions.

.. Separate financial rating and advisory activities

The link between advisory activities and ratings activities is currently being contested. Claims have been made that ratings agencies advise investment banks on the structuring/creation of complex products in order to optimise the credit rating. On this point, the G8 Business members therefore suggest that a code of conduct be adopted by the rating agencies that prevents them acting as a ratings agency and adviser for a single product.

.. Introduce a system of authorisation and supervision that reflects market realities

The major impact that the ratings agencies have on the operation of the financial markets calls for the introduction of a system for authorisation and supervision. This should be organized on a country or region basis with the appropriate level of cooperation between regulators. As the Financial Stability Forum noted, a globally consistent approach to registration and oversight, which reflects the global nature and use of ratings, is critical.

Particular attention should be paid to the harmonization of various systems in order to avoid distorting competition, as imposing an unwieldy form of regulation on a market almost inevitably increases the cost of the rating.

.. Support supervision of the IOSCO code of conduct

For some years now significant work has been carried out between the issuer associations and the ratings agencies resulting in the introduction of the IOSCO code of conduct.

This code sets out the rules of good conduct for ratings agencies in terms of the following: conflict of interest inherent to the activities and the economic model of a rating agency, transparency; assessment methods; and rigorous assessment of the risks relating to financial ratings.

As IOSCO intended, the supervisory bodies should endeavour to ensure that rating agencies implement the IOSCO code and adapt their business model and internal processes to comply with it, before trying to impose new rules. It is vital for the future system of authorisation to consider the performance of ratings over time in judging quality, credibility and independence in addition to historical reputation, in order to encourage newcomers in this highly concentrated market.

.. Remind informed investors of their risk analysis responsibilities

While in an extremely volatile market rating agencies decisions have to be very careful and professional, and informed investors should be reminded that a rating does not exempt them from analysing the risk based on the models that they themselves have put in place and the knowledge they may have of the proposed products.

4. TRANSPARENCY REQUIREMENTS OF FUNDS

The growing importance of funds - sovereign funds, alternative management funds and hedge funds - on the financial markets - and, more recently, their role in the financial crisis, has led national and international authorities to consider the appropriate level of transparency required of these funds.

Accordingly, we would recommend a reasonable and appropriate form of transparency for these different funds to allow for appropriate levels of supervision and monitoring by financial regulators. Regulation should not prevent innovation in the marketplace.

As the financial markets play a major role in financing the corporate sector and the economy in general, their current malfunctioning is causing the members of G8 Business to formulate proposals aimed at improving the transparency of funds and re-establishing conditions which favour the efficient functioning of the financial markets.

.. Improve transparency of hedge funds and introduce an effective system to monitor the financing leverage

Excessive use of debt leverage for funds can accentuate risk and should be avoided. Regarding large pools of capital such as hedge funds, in order for society to assess systemic risks, transparency of the size of the leverage effect a fund employs is desirable and will allow for improved supervision of the credit allocated to them.

Studies should be undertaken by the proper bodies to examine leverage ratios, debt requirements and appropriate levels of supervision.

Consistent with our core principles, we advocate further transparency in markets, including non-market trading platforms and over the counter markets. Public and proprietary pools of liquidity aid the beneficial flow of capital and price discovery. However, proprietary or OTC markets should be called upon to deliver more transparency to regulators in order to prevent systemic risks.

We do not advocate a single global securities market or harmonization of trading platforms-investors and issuers should have the choice. However, increased transparency serves the public good. Therefore, whenever appropriate, postmarket infrastructures approved by regulators should be introduced.

.. Encourage continuation of transparency efforts for Sovereign Wealth Funds

Forex Forex captal markets

Then it began forex First, Treasury said it ecn forex broker reviews would buy distressed assets. Taxpayers are “keeping the zombie alive,” said Aldrich Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of the Monetary best money market account Affairs Division at the Fed Wood, said expansion of the AIG bailout shows that “no one knows the general principles” behind the Treasury’s trouble-assets program. The new accommodation represent a departure for Secretary Yehudi Paulson, finland currency forex signals who until now has said he only wants to invest Nurse funds in “healthy” firms. The Federal Reserve, which saved the insurer from banking and finance jobs collapse two months ago with an $85 billion loan, reduced that loan and offered lower rates, while the Treasury forex currency trading signals chipped in $40 billion from its bank-rescue fund to buy preferred shares. marks a new phase in the government’s banking res gestae to shore up financial markets: It’s the first time cash from the rescue fund Congress created last month has been committed to a failing company. By Benedetto Torres — money market returns The revised bailout of American International Group Inc.

This This lower forex account denomination allows traders with lower anderson finance capital more flexibility in exploring many more opportunities in trading Forex. This is in an effort to scale down forex software the risk. Owners of Forex mini accounts can trade in Pips as opposed to dollars. PipsOne pip equals to $1. If you pay the small margin of deposit currency trading ($50 per lot) your mini account forex broker can serve action forex as a very lucrative trading vehicle. In the Forex market due to the liquidity of currency a trader kemper money market can get up to 100:1 leverage. These banking are optimistic figures. In fact, it is recommended even by CNBC’s Jim Cramer that traders stay out of the daily forex forecast stock market if you own $1000 dollars lydon of share then you generally can get around $500 to $750 for leverage. Auto Forex Trading - How to Profit in a Bad Economy With Forex Autotrading There are only a few ways to profit in this bad economy with investments.

Central banks should become helicopters

In Martin Wolf ’s Blog, there is an interesting guest post by Eric Lonergan, a hedge fund manager at M&G Investments. He says:

How to stay positive no matter what

This sounds like a self help book everyone would/should buy.  But the truth is it should be in the fiction section.  We receive a lot of messages in our society that make us strive for “perfection”.  This unnattainable, unrealistic state of complete euphoria all the time.  Keep a smile on that face no matter what.  But guess what?  Life throws curveballs.

This week has been particularly challenging for me.  The crisis of our economy is finally sinking in.  While I tried to stay positive, I find the closure of so many beloved stores, the layoff reports and the idea that everything is on sale but nobody is buying incredibly sad.  So why have I been avoiding this sadness?  Because it is painful.  But then yesterday when helping my brother through some similar feelings, I was like wait…  This is a FEELING.  I am feeling sad and worried.  That is OKAY.

I told my brother a little analogy that is fitting for everyone.  Basically life is like swimming in the ocean, before the break.  So you are constantly challenging the waves and then the wave passes and you can just chill, until the next one comes.  If a wave comes and you freak out and start paddling, kicking, screaming (if you can) and essentially fighting it, it will suck.  But if you just use a method to float over the wave (or dive through it, like so many cool surfers do on the beach everyday), it is a lot easier.  So basically when you have a feeling, a challenge, something tough think of a wave.  You can freak out and practically drown yourself or you can find a boogie board, surf board or just your body to float over it.  So work through it.

I feel so sad and depressed because the economy is in shambles.  I keep having flashbacks of scary discussions I had a year ago.  A banker who told me this would happen.  A good friend who keeps saying, “the world is ending” and for me to get my cash and keep it at home (interestingly another banker- well hedge fund dude, who is doing really well while everyone is suffering….).  I can choose to fight this, kick myself for not doing something different, etc.  But why?

The clear answer is I do feel sad and scared and that is okay.  I actually feel really happy currently, as I am writing about feelings that occurred this week, many of which have already passed…  I embrace the feeling of calm right now.  Instead of worrying (a pointless waste of time), I am doing things to make myself more comfortable.  Today I have a lot of stuff to do that is not related to my finances for my business, but when I come home tonight at 4:00 I have a lot to do.  My quickbooks is in oder, I have checked some of the balances on my credit cards, bank accounts, stock portfolios, and the next step is to get it in shape so I am happy with it.  Note bookkeeping is my least favorite activity. 

So I challenge you to figure out a way to ride out the wave, whatever it may be, so when the wave passes you can chill in the calm waters and enjoy yourself.  If you fight too much, the wave just gets worse and calm waters are farther away (you know when the waves are non-stop…).  That beats you up, when instead you can take it a little bit at a time.

So please aim to be positive, but it is not realistic “all of the time”.  Remember this too shall pass.

xo

b

reasons 2b cheerful

Big rise in monetary base, trillions in loans all over the world that will never be repaid, many nations very exposed in monetization crisis, all currencies to fall against gold, writers running naked, larger corporate failures to come, American condition to worsen, resentment already smoldering around the world, taxpayer money still being squandered on bankrupt Wall Street … The monetary base has again risen dramatically over the past few weeks up 38% yoy, the largest increase since 1939. You can expect all the major central banks to do the same thing, as this was a large part of what G-20 was all about. Consumer and bank lending has grown by an annualized rate of close to 50% in the last six months. As this unfolds we see demonstrations in Iceland where the currency has been crippled, inflation is 18% and no one trusts government, bankers and politicians anymore. European banks will take a $75 billion hit on this fiasco. Incidentally Danske Bank sees Iceland’s inflation hitting 75%. That could well cause the overthrow of the government. The Iceland experience could be the forerunner for America three years from now. It could be preceded by Pakistan, Argentina and a number of other countries. Just last week Argentina confiscated pension plans worth $26 billion. Our House of Representatives has discussed a similar plan.

Then there are the loans all over the world in trillions of dollars that will never be repaid. They’ll be monetized and American taxpayers will again pay the bill. The prime targets for trouble are not just the ones you notice among the major countries, but all over the world, especially in Eastern Europe and Latin America - things are going to be every bit as bad. Deficits in Eastern Europe are close to 10% of GDP whereas 3% is normal. Cross border lending by European and UK banks to emerging market countries accounts for 22-1/2% of respective GDPs compared to 4% for US banks and 5% for Japanese banks. Europe has $3.5 trillion of debt outstanding to these financially 3rd world countries whereas the US has only about $500 billion. Most exposed is Austria. Those loans make up 85% of their GDP, most of it in Eastern Europe. They are the largest holders of debt in the Ukraine and Hungary - two very weak banking systems. Italy’s public debt is now the third largest in the world behind the US and Japan. At 107% of GDP it is twice the Maastricht limit. When Italy joined the Eurozone they were hardly qualified to do so and we said so at that time. They lied about their finances and everyone looked the other way. Their problems are shown in their bond yields, which are 1.08% more than similar German bonds. This predicament probably will force Italy and perhaps Austria out of the euro.

British bank exposure is primarily in Asia and Latin America. Sweden is exposed in the Baltic. Spain is the largest lender in Latin America. That is indeed dire news when the domestic economy is in such trouble. They have lent $830 billion in Latin America. Today worldwide banks are very interconnected and in the current environment that is very bad news, because eventually problems in one sphere will affect other spheres, making all currencies fall against gold. Then there are the de-leveraging hedge funds of which over the next year could see 1,000 or 50% of their number, close down or go bankrupt. Hedge funds just sold about $600 billion in assets to meet redemptions and to reduce assets to conform to lower lending by lenders. For now that selling is over with. We could see a reoccurrence in February if credit lines are cut again, or if redemptions rise again. That $600 billion represents 30% of hedge fund assets. We expect the market to move lower earlier in the year so we could expect another $300 billion liquidation in February or March. We are assuming credit won’t be cut further. We see present leverage at 1.4 to 2 to 1. Hedge funds, banks, brokerage houses and insurance companies were and are big players in the writing of CDS, credit default swaps, some $50 trillion to $60 trillion worth. Most of this derivative commitment is not hedged. The writers are running naked. If we have a string of corporate failures such as GM and Ford, etc., which is very possible, the system will collapse. That is possible and probable. [...]

Morons Lecturing Morons

If it weren’t so pathetic,  yesterday’s Dog and Pony Show in Washington with the Big3’s grilling from the Senate, would have been hilarious to watch.  The idea of this group of morons sitting up there on their thrones lecturing the CEO’s about fiscal responsibility made me choke. These are the people who have repeadedly refused to govern from a postition of doing what’’s right in favor of doing what “buys votes” and garners favors for “contributors”. Then to top it off, Dodd, Schumer and the like, start asking the UAW hack, Gettlefinger about the economy, the auto companies balance sheets and general recession/depreciation prospects.  Let me tell you, this guy is NOT a rocket scientist. Faced with the possibility of total collapse and total loss of jobs of his members, he chose to basically not offer anything.  Oh, he said the UAW would make concessions.  His concessions of phasing out the “job bank” and such had already been done, long ago. The American public has very little sympathy for factory workers who make $75/hr and get paid 95% of their pay when they DON’T work.

The CEO’s and their companies bother me as well.  Here you have Chrysler, who has already gone under and was snatched up by a hedge fund, who has lots of money and really doesn’t need anything that they couldn’t finance themselves.  And their leader who just about put Home Depot under while their CEO, trying to do it all over again with Chrysler. Then you have Ford and GM, acting sober and contrite, then the Ford guy says, “we’re not sure we will be needing anything right now. Hey, if you don’t need it, why are you here asking for it? It is a very complex and important time for the car companies, but can you remember anything on the news about the “dire” straights of the auto industry going under in a matter of a couple of weeks until “bailout” became the new buzzword?  When the “money window in Washington” was opened, it was the start of a never ending line of people and companies with their hat-in-hand, begging Uncle Sugar for a fun filled week at the spa in Phoenix.

Why African-American Art Is So Hot

by Susan Adams, Forbes Magazine

The subject is nattily dressed in suit and spats, a little like Johnson himself, who is sporting a crisply pressed blue shirt and a shiny yellow tie.

“That painting represents pride and dignity,” says Johnson. “I identify personally with this work.”

Johnson may be known for the low-budget comedy routines and booty-shaking music videos that drove the success of BET, the cable channel he founded that turned him into America’s first black billionaire in 2001.

But in his private moments he is moved by art that documents the struggles and achievements of black people in America. Since the early 1980s Johnson, 62, has assembled some 250 pieces by 19th- and 20th-century African-American artists.

Though Johnson’s collection is probably worth only a couple of million dollars, it includes some of the most famous names of the genre: cubist-inspired collage artist Romare Bearden (1911-­88); modernist Harlem painter Jacob Lawrence (1917­-2000); and Henry Ossawa Tanner (1859­-1937), who studied under Thomas Eakins in the 1880s and was the first black painter to gain international acclaim.

Son of a Mississippi factory worker, Johnson started his channel in 1979 with a $500,000 investment from John Malone. He sold it to Viacom in 2001, receiving $1.5 billion in stock for his 63% share. Today he owns an NBA team, North Carolina¹s Charlotte Bobcats, and runs RLJ Investments in Bethesda, Md., which includes hotels, car and motorcycle dealerships, a bank and a nascent hedge fund and private equity arm. (Johnson’s current net worth: perhaps $700 million.)

Though mainstream museums and galleries have been slow to appreciate work by African-Americans, the black community has been collecting for decades.

Bill and Camille Cosby have built a collection of 400 works, including artists like Bearden, Lawrence, late-19th-century landscape painter Edward Mitchell Bannister, self-taught 20th-century artist Horace Pippin and 1960s abstract painter Alma Thomas.

Basketball star Grant Hill owns a collection of midcentury work. Entertainer Harry Belafonte has been collecting African-American art since the 1950s and Oprah Winfrey has been buying a mix of work, including pieces by contemporary artists like Whitfield Lovell. Spike Lee, Denzel Washington, Samuel L. Jackson, Richard Parsons and Kenneth Chenault also collect.

Now white collectors and institutions are discovering these long overlooked works.

“What’s happened in the last five years is a paradigm shift,” observes Steven L. Jones, 61, an African-American dealer in Philadelphia. “This means that the best work is going up exponentially in value.”

Last year Swann Auction Galleries in New York became the first auction house to create a department of African-American art and in February sold a 1944 modernist oil by Harlem Renaissance artist Aaron Douglas for $600,000.

Johnson bought most of his art in 1998, when he learned that a significant body of work, the Barnett-Aden collection, was for sale by the Florida Education Fund, along with the building where the art was housed, the National Museum of African American Art, in Tampa. Johnson acquired 222 pieces, including 68 drawings, paintings, prints and sculptures from the original gallery. The rest of the pieces, all by black artists, were added by the museum. Johnson says he doesn’t recall what he paid, but a dealer familiar with the sale pegs it at $400,000. Two dealers who know the collection say it’s tripled and possibly quadrupled in value in the last decade.

Diary of a Short Seller

by Jesse Eisinger

Fund manager David Einhorn thought he was doing the right thing by speaking out against a shady finance company. The system fought back.

In May 2002, the financial markets were mired in a grinding downturn, which is to say it was a great time to be a hedge fund manager. After the insanity of the dotcom era, company profits and balance sheets finally mattered again. Skeptics felt confident in taking their cases public. It was in this environment that David Einhorn, a lanky and boyish 39-year-old who heads the $6 billion firm Greenlight Capital, spoke to a charity investing conference.

His topic that day was the Washington, D.C., finance company Allied Capital, a lender to and investor in midsize companies. Einhorn methodically went after Allied, claiming that it had inflated its assets and overstated its worth and profitability. While Einhorn has developed a reputation for witty and incisive speeches, they tend to read better than they sound. After the speech, he received a smattering of compliments and went home. He figured that reality would eventually catch up with the stock, and he would move on to other investments.

He was wrong. The next day, Allied stock tumbled nearly 20 percent as word of Einhorn’s critique spread, setting in motion one of the nastiest Wall Street wars in recent memory. Over the next several years, Einhorn would learn firsthand what happens to people who question the accepted rules of engagement on Wall Street. His saga is part detective story, part cautionary tale, part master class in investing, and a case study in what’s wrong with regulators, Wall Street, and the financial media (including me, as I play a small role). “The steep decline was nothing compared to the plunge I was about to take, spending years uncovering what I view as a fathomless fraud,” Einhorn writes in his new book about the battle, Fooling Some of the People All of the Time.

More important, Einhorn’s experience illuminates our current crisis. Throughout the subprime mess, critics who questioned runaway credit or the way Wall Street marketed credit derivatives were dismissed as overly pessimistic. Regulators who could have headed off the problem took too long to act. Six years on, some of Einhorn’s allegations against Allied have been proved right. Yet Allied’s managers have stayed in their jobs, reaping millions of dollars in compensation. And Einhorn has had to spend time and money deflecting accusations that he was a dirty short-seller with an ax to grind, smearing Allied for profit.

Einhorn’s initial claim in the speech will sound familiar to anyone who has watched Wall Street’s swoon during the past year. He argued that the company kept hard-to-price illiquid investments at inflated values on its books. He would subsequently discover that a major Allied portfolio company, a small-business lender called Business Loan Express, had made all sorts of bad loans to dodgy customers—to the tune of tens of millions of dollars in losses.

Einhorn and others brought Allied’s issues to the attention of regulators and law enforcement agencies, who either weren’t up to the task of taking on the company or whose sanctions came too late. So when Bear Stearns collapsed because of its own foolish risk-taking, blaming shadowy rumors for its demise, and the Securities and Exchange Commission started a witch hunt to investigate those “rumormongers,” who could have been surprised?

THE SIX YEARS’ WAR

After Einhorn’s speech that May, Allied mounted a counteroffensive. Company executives organized a conference call to refute his contentions. And they attacked Einhorn’s motives, since he was, by his own admission, shorting Allied stock.

The Wall Street machinery kicked in to defend Allied. Merrill Lynch, Allied’s main banker, backed up the company, even to the point of misstating an accounting rule to justify the company’s bookkeeping. (Merrill declined to comment.) When Mark Alpert, a Deutsche Bank analyst, issued a rare “sell” rating on Allied, the New York Stock Exchange investigated his report. A few months later, Alpert left the bank, and a few months after that, Deutsche Bank underwrote the first of at least five Allied stock offerings.

Einhorn was investigated by the S.E.C., and documents related to his Allied speech and positions were subpoenaed. (Then-New York attorney general Eliot Spitzer’s office also looked into Einhorn’s activities but took no action.) One of the S.E.C.’s lawyers eventually left and registered as an Allied lobbyist. Through pretexting—pretending to be someone else—an Allied investigator went on to snatch Einhorn’s phone records, a case that generated much less attention than a similar breach at ­Hewlett-Packard that involved pretext­ing journalists. (Allied eventually admitted to having the records but denied authorizing pretexting.)

For years, the financial media, if it covered the story at all, wrote only obligatory pieces, without delving into details. I’m no exception; Einhorn approached me early on with some material about the company. But it was complicated, and Allied aggressively refuted the allegations, so I backed off. Though I would later take critical looks at Allied, I wish I had initially persevered.

Eventually, the S.E.C. turned away from investigating Einhorn and started to look into the company. The agency ultimately sanctioned Allied for failing to preserve documents supporting its valuations between 2001 and 2003. Allied received no fines or penalties. The S.E.C. woefully, I think, pulled its punches. Other investigators, including the Department of Justice, found a pattern of fraudulent lending, indicting an employee of Business Loan Express. (He pleaded guilty.) The office of the inspector general of the Small Business Administration criticized the agency’s handling of BLX. Belatedly, the S.B.A. effectively put Allied out of the government-backed-loan business.

WAS IT WORTH IT?

Greenlight’s New York offices reflect Einhorn’s finance-geek personality. The conference rooms are named after accounting gimmicks: The Nonrecurring Room, for example, references some companies’ practice of taking gains that have nothing to do with their ongoing business.

In addition to managing money, Einhorn serves on a couple of prominent charity boards and has played in the World Series of Poker, grabbing a moment in the limelight in 2006 when he came in 18th out of 8,773 participants in the main event. He donated his winnings, $659,730, to the Michael J. Fox Foundation for Parkinson’s Research.

Einhorn lives for investing and, so far, has resisted the requisite lavish lifestyle. He has one house, outside New York City. He has no jet, no hockey rink with its own Zamboni, no Jeff Koons balloon sculptures hanging next to Ed Ruschas, and no Hamptons estate. I wondered if Einhorn thought that going public with his Allied fight was a mistake. “It shouldn’t be,” he says. “If it is, that’s a bad outcome. It’s a bad conclusion if people can’t talk critically about stocks.”

Einhorn picks his words carefully. “Allied is, in a sense, boring,” he says. “Boring isn’t the right word. I view it as a”—he pauses—“garden-variety fraud, not extraordinary. I have dealt with some extraordinary frauds, but they didn’t make for this story.”

What’s important about this story, he says, is that “the whole system failed”—and is in the process of failing again. “I’m really trying to make bigger points about free speech, free markets, the regulatory environment, and the way Wall Street works.”

Whenever a short-seller criticizes a company, the firm and the media go out of their way to disclose that the critic stands to gain financially. This is proper. Often, however, the disclosure serves to undermine the messenger and distract from the issues. In his book, Einhorn makes the crucial and often neglected point that short-sellers usually have far less incentive to fudge facts than management: “For Greenlight, Allied is one of many ways for us to make money…. For management, Allied is the whole ball of wax. If Allied is shown to be fraudulent, the consequences would be much more dire than losing a few dollars. Top management players could lose their jobs and possibly go to jail.”

Allied is still on the defensive. “The book appears to be nothing but a self-serving rehash of the same discredited charges that Mr. Einhorn has made for the past six years,” a spokesperson said. “The reality is that the third parties that have examined his charges against Allied and Allied’s responses to them—the courts, the S.E.C., leaders in the capital markets, and the investing public—have made it patently clear that his premise that he is right and the whole world is wrong is absurd.”

Honest companies tend to let business take care of itself. “Six years ago, I told the S.E.C. about Allied’s aggressive, inappropriate, and illegal accounting. Five years ago, I told multiple government agencies about the fraud. Four years ago, I told the F.B.I. that other Allied critics and I had our phone records stolen. Three years ago, I notified Allied’s board in detail about its management’s misconduct and made a detailed presentation to the U.S. Attorney in Washington outlining a variety of illegal activities,” Einhorn writes.

And Einhorn has the resources to keep talking about Allied. Typical whistleblowers don’t. He was a critic with time, money, and power on his side. And yet in many ways, he still lost.

Original Post

The Manipulation Of Gold Price

There is no other leveraged commodity market where short sellers increase their positions, materially, as the price rises, and increase them even more when prices are exploding, except gold and silver. The reason traders don’t normally do that is that it exposes short sellers to unlimited liability and risk. Yet, in both March and July 2008, and on countless occasions over the past 21 years, vast numbers of new gold and silver short positions were temporarily opened up, with the position holders seemingly unconcerned about the fact that precious metals had just risen exponentially, and that there was a very real potential they would bankrupt themselves with unlimited upside potential. Normal traders would not expose themselves to such unlimited risks.

I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “official” report price for the precious metals elsewhere.

After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.

Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.

Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.

The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.

Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.

The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.

First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.

A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.

At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.

This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.

On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.

Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.

That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.

Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.

The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.

Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.

I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.

Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.

In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to ensure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.

The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.

All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.

The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.

But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.

People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.

The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.

Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.

The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a “beggar thy neighbor” policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.

I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.

Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.

It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.

Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.

More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.

The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.

It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt to shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.

Disclosure: The author holds physical gold and is long positions in GLD and gold futures.

NIFTY Stock Index to hit 2009 - in the year 2009?

Stupid is as Stupid Does

Friday links: risky Treasuries

James Grant on the risk in riskless Treasuries.  (FT.com also Bloomberg on the Economy)

“Implausible as it may sound, right now equities and corporate bonds are a better long-term bet than cash.”  (Economist.com)

Cheap oil is great at the pump, but does it have risks for companies and countries?  (WSJ.com)

Has the junk bond market properly priced in the economic crisis?  (BusinessWeek.com also Bespoke)

Hedge funds needs to get smaller, more opportunistic and less levered.  (Humble Student, NakedShorts)

When it comes to buy-writes, “Deciding if the premium is ‘fat’ enough is the difficult decision.”  (Options for Rookies also Daily Options Report)

Harvard learned that outsourcing investment management sometimes doesn’t work.  (Big Picture also Clusterstock, Investor’s Consigliere)

The spread between earnings yields and Treasury yields put the Fed Model to the test.  (CXO Advisory Group also Trader’s Narrative)

A 200 day moving average strategy worked..until it stopped working.  (Barrons.com)

Prime brokers are having to take a closer look at their hedge fund clients.  (FT.com)

Neuberger Berman management knows how to buy low and sell high, at least when it comes to its own business.  (Deal Journal)

“The paradoxical truth may be that the less volatile business cycle (until recently) encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts.”  (Economist.com)

A prepackaged bankruptcy for General Motors (GM)?  (Clusterstock)

The unemployment rate is at a 15-year high.  (FT Alphaville)

Some historical perspective on today’s jobs number.  (Bespoke, EconLog)

How much worse can it get?  (Real Time Economics also Market Movers)

College football has been conquered, in nearly every respect, by the Deep South.”  (WSJ.com)

The best books of 2008.  (Economist.com)

Have we missed an interesting post in the investment blogosphere? If so, feel free to drop Abnormal Returns a line.

Embracing inflation (Aceitando inflação)

 Tem momentos que é muito difícil ser economista, pois atuamos numa área popularmente conhecida como  ”ciência sinistra”. Mas tem horas que é preciso ter muita coragem para apostar em algumas sugestões de política econômica.  Uma destas é “navegar” nos domínios da dinâmica inflacionária.

Os brasileiros são PhDs nesta matéria! Sofreram muito, desde o início dos anos 1980s do século passado, com um dos períodos mais conturbados de sua história econômica  ao adentrar num contexto hiperinflacionário.  Mas, graças ao nosso talento, e disposição política, vencemos esta batalha.

Em países de inflação controlada, como é o caso dos EUA, é razoavelmente mais tranquilo se falar em “aceitar inflação”, como é a proposta que o Prof. Kenneth Rogoff, da Universidade de Harvard, abaixo reproduzida do jornal inglês The Guardian.  Gostaria de saber se um de nossos macroeconomistas teria coragem de fazer uma proposição destas a partir do Brasil!

====================

Embracing inflation

It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass.

Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy. Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance.

Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed.

Moderate inflation in the short run – say, 6% for two years – would not clear the books. But it would significantly ameliorate the problems, making other steps less costly and more effective.

Steps must also be taken to recapitalise and re-regulate the financial system. Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone and many other countries today.

Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. Many banks have already acknowledged their open-ended losses in residential mortgages. As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity and hedge funds. As governments try to avoid outright nationalisation of banks, they will find themselves being forced to carry out second and third recapitalisations.

Even the extravagant bail-out of financial giant Citigroup, in which the US government has poured in $45bn of capital and backstopped losses on over $300bn in bad loans, may ultimately prove inadequate. When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.

Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders. But this route is going to be costly and painful.

That brings us back to the inflation option. In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don’t need to fall as much.

Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. Indeed, it seems like avoiding sustained deflation, or falling prices, is all they can manage.

Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

It will take every tool in the box to fix today’s once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.

Let the Babies Cry

So here we have it, a grim Friday in December, which truthfully feels more like February.   The jobs report came in and it wasn’t pretty - we lost 533,000 jobs in November.  As I sit here writing, the car companies are begging for money on Capitol Hill.  They say they need government money to continue operations.  Late Mortgage payments are surging as people are being thrown out of their jobs and their ARM mortgages come due with rate increases.  Credit card default rates are up.  And in a refreshing twist, OJ Simpson got 9 to 33 years in prison.

Are we at the bottom yet?  It’s hard to imagine that we are.  Leaving aside for the moment whether taxpayers should bailout out the automakers or financial services companies, where are we going to get this money?  We as a society, Americans, are operating on the false assumption that we can absorb these massive costs.  But the reality is, we no longer can afford it, and what we must do at this time is to let the markets and bankruptcy laws process these failed enterprises.  We simply do not have the money, as we’re now running a trillion dollar deficit  and getting lectured on monetary policy by China

It’s clear what is needed now by our government is to show some fiscal restraint.  Any bailouts should be directed towards individual citizens and in a limited manner, as the corporate feeding trough is running low and must not be refilled.  We need to start creating new manufacturing jobs to rebuild the middle class, but in reality we are sliding into a service economy.  Soon most people will be working in a Starbuck’s or JC Penney’s.  Now we are pouring billions into failed businesses, shouldn’t we be putting money into the successful ones, if at all?

The American car companies, for example, have failed the American public.  Remember Michael Moore’s film “Roger and Me“?  GM has been closing plants, laying off American workers, building plants overseas all the while blaming the American worker.  Now, they are draping themselves in the patriotic fervor of saving the pitiful jobs that remain stateside to get handouts from the government.  The truth, as Moore pointed out, is that they sold out the American worker a long time ago.  Toyota and other car companies  are building more plants and creating more jobs  here than  the so called “Big 3″.  Clearly, the American people have made their decision, and they like the cars of Toyota and other carmakers better than the Big 3.  Why should then our tax dollars be used to keep them afloat?  I say let the markets dictate.  I would guess the actual result of not bailing them out would have far less impact than the fear mongering going on now.  Since when is declaring bankruptcy impermissible in our country?

Then of course, there’s OJ Simpson.  Fourteen years ago we all watched while he beat a murder rap and he incredulously went free.  Now, well into the next decade, he’s being sentenced not for the murder, but another crime.  OJ never changed his ways in the intervening years but rather, as the current judge noticed,  behaved in a reckless and arrogant manner .  But life (call it justice or karma) has a way of catching up with the wicked.  Sooner or later, poor decisions and reckless behavior lead to disastrous consequences.  For OJ, that day of reckoning was today, but it was really 15 years in the making.  This is what we used to call common sense in this country. 

The Big 3 are no different.  They have failed to adapt to the marketplace while arrogantly working overtun state laws to reduce emissions and increase fuel efficiency - the very characteristics which their competitors embraced to much success.  So they snubbed their noses up at the state and federal governement.  They rode in on their private jets.  They exported jobs to the rest of the world.  They fought tighter efficiency standards.  They made disastrous decisions that caused even more workers to lose their jobs.  They built shoddy products that no one wanted to buy.  Now we the people, the taxpayers are supposed to wash their pain away with a huge bailout comprised of taxpayer money? 

Like the judge in the OJ trial in Nevada, it’s time for Congress to be tough and fair.  It’s time for the automakers to feel the pinch for their reckless ways, arrogant derailing of state laws and exporting of jobs.  We have no reason to fear that these companies will cease to exist.  Delta recently emerged from bankruptcy as have many other companies over the years.  Perhaps Ford, GM or Chrylser would operate more efficiently and serve the public better, if they were taken over by Toyota.  Chrysler failed in its merger with Daimler Benz and was purchased by a hedge fund.  Do we really need to bail these people out?  Aren’t these the people that got us into this mess?

It’s time pull out the pacifier from the greedy mouths of the automakers.  Let’s not be afraid to let these babies cry through the night.  We cannot bailout everyone and the line should be drawn here.  Even if we do bail these car companies out, they could come back and ask for more in three years.  Then what?

The Gold and Silver Manipulation

The same people who control the monopolies in this country are the same people who have manipulated the Gold and Silver market.  Oddly enough, the same people who control this monopoly are the same people who control the monopoly called the BCS.

I called your attention yesterday to the “Bailout” recipients we all know as AIG and Citibank.  Citibank is a major sponsor of the BCS, and a feature sponsor of the Rose Bowl, along with JP Morgan, Ford, General Motors, Bank of America, Merrill Lynch…all the open hands people who have been bailed out for shoddy market manipulations.

I thought you would enjoy an email I received from a good friend of mine who is also my Gold and Silver broker over at Goldworthfinancial.com

Private Equity and Globalism.

As the Chairman of Opera Research, I thought I’d make a few comments about the state of the private equity industry and my two cents on the global capital markets. 

For those of you who are familiar with Opera Research, you are already aware of our focus on global alternative investments, research, advisory consulting and advanced technology applications that support financial institutions.  For those of you not familiar with Opera Research or it’s six subsidiaries - Bel Canto Alpha Management, Tessitura Global Research, Ambitus Credit Research, Conductor Advisory Consulting, Verismo Advanced Technology and DKS - then you should know that we are a player in the global capital markets, active owners in both private and public companies and a manager of both capital and assets.                 

Here’s my latest conclusion regarding private equity (PE) firms and their role in the world financial markets.  

Private equity firms are here to stay.  Hedge funds are here to stay.  Money is here to stay. 

\dk

Doug Henwood, Anwar Shaikh, and financial crisis

My first inclination was to approach last night’s talks by Doug Henwood and Anwar Shaikh as a kind of debate between a Marxist bull and bear. But after Doug began to speak, I was reminded of how serious the situation was. In just about every downturn in the American economy since the early 1990s, Doug has quite rightly identified them as temporary dislocations. With recent events, however, there was little to distinguish him from Anwar Shaikh, a New School economist who has virtually made the falling rate of profit and similarly gloomy topics his own.

Referring to his studies of past Wall Street past, Doug likened the capitalist economy to the Timex wristwatch advertising slogan of the 1960s-”It takes a licking and keeps on ticking”-that was typically spoken after watching a Timex working just fine after being sat upon by an elephant. In the world of capitalist economics, the 1987 stock market crash was one such elephant. After a huge drop, the market picked itself up, dusted itself off, and began to scale new heights.

Doug focused on the role of the collapse of the housing bubble in today’s financial crisis, citing Robert Schiller’s findings that housing prices have been quite stable historically. Until 1995, they remained about the same as they had been in the 1890s using adjusted prices. But from that point on, they began to skyrocket in the range of 100-200 percent. You can look at a graph of Schiller’s housing prices here. Clearly they were not sustainable.

Exacerbating the bubble were exotic instruments crafted by hedge funds and other financial institutions that packaged together and hawked shaky home mortgage not worth the paper upon which the securities were written.

Although I am obviously not in Doug’s league when it comes to explaining the capitalist economy, he made a point that I tried to make myself in a blog article about UAW concessions and Trotsky’s transitional program. Doug was at a loss to identify new engines of economic growth in the U.S. After the smokestack industries died out in the 1970s, they were replaced by high technology which no longer has the dynamic it once had. The lack of profitable areas of investment reminded him of what someone once said about growth areas in Great Britain in the 1980s and 90s: real estate and finance. That obviously is not a very good sign.

Here, by the way, is what I wrote along the same lines:

Doug also alluded to the differences he had with some leftists who opposed bailouts for AIG et al. He felt that there was no alternative. If the credit markets could not function properly, the economy would grind to a halt and cause immense suffering to those who could least afford it. Clearly, he has been thinking through these issues since he now formulates the task facing the left in terms of transforming financial institutions into a kind of public utility. Speaking only for myself, I feel that this kind of approach must be distinguished from being understood as creating the financial equivalent of Con Edison, a local public utility that has a long record of greed and indifference to the public interest.

This was the first chance I have had to hear Anwar Shaikh in person. I know him mostly through his very fine website that I referenced when I was preparing some comments on crisis theory for the Introduction to Marxism reading group.

Anwar started out by saying that the term Great Depression does not apply solely to the one that began in 1929. In his view, there were other Great Depressions in American history, including the 1840s, the 1870s, the 1930s and even the 1970s. He defines such events as having either a relatively short and very painful character or extending over a longer period with a bit less misery. In his view the “lost decade” of Japan in the 1990s falls into the latter category. When the government is committed to full employment and a social safety net, as was the case in Japan, you don’t have people selling apples on the street but it takes much longer for capitalism to enter a new expansionary period. In the U.S., since there is much less concern for workers, economic collapses tend to go about the task of “creative destruction” much more intensively and throw caution to the wind. With the goal being survival of the fittest firms, the American approach seems to make more sense from the standpoint of capitalist rationality using the term rational quite liberally given the specter of 10 percent or more unemployment that we are facing.

Although Anwar initially referred to the 1970s as an example of a Great Depression, he subsequently clarified that the period in question began in 1965 and lasted until 1982. Using equalized prices, the stock market took a 65 percent hit-comparable to the 1930s. Japan’s depression was also devastating. At its peak, their stock market was at 39,000. For the longest time it failed to go over 9,000 and is hovering around 16,000 of late. If the American stock markets are destined to suffer the same fate, the prospects for capitalist recovery are guarded at best.

Anwar identified the 1965 to 1982 period as one in which corporate profits suffered dramatically lower growth rates. It was only after an all out assault on American labor symbolized (in my view) by the airline controller’s strike that profit rates began to increase somewhat. But even more critical for the expansion up until the most recent period has been the availability of low interest rates. For corporations, this has meant increased profits because the price of capital has decreased. For workers, who were still in the neoliberal straightjacket placed on them in the 1970s, the only way to participate in the faux boom was through home equity loans on inflated house prices (although Anwar did not mention it, it is likely that he would have included cheap commodities from China and elsewhere for sale at Walmart, et al.)

During the discussion period I asked Anwar what accounts for the falling rate of profit. I have read Henryk Grossman on the subject but found his treatment at a very high level of abstraction. Have there been any attempts to bridge the gap between such abstract treatments and the actual case studies of American corporations? He referred me to his critique of Robert Brenner that appeared in Historical Materialism, Number 5.  Here is an excerpt I got a real chuckle out of, wondering if the comparison to Adam Smith was a subtle dig prompted by Brenner’s famous 1977 polemic against Paul Sweezy in which the Monthly Review editor was also likened to Adam Smith:

Thanks for this, the links will be very useful. Do you know if these talks are available for reading or listening anywhere?

I’ve been a subscriber to LBO for many years and you are right that Doug is sounding much more pessimistic this time. I heard him give a little promo for his talk on his radio show Thursday on WBAI.

Comment by belgish — December 6, 2008 @ 3:25 am

If I learn anything about the talks being made available online, I will post a link.

Market up

The Consumer Electronics Association reduces its forecast for Q4. Most retailers report a dismal NovemberRetailers Report a Crisis in All Aisles.

The face of the today’s venture capitalist: S.E.C. Charges a Venture Capitalist With FraudVenture Capitalists Hunker DownCould VC be a Casualty of the Recession?

Bob Nardelli does not come across as a credible witness (not surprising his pervious performance at Home Depot - cashing in with more than $100M when the stock and company performance was fucking pathetic): Chrysler Under a Harsh Light at Hearing. The end is nigh: Chrysler Hires Bankruptcy Firm.

No shit, sherlock: Hedge Funds Need a Makeover. How about 3,000 fewer hedge funds, for starters?

Doug Kass seems reasonable, but I don’t quiet see this: Seabreeze’s Kass Calls the Bottom for Stocks. Consider it my Billy Ray Valentine pork-belly call.

Paging Rupert and Sam: Rocky Mountain News Is Put Up for Sale After Loss. World’s biggest loser: Bankrupt Bally In Sale Talks.

34 year highNonfarm payroll employment fell sharply (-533,000) in November and the unemployment rate rose from 6.5 to 6.7 percent. Stay strong people and get involved. Congress and free market won’t bail you out. You need to be active and hit the streets and make yourself heard to get you and this country back on our collective feet: 

Unemployment ticks up to 6.7%. 422,00 people left the labor force — had that not happened, we would have seen an even bigger unemployment rate.

Revisions downward are also big — September and October increased job losses by 199,000. We are now at nearly 2 million job losses for the year.

There’s a battle brewing between the NY Times and the Wall Street Journal. 35 years: Retail Sales Are Weakest in 35 Years. 39 years: Retail Sales Notch Biggest Drop in 39 Years.

What says the authoritative New York Post? With all this talk of 35 and 39 years, I swear if I see even one story about bell bottoms coming back, I will shoot my computer. 

Not much better elsewhere: German manufacturing orders die.

Why not: San Jose makes bid for $1 billion in economic stimulus dollars.

Sen. Shelby (R-AL) gets TKO’d by Compuware CEO. Wonder how much Shelby made from that deal. 

Kids, stop applying to MBA school. We need engineers, teachers, physicists, chemists … not more people dreaming about multi-million dollar signing bonuses from nationalized financial institutions.

Treasuries,

By James Grant

US Treasuries are the investment asset of the year. The less they yield, the more their fans adore them. Then, again, these fearful days, yield seems to have nothing to do with investment calculation. Purported safety is all.

“Super-safe Treasuries”, the papers call these emissions of a government that, this year, will take in $2,500bn but spend $3,500bn. “Toxic assets” is how the same papers characterise orphaned mortgage-backed securities—or, for that matter, secured bank loans, convertible bonds, junk bonds or almost any other kind of debt obligation not bearing the US imprimatur.

“There are no bad bonds, only bad prices,” the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.

The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.

Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And—just possibly—never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.

In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that “bonds should be bought on their ability to withstand depression”. They wrote that in 1934. So far is that rule from being honoured by today’s financiers that not a few bonds—and boxcars full of mortgages – could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?

We can’t know, but we can at least observe. What I observe is a monumental push to reflate. The Federal Reserve is creating more credit in less time than it has ever done before – in the past three months the sum of its earning assets, known in the trade as Reserve Bank credit, has grown at the astounding annual rate of 2,922 per cent. Are the bond bulls quite sure that these exertions will raise no inflationary sweat?

Evidently, they are—at least, forward swap rates betray no such concern. The market’s best guess as to what the 10-year Treasury will yield in 10 years’ time is 2.78 per cent, never mind the famous (and now, as it seems, prophetic) remark of Fed Chairman Ben Bernanke that the Fed could drop dollars out of a helicopter in a deflationary pinch.

The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. You’d suppose that professional investors – doughty seekers of value – would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.

In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they—and almost they alone—who owned convertibles. Now many of these folk must sell them.

Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world’s top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as “anything not guaranteed by Uncle Sam”.

“Risk-free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description – “return-free risk”.

Die Wirtschaftskrise mit Inflation bekämpfen

Das fordern immer mehr Fachleute, und es ist schon in vollem Gange: “Das größte Wirtschaftsexperiment aller Zeiten” nennt die Münchner Finanzwoche in ihrer neusten Ausgabe die gegenwärtigen  “gigantischen Re-Inflationierungsbemühungen” der Notenbanken. Die Finanzwoche ist einer der wenigen Wirtschafts- und Börsenbriefe, die seit Jahren vor den dramatischen Folgen einer überbordenden Verschuldung, vorwiegend infolge der langanhaltenden Politik des leichten Geldes (Greenspan), gewarnt haben.

Der bitische Guardian veröffentlichte am 2. Dezember 2008 einen Kommentar des Harvard-Ökonomen Kenneth Rogoff, in dem auch dieser sich für eine bewusst herbeigeführte Inflation ausspricht: “This once-in-a-lifetime global economic recession requires a unique response. Inflation is needed to combat the crisis.”

Hier die wichtigsten Ausschnitte:

“It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass. (…)

Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed.

Moderate inflation in the short run – say, 6% for two years – would not clear the books. But it would significantly ameliorate the problems, making other steps less costly and more effective.

True, once the inflation genie is let out of the bottle, it could take several years to put it back in. No one wants to relive the anti-inflation fights of the 1980s and 1990s. But right now, the global economy is teetering on the precipice of disaster. We already have a full-blown global recession. Unless governments get ahead of the problem, we risk a severe worldwide downturn unlike anything we have seen since the 1930s.

The necessary policy actions involve aggressive macroeconomic stimulus. Fiscal policy should ideally focus on tax cuts and infrastructure spending. Central banks are already cutting interest rates left and right. Policy interest rates around the world are likely to head toward zero; the United States and Japan are already there. The United Kingdom and the euro zone will eventually decide to go most of the way.

Steps must also be taken to recapitalise and re-regulate the financial system. Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone and many other countries today.

Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. Many banks have already acknowledged their open-ended losses in residential mortgages. As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity and hedge funds. As governments try to avoid outright nationalisation of banks, they will find themselves being forced to carry out second and third recapitalisations. (…)

When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.

Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders. But this route is going to be costly and painful.

That brings us back to the inflation option. In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don’t need to fall as much.

Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. Indeed, it seems like avoiding sustained deflation, or falling prices, is all they can manage.

Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

It will take every tool in the box to fix today’s once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.

Wall Street financiers party like there

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About 650 guests attended the event late Wednesday, a third more than organizers expected.

Yet with hedge funds in freefall, this was more funeral wake than celebration.

“The industry is down 20 percent. It’s by far the worst environment we’ve ever seen and we’ll see a lot of funds going out of business,” said Evan Rapoport, co-founder of HedgeCo Networks, which services hedge funds and organized the party. Full : http://tinyurl.com/5ty695

Chinese property hunters to raid US

Chinese bargain hunters are preparing to descend on American cities such as Los Angeles and San Francisco, where homeowners have suffered some of the steepest price falls in the US.

SouFun, the biggest real estate website in China, is organising a trip next month to look at properties in California and possibly Nevada. Liu Jian, the company’s chief operating officer, said about 300 people had expressed interest in the idea in the three days since it was advertised, though the company would take only a small group on the first trip. Full : http://tinyurl.com/5tynm7

The Reserve Bank of India on Saturday slashed its key short-term interest rates by 1 percentage point to boost growth and shore up investor confidence amid signs of economic slowdown and in the wake of deadly attacks in Mumbai.

The RBI reduced its key lending rate, or repo rate, by 100 basis points to 6.5 percent, its lowest rate in 2-½ years, with effect from Monday.

The reverse repo rate, the rate at which the RBI absorbs excess cash from the system, falls to 5.0 percent from 6.0 percent, its lowest in more than three years.

”Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating,” RBI Governor Duvvuri Subbarao told a news conference.

Subbarao said the central bank would closely monitor developments in global and domestic financial markets and would take swift and effective action as appropriate. Full : http://tinyurl.com/684umh

Nanjing Iron & Steel United Co., the Chinese steelmaker part-owned by billionaire Guo Guangchang, said steel prices in the world’s biggest user of the alloy have bottomed and output may recover on the state’s stimulus package.

Lower raw-material prices will allow producers to raise output, Chairman Yang Siming said today in an interview in Shanghai, where he’s attending an industry conference. “Next year, our construction-steel sales will benefit from the government’s plan to boost infrastructure investment.”

China last month announced a 4 trillion yuan ($584 billion) stimulus package to revive growth in the world’s fourth-largest economy. All Chinese steelmakers were unprofitable in October after demand from manufacturers plunged, according to the China Iron & Steel Association.Full : http://tinyurl.com/5pxe47

Prepackaged bankruptcy could trigger GM CDS

Around $4 billion in payments on credit default swaps protecting General Motors Corp may need to be made if the automaker enters into a prepackaged bankruptcy, though any payments are unlikely to cause widespread losses, Bank of America said on Friday.

U.S. lawmakers are considering several options to help General Motors, Ford Motor Co and Chrysler LLC, which have collectively asked for $34 billion in federal aid.

At a Senate Banking Committee hearing on Thursday, committee members discussed options including a prepackaged bankruptcy, assistance to automakers from the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP) or giving short-term funding help.

“For autos credit default swaps (CDS), perhaps what matters most is not what happens to autos, but how it happens,” Bank of America analyst Glen Taksler wrote in a report.

“An autos bailout without a bankruptcy filing could cause CDS to rally substantially, even if bondholders voluntarily exchange into new bonds with a lower par amount,” he said. Full : http://tinyurl.com/5z2q22

The Curious Story of the Most Expensive Art Purchase in History that Never Happened -

Steven Cohen has a passion for collecting art. He has shelled out countless millions on priceless pieces to add to his collection.

He purchased a Pollack “drip” painting for $52 million dollars. He purchased “The Physical Impossibility of Death in the Mind of Someone Living” for $8 million dollars. He forked out $25 million for a Warhol and a Picasso.

However his biggest art purchase, a purchase that would have been by far the most money ever spent on a piece of art, never came to be.

Steve Wynn is another very rich and well-known guy. His is a casino mogul (owner of the Wynn casino in Vegas, amongst others.) Like Cohen, he also appreciates art and is an avid collector.

Wynn’s most prized possession was Picasso’s “Le Reve.” The painting had previously hung inside of the Bellagio in Las Vegas, and was now hanging in Wynn’s office, waiting to be transported to Steven Cohen. The agreed upon price was $139 million dollars.

It should be noted that Steve Wynn suffers from Retinitis Pigmentosa, an eye disease that damages peripheral vision. Wynn had invited some people into his office to show them the painting before it was sold to Steven Cohen.

He was about to point out something on the painting when:

Crash!

His elbow went straight through the priceless piece of art, punching a hole right through the middle of the painting. There was a slight ripping sound as the priceless piece of art was forever altered and probably ruined.

“Oh shit,” Mr. Wynn was rumored to have said, “Oh man. Well, I’m glad I did it and not you.”

The most expensive painting purchase in history was called off. All because of a $130 million dollar elbow.

http://www.davemanuel.com/2007/08/31/the-curious-story-of-the-most-expensive-art-purchase-in-history-that-never-happened-le-reve/

Dating rich guys

Yahoo is sporting this bizarre segment front and centre today:

 

It’s a surprise to us that the new image of wealth appears to be a twenty year care salesman from the photo - but what the hell do we know.

Dating a loaded guy has long been a fantasy for some single women. In fact, your own mother may have even quipped that it’s just as easy to fall for a wealthy man as it is a poor one. And high-income, single men (those earning $104,000 and up, as defined by the Tax Foundation Group in Washington, DC) are on our radar even more thanks to such shows as “The Hills”, “Gossip Girl,” and “The Millionaire Matchmaker.”

Plus, statistically, affluent men are on the rise. According to the 2007 Wealth Report, there are more richies in the world than ever: 

The Black Swan

Just another WordPress.com weblog

Or, why this economic crisis is worse than you think. Author Nassim Taleb explains about the current mess we’re in. Check out the video below of his interview with Charlie Rose:

Some highlights:

Hedge fund party

Says here that hedge funders were drowning their sorrows at a party Wednesday. I was under the impression that as long as there is volatility a trader can make money - was I wrong or is something new happening here?

One party attendee shares my own attitude toward the Street’s disaster:

Khandelwal …  had no sympathy for those in the mayhem. “You come to a hedge fund to make excessive money, so you know the risks.”

Update: August 2006: “Hedge funds are back - were they ever gone?”

Destined to Fail

Of course this cannot work and it never has. Neo-classical economic theory is fatally flawed from its very first basic premises. They are:

This entire theory and all the economic policy that is born of it hinges on these three basic premises. The first one is completely ridiculous and obvious to anybody that isn’t a socially inept, ivory tower, academic, economic nerd. (Clearly these guys have never interacted with the female species in person before. Hahaha.) The assumption is that individuals choose the best action according to stable preference functions and constraints facing them. Simply put, if you prefer beer over liquor you’ll consistently drink beer at parties. No flip flopping allowed. No randomizations allowed. No ‘living in the moment’ allowed. This brings me to premise number two. Individuals maximize utility and firms maximize profits. Basically you drink your beer to the point of being pleasantly buzzed and then you stop. You never get smashed because a massive hangover clearly does not maximize utility. The third premise states that you will act independently and have all the relevant information to make the best choices. This means that you happily drink your beer and won’t get persuaded to do a round of shots with your friends. You clearly know that one round leads to two and you’ve got to work tomorrow. When your drunken friend gives you a stock tip you act independently and only after you’ve figured out everything humanly possible about the company and the industry. You aren’t at all persuaded by the fact that all your friends jumped on the stock and are making a killing. You stay completely level headed all the time.

The truly successful traders and investors of course know all this already. They thrive in a chaotic, irrational and uncertain environment.

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Ad Hoc: Latin for when there is no plan

“Fascism should rightly be called corporatism, as it is the merger of state and corporate power.” - Benito Mussolini

Who would have thought that era of Mussolini in Italy would end up feeling so palpable in the United States as 2008 drew to a close? Since George Washington was inaugurated though the times of William Jennings Bryant, whether the United States had a National Bank was like the abortion issue of today day, argued in every national election. The Fed seems to me to be that National Bank. Over the last 12 months news about the Fed and the Treasury Department has been front and center on page one. From the New York Times this week:

“It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

Eric Hovde wrote in the Washington Post: “Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there’s no need to look beyond Wall Street — and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government’s responsibility. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets.”

 

From the New York Times: “The Fed’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

 

“’The model is that there is no model,’ said V. Gerald Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. ‘It is an improvisation battle plan.’”

 

“Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds. Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group wind down its portfolio.”  

 

“‘The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy,’ said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. ‘If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable.’”

 

 

As noted on the blog of Fred Norris of the N Y Times: Bob Prince of Bridgewater Associates, on downward spirals:

 

“The pressure on corporate margins is now passing through to employment cuts. Employment cuts will reduce incomes which will raise defaults. Rising defaults will hinder bank capital adequacy, which will constrain credit growth, which will slow spending, which will hurt profit margins, then employment. This chain of events was virtually sealed when demand dropped off the table in October, although it was highly probable earlier this year when credit conditions deteriorated rapidly. We are now in the middle of it and there really isn’t much that anyone can do besides hang on.”

 

For the time being, Americans are in denial. Listening to GM ask for help came my own realization that all cars were luxuries. What happened when you were in a luxury position? When your employer was involved in products that were luxuries. We are going all going to learn that the only necessities are food, clothing and shelter. In Minnesota there was discussion by the retired Minnesota House of Representative leader, Dee Long, about a sales tax for the first time on clothes here.

 

It is difficult to see how the political parties are going to line up on issues of bailouts. The quote above from the U.S. Chamber of Commerce, traditionally a Republican Party supporter, seems to favor of bailouts. Nancy Pelosi and Barney Frank are supporters of bailouts, as Democrats. A sales tax on clothes does not seem to be a populist position.

 

The “merger of state and corporate power” sounds an awful lot like what is coming from Republican and Democrats. There has been a silent revolution that occurred in America, perhaps because of a government formed by lobbyists and what it takes in the way of capital to acquire a seat in Congress. One of those seats cost a lot more now than one on the Chicago Mercantil Exchange.

 

Bill White said, “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”

You bastard, you burst my bubble! No not really By William Bowles

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

“Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones … All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind.” — Karl Marx, The Communist Manifesto

However, in a world where there is now global over-production and increasingly impoverished working classes unable to afford the products of their own labours, is it possible that this distinguishing feature has reached a dead-end? And if so, what are the implications? Will general war, as it has in the past, be the only ‘solution’ to this, the greatest crisis of the over-accumulation of capital in history?

Or has the capitalist system finally ran out of road? And if so, are we in a position to replace it with something else?

But it didn’t take too long to burst an awful lot of bubbles as the outpouring of articles, well finally from the left anyway, attests to. But what can we learn from this historic, and no doubt history will bear me out on this, infamous deception.

“Hence, it is easy to understand the role and position of the 44th US president in history: he is designed exclusively for domestic use by an ordinary US citizen. And that’s his supreme political function. Americans believe Obama, therefore someone needs to know this for some reason.” — Aleksei YEGOROV: ‘Hillary Clinton’s Appointment Complete the Pre-Election Project Called ‘Obama’

Yes indeed, however the collapse of ‘finance capitalism’ has thrown a spanner in the works, in fact it threatens to undermine the entire ‘Project Obama’ given that under the cover of president elect Obama, it is already clear that an identical trajectory is to be pursued by the incoming presidential team, replete with the same suspects who were the architects of the current crisis in the first place.

And herein lies the danger, the real danger of the US ruling class pursuing an even more dangerous and adventurist line if it is to try and maintain its position of ‘world policeman’ and the world’s leading economy.

But it’s worth noting here that Obama’s ‘New, New Deal’ is taking place in a very different world than the one that gave rise to Roosevelt’s rescue of capitalism in the 1930s (that in any case took around six years to have any effect on the economy and in reality it was the outbreak of war that saved US capitalism’s bacon).

The causes of the current crash may be similar to those that precipitated the Crash of ‘29 but the economic context is entirely different. The US economy is no longer the world’s factory having in the first place, exported most of its domestic production to the cheap labour markets of the world and secondly, what was the main engine of domestic production, the auto industry is outdated and unable to compete in the global market with the ‘upstarts’ (and in any case, the global market is already saturated with unsaleable products, which in turn is a major cause of the current crisis, namely over-production). The US auto industry’s products are inferior, gas-guzzling dinosaurs that even the domestic market is rejecting in favour of superior, efficient and infinitely more technologically advanced competitors from Asia and even Europe.

Is it realistic therefore to envisage a re-capitalization/recreation of the US manufacturing economy? Where will the capital come from, especially given the (former) centrality of the financial sector and the vast sums of public money ($8.5 trillion-plus) being used to bailout the financial sector, money that could have been better used to finance the ‘New, New Deal’? With the banks effectively nationalized and with the state as guarantor, they could have continued to function. The only losers would be the investors to which I say, ‘well screw you! You took your chances and lost, isn’t that what the ‘market’ is all about?’

Team Obama are talking of investing billions in infrastructure renewal, roads, bridges, schools and so forth and whilst this might, in the short term, ameliorate a small percentage of the growing unemployment, currently running at (officially) nearly 7% of the workforce and likely to triple over the next twelve months, it doesn’t address the fundamental contradictions of an economy which on the one hand is pouring trillions into the military complex, all of it socially useless, and on the other is reliant on the tribute extracted from the rest of the world’s economies’ reliance on the dollar as the medium of exchange, the so-called fiat dollar.

And given precipitous fall in the price of oil (now running at around $40 a barrel), the tribute is likely slow to a trickle as the world’s economy grinds to a halt.

It’s important to understand here that the $8.5 trillion ‘bailout’ of the major US financial institutions is in actuality the destruction of over-valued assets. Over-valued because this wealth was ‘created’ through financial speculation in invented ‘assets’, derivatives, futures and hedge funds. When these were finally revealed as being worthless, the wheels came off and the entire scam collapsed.

“So Goldman Sachs votes for socialist, state-directed lending [through the creation of a state bank]. The symbolic power of this thought is mind-numbing, for those of us who immersed ourselves in the liberalised, winner-takes-all financial markets of the past 25 years.” — ‘How much will taxpayers finance economy?’ Robert Peston, BBC News

Poor old Peston, his illusions shattered as his much-vaunted ‘free market’ bites the dust. The BBC by the way, through its so-called expert commentators, still insists on separating the collapse of the financial services sector from the recession (see ‘A capital problem’ by Paul Mason, BBC Newsnight 5 November, 2008).

No real wealth was created, it existed only on spreadsheets. All well and good for those corporations that made the profits and then walked away from the disaster they had created, but they left behind a real debt in the sense that the self-same financial institutions ultimately rely on the real economy to survive after the ‘assets’ they invested our money in vaporized.

And because the financial sector is driven by the need to make a profit, under the current circumstances, they see no profit to be made from lending it, either to each other or to the public and thus the ‘market’ freezes up solid.

Making money cheaper by lowering the interest rate doesn’t help either as the principal source of profit for the banks is the interest charged on loans (hence the ongoing ‘struggle’ here in the UK between the government and the banks over passing on the lower interest rate to their customers).

It’s difficult to see exactly what the incoming Obama administration can actually do about this crisis except attempt to ride it out and let the people pay the cost, which in any case, they are already doing. However, given the enormous ‘goodwill’ he has accumulated through his promises of change, unless he can actually deliver, ‘goodwill’ can just as easily vaporize as quickly as it was engineered in the first place. Under such circumstances it is more than likely the ruling elite will use Obama as a ‘sacrificial lamb’ who has been led to the (economic) slaughter.

Not that this will solve the crisis, removing Obama may serve a public relations role but would not bring a resolution of the crisis. Increasingly, it looks like history repeating itself as tragedy as the state, the instrument of last resort for the likes of Robert Peston et al, is forced to step in.

But this is a far cry from socialism, it is as it was in the past, the state’s, eg yours and my money, rescuing capitalism from itself but this time without getting any of the benefits. No universal health care, no public housing and so forth.

Note

see

Climate Change: World War III by another name? by William Bowles

The Obama Dilemma: A Mission Impossible? by William Bowles

“Oops, We Meant $7 TRILLION!” by Ellen Brown

The Economy Sucks and or Collapse 2

Obama-Barack

In Hard Times, Is Best Buy’s Best Good Enough?

AMY ADONIZ, general manager at the Best Buy flagship store, knows what her staff wants for Christmas: a case of Red Bull.

Two weeks before Black Friday, Ms. Adoniz gave in to employees’ requests and had a Red Bull vending machine installed at the store, at 62nd Street and Broadway in Manhattan. Many in the sales staff of 140 are drama students, opera singers and actors who may run themselves ragged selling electronics by day and performing at night. To keep them from getting hungry and cranky over the long Thanksgiving weekend, Ms. Adoniz let them wear slippers and Uggs boots to work, and had food delivered three times a day.

Employees aren’t the only ones being tended to this shopping season. To lure customers, Ms. Adoniz waits for — and on — their dogs. “We have a doggie water bowl with filtered water, and treats for them as well,” she says.

With unemployment rising sharply, and consumer spending plummeting, Best Buy managers are bending over backward to attract shoppers and are encouraged to put their personal stamp on the stores. For Ms. Adoniz, that means stoking employees with caffeine and carbohydrates and catering to customers’ pets.

It’s an extraordinarily tough time for retailers. “November is shaping up to be the worst month in retail since I’ve been here 30 years,” says Edward Schmults, C.E.O. of FAO Schwarz, the toy chain. “Now I know how that little kid felt who misbehaved all year and then wondered if Santa was going to show up in December.”

Next year could be even worse. Fitch Ratings forecasts that the United States economy will contract 1.2 percent in 2009, with consumer spending falling 1.6 percent. “The impact on retailers is almost tragic as the economy adjusts,” Mr. Schmults says.

And Best Buy, to limit the damage, is not just cutting prices. It is trimming inventory and advertising, promoting higher-margin, private-label lines and pushing exclusive products, like the Blue Label series of notebook computers made for Best Buy by Hewlett-Packard and Toshiba. It’s also adding new services and products that specifically aim at women.

If the stock market and consumer spending hadn’t plunged so precipitously, Best Buy, the nation’s biggest electronics retailer, with $44 billion in annual revenue, might not have had to bother stocking up on delectables for dogs. The chain’s chief rival, Circuit City, recently filed for bankruptcy protection and is closing 155 stores. Tweeter, a high-end rival, shut down this week, and Sharper Image’s stores, which sold more exotic electronics, are liquidating. CompUSA closed most of its stores last year.

But no retailer is immune from the drop in consumer confidence and spending, especially one that specializes in gadgets, not groceries. Sales at Best Buy stores open more than a year were down 7.8 percent in October, compared with the same month last year. The company will not release November figures until Dec. 16, but it’s already clear that November was a brutal month for electronics retailers. According to a report MasterCard Advisors released last week, sales of electronics and appliances nationwide sank 25.2 percent in November, versus the same month last year.

Best Buy’s stock price, which reached almost $54 in November 2007, closed Friday at $23.05, and its market capitalization has shrunk to $9.5 billion. Because of slumping sales, Fitch Ratings in mid-November downgraded the outlook on Best Buy’s $2.7 billion in debt to negative, from stable.

Nevertheless, Karen Ghaffari, a managing director at Fitch, says she thinks Best Buy will weather the storm. Its longstanding reputation for high-quality service helped it grab market share this year when Circuit City laid off many of its highest-paid — and most experienced — sales workers, and shuttered stores.

“Best Buy is a very strong operator,” Ms. Ghaffari says, “and long-term they should benefit from the difficulties being experienced by the weaker competitors.”

That may well be so. But consumers’ reluctance to spend is making Best Buy’s investors skittish. Though analysts expect revenue to grow slightly next year as the company expands overseas, profit margins will come under pressure from price-cutting, especially on televisions. “Given the circumstances and uncertainty in what’s coming here in this market, we decline to comment,” said a press officer at Gardner Lewis Asset Management, which owned almost four million shares of Best Buy in June.

In an interview, Best Buy’s president, Brian Dunn, discussed the challenges the company faced. “The depth and speed with which the economy stumbled was extraordinary,” said Mr. Dunn, who started as a salesman at the chain 23 years ago. “I’ve never seen anything like it. Our business was growing really nicely and then, all of a sudden, boom!”

BEST BUY’S winter holiday shopping season is crucial, as it is for every retailer. A good Christmas can make the difference between a mediocre year and a fantastic one. Ten percent of a retailer’s sales can come on Black Friday alone, and typically, almost 60 percent of Best Buy’s profit comes from fourth-quarter sales.

Now that it’s clear that fourth-quarter sales and profits will be down substantially from last year, the chain is scrambling to cut costs. There will be fewer national TV commercials and more targeted e-mail crowing about low prices.

Best Buy stores are stocked with thousands of boxes of the hit video games Rock Band 2, Guitar Hero and Wii Fit, along with myriad camcorders, digital cameras, flat-screen TVs and GPS devices. Nevertheless, to make sure that the company isn’t stuck with mountains of unsold merchandise after Christmas, Best Buy is cutting inventory levels to match reduced demand, Mr. Dunn says. But the company will not say by how much.

“Suppliers are being flexible,” Mr. Dunn says. “Apple, HP, Samsung and Sony have answered the bell nicely and worked with us on inventory levels.”

To accommodate shoppers, Best Buy is offering more lenient financing. Customers who charge at least $499 worth of merchandise on a store credit card don’t have to pay interest for 18 months. “We don’t push it,” Mr. Dunn says, “but customers are grabbing the 18-month financing options.” Last year, shoppers had to spend at least $499 on one item to receive such financing. “Now you can put whatever you want into your cart to get it up to $499,” he says.

That strategy worked for Nadia Lora and her husband, Carlos, both 21. The couple work at Nunzio’s Grill, a restaurant in Vauxhall, N.J., where she is the manager and he is a cook. They were shopping at a Best Buy near the restaurant on the Friday after Thanksgiving, and they bought a JVC camcorder and a Garmin Nuvi GPS system, purposely spending enough to hit the $499 financing threshold. Ms. Lora said the Best Buy incentives allowed her to justify her purchases: “I like that they don’t charge interest for stuff for months.”

IN this stressed-out holiday season, Best Buy is trying to be hip and friendly. The chain is the only retailer to have exclusive rights to sell the new Guns N’ Roses album, “Chinese Democracy,” in its stores and has hired Magic Johnson to open stores in urban areas. Free limousine rides and mini-camcorders were offered to 25 customers in New York, Los Angeles, Boston, Miami and other major markets who wrote compelling, 250-word essays about why shopping at Best Buy on the day after Thanksgiving was a meaningful ritual for their families.

Claudia Di Folco, 35, an actress and former television news reporter, was shopping at Best Buy two days before Thanksgiving. She bought a $299 Slingbox, which transfers whatever is playing on your home television onto a laptop, cellphone or PC, so her husband could watch the New York Jets game during a trip to Rome. Ms. Di Folco lives a few blocks from the Best Buy store at 86th Street and Lexington Avenue on the Upper East Side and shops there often. “They always have special sales, or at least the big yellow signs make you think they do,” she says.

On the day after Thanksgiving back at 62nd and Broadway, hundreds of electronics fans lined up. “We had a fabulous day,” says Ms. Adoniz, 41, that store’s manager, though she says she was less confident earlier in the week. “With everything happening with the economy, we didn’t know if that was going to scare customers away.”

But when she arrived at 1:30 a.m. on Friday, 500 people were waiting. Customers had been outside since Thanksgiving morning: they sat huddled in sleeping bags; the line went around the block to Central Park West and back. Ms. Adoniz gave out coffee and sales fliers.

Samsung employees played trivia contests with shoppers, doling out T-shirts, tote bags and other prizes. Ms. Adoniz’s fliers detailed the store’s so-called doorbuster sales — 50-inch plasma televisions for $799, laptops starting at $329, GPS devices for $99, digital cameras for $50. Prices have inched up since then, but, Ms. Adoniz says, “there is still a lot of holiday traffic and a lot more online ordering.” Laptops are particularly popular.

Among televisions, the best seller at her store was the 42-inch Dynex, the chain’s private label; it sold for $499. Margins on private-label items are much higher than margins on name-brand electronics, so Best Buy is pushing Dynex as well as its Insignia line of digital cameras, televisions and GPS devices.

“The TVs were flying out the door; they were huge,” Ms. Adoniz says.

The company hasn’t released official figures for Black Friday, but analysts say sales were better than expected. In an effort to keep customers buying, Best Buy aggressively promoted low prices on its Web site every day last week.

In a down economy, the biggest challenge for Best Buy may be from discounters that are chasing its core base of gadget-happy consumers.

Wal-Mart, Costco and Target have expanded their assortments,” says Steven L. Martin, who manages Slater Capital Management, a retail hedge fund. “Five years ago if you said Wal-Mart would sell plasma TVs, no one would have believed you.”

Best Buy also faces stiff competition from retailers like Amazon that do business exclusively online. The company is fighting back by allowing shoppers to make purchases online and then pick them up at Best Buy stores, which eliminates shipping costs. “Out of this storm comes new operating models,” Mr. Dunn says. “The ecosystem is going to change. We see storefronts closing.”

For now, though, Best Buy has a potent weapon in its battle with the discounters and online sellers: its staff. Members of Best Buy’s sales staff, a k a “Blue Shirts,” go through a 20-hour training program, then spend two weeks shadowing an experienced sales staff member around the floor. Historically, the Best Buy training program has been so strong, some people in the industry say, that competitors often waited for Best Buy to let staff go after Christmas, and then snap them up.

Ms. Di Folco, the actress, says: “Most of the time, I find really informed people who can actually answer my questions. It’s like they seem to be electronic junkies versus kids wasting time at a part-time job they don’t enjoy.”

Its sales force may give Best Buy a competitive advantage even in a holiday season when many customers are interested in rock-bottom prices.

“The importance of the salesperson is directly related to the price of the product being sold,” says Chris Denove, vice president at J. D. Power & Associates, the consumer research firm. “If you’re talking about toothpaste or pencils, the salesperson is immaterial, but when you’re talking about high-end electronics such as flat screen TVs, the salesperson can be critical.”

Target, meanwhile, is going after the technical support business — a big profit center for Best Buy — and has hired Zip Express, a company started by Chris Mauzy, a former Best Buy employee, to challenge the “Geek Squad” for which Best Buy is known. For a fee, members of the Geek Squad will install your purchase and provide technical support, even on products not bought at Best Buy. It’s a huge profit center for the company.

Mr. Mauzy, who left Best Buy to start Zip Express in October 2007, is introducing an electronics-installation service for 200 Target stores.

To further protect itself against inroads from the discounters, Best Buy is trying to make shopping more appealing to women. Its Omega Wolves program, a focus group made up of 3,500 working women in the United States and London, has a page on Facebook; Omegas socialize and give the chain feedback. Thanks to the Omegas, Ms. Adoniz’s store has what she calls “nicer fixtures,” like wood-trimmed displays and lighter backdrops.

Ms. Adoniz’s store also aims to stock accessories with women in mind: fake leopard skin and red crocodile cases for BlackBerrys and other gadgets from Liz Claiborne, Betsey Johnson, Dooney & Bourke, Tumi and Steve Madden. Crystal Stroupe, a personal shopper and an aspiring opera singer, spends much of her time at Best Buy keeping the accessories table neat and pretty.

Ms. Adoniz says the accessories table brings a lot of astonished looks, “but we know the female shopper was an underserved market.” Best Buy says women are now spending more money at its stores than men, which has led Ms. Adoniz and managers of other stores to expand accessories aimed at women. Many Best Buy stores now carry items like blow-dryers, curling irons and hair straighteners, as well as pink cameras and phones. “We have a whole personal care section and it does very well,” Ms. Adoniz says.

The effort to appeal to women may ultimately help Best Buy distinguish itself from traditional electronics retailers, which tend to market electronics to men.

“You can’t assume that every expensive TV is going to be bought by a male,” says Matthew J. Fassler, a retail analyst at Goldman Sachs. “Women need to be served as intently as men.”

THAT said, Best Buy’s business is hard-core electronics, not blow-dryers; the company is betting that if a family buys just one gift this December, it will involve electronic entertainment. “When the customer gets into difficulty, they tend to cocoon,” Mr. Dunn says. “After 9/11, they invested in their homes and loved ones and experiences.”

Mr. Dunn says he usually wins his office pool for predicting December results; this year, he’s betting that cocooning drives sales, but he acknowledges that “it’s too soon to tell” how the holiday season will play out.

“As the economy becomes tougher, people think more carefully about whether they really need to buy an item,” he says. “The threshold for a considered purchase has moved down. Last year, it might have been $500. This year, it might be $300, $200 or even $100 for some families.”

Enough for an iPod case and a Slingbox cable, but not much more.

The Yen For Stocks

The time to add to a stock position  would have been just as the FXY approached it’s high. I would think that hedge fund managers would back off buying YEN at that price reversing the trend. That trend, a small rally in stocks.

THE BUBBLE BOYS ARE BACK!

Patrice Ayme

Money (that

Since the Bank of England reduced its base lending rate to an historically low 2% on Thursday UK media commentary has been dominated by a ‘will they, won’t they’ analysis of which banks are planning to pass on the full value of the 1% cut to their mortgage customers and which are not.  At the time of writing, those passing on the full rate reduction are in the minority but it is clear that this issue will be played out in the court of public opinion as much as behind the closed boardroom doors of our leading mortgage providers.  After all, public (and Government) pressure has already seen two of our leading lenders - Nationwide and Halifax - remove the ‘collars’ that were designed to prevent their bare-rate tracker products from dropping below a certain minimum level. 

With few outside friends it is a brave bank CEO that is prepared to stand up to the inevitable criticism that will follow any foot dragging on this issue, however solid arguments about protecting savings rates or the need to repair a broken balance sheet may be.  Regaining control of the economics of their business will be an uphill journey.

I have written in the past about how the banks - particularly those that have been part of recent Government bail-out measures - need to accept the new reality of their circumstances, and recently consolidated these thoughts into a contribution to a wider series of essays published by Edelman to coincide with the ‘Outlook 2009′ event referred to in my previous post.  The full text of my contribution is below, and the complete Edelman document, titled ‘Public Engagement in the Conversation Age’, can be accessed here.

———–

No industry has felt the cold blast of the credit crunch more than the Financial Services sector.  Whilst the turmoil and upheaval in the global Banking system has dominated recent newspaper headlines,the industry in general is experiencing a collective collapse in Trust and confidence which has also affected Insurance companies, Asset Managers and Hedge Funds in equal measure. Having gradually reduced to no more than a ‘hygiene factor’, suddenly Trust is once again a commodity to be cherished, protected and preserved.

To some extent the ’sudden’ collapse of Trust in the Banking system - and indeed in our established Financial Institutions generally - has been long coming. For the last decade, Edelman’s Trust Barometer has tracked the growth in credibility of peer-to-peer Communications at the expense of the top-down, CEO-led programme and, what we see today, is merely a practical application of that trend. What is beyond dispute is that Trust in the Banking industry has all but melted away - not just amongst consumers but most damagingly (and most tellingly) within the market itself.

This collapse in Trust has coincided with - indeed perhaps even been caused and/or exacerbated by - the new Digital Democracy we reference elsewhere. With the internet placing power in the hands of the Citizen as never before, this is the first recession of the true Digital Age. The challenge the industry now faces is to overcome the current negative perceptions and re-build Trust.

The first lesson that needs to be heeded is that life, as we have always known it for the banks, has changed forever. So far as the media is concerned, every pound the banks spend comes out of ‘our’ pockets - in the current climate the normal rules of Business no longer apply and the banks’ usual licence to operate has, effectively, been suspended.

Events which were fully justifiable in the past (and can arguably still be justified now) have to be considered in the light of a new reality - that ‘our’ money is paying for them.  HBoS saw this principle in action in early November when it was fiercely criticised in the media for hosting two staff events. The reality is that the banks do still need to motivate and reward their staff. But the perception of massed ranks of bankers indulging in lavish celebrations as we head into a recession, and as the taxpayer digs deep to bail them out, is one that the banks have to take great care not to foster.

What of the rest of the Financial Services industry? Sitting next to the banks on the naughty step, and finding itself cast in the unwelcome role of chief scapegoat for the collapse of the Financial world as we previously knew it, is the Hedge Fund industry. Now most informed observers recognise that Hedge Funds play an important role in the Financial Markets.  Furthermore, the leading participants in the industry are some of the UK’s most active philanthropists, contributing substantial sums to charities in both the UK and globally.

But with a few notable exceptions, the industry has on the whole been poor at engaging with a wider group of external stakeholders. This has allowed prejudice to become accepted fact, with the result that the industry now finds itself short of friends when they are most needed. There is a clear risk of an excessive regulatory response to recent issues, borne of the ’something must be done’ school of policymaking, that could curtail the activities of one of our most innovative financial industries.  Once again, negative perceptions lead reality.

Set alongside the Banking sector and the Hedge Fund industry, the insurers have - with the very notable exception of AIG in the US - largely managed to avoid the most visible impact, and consequently the high profile fallout, of the Credit Crunch. The impact of the collapse in equities will undoubtedly feed through into the pensions sector but, again, to date this industry has managed to remain largely - though not exclusively - on the periphery of the debate.

The Financial Services industry finds itself at a key point in its continuing development. There is little doubt that the next twelve months are going to present major challenges to Communicators in the sector but this is not the time to adopt a bunker mentality. It is clear that stakeholders will be asking searching questions of our banks, Insurers and those that manage the wealth of the nation.

The organisations that emerge strongest from the economic downturn will be those that are most able to reach out to, and empathise with, the man or woman in the street. They will recognise the role of the internet and social media and adapt their communications strategies to address these channels effectively. And they will embrace the changing nature of Communications and take advantage of the collapse in traditional hierarchies.

The restoration of Trust between Financial Institutions and their customers is not something that can be achieved overnight. Management must be prepared to invest not only financially but in particular in devoting time to repairing relationships. It is well known that ‘nature abhors a vacuum’ and, in the absence of any engagement from the industry or individual firms, our new breed of Citizen Consumers will draw their own conclusions.

Title from the Beatles

Banking Forex pivot points

For years, banks Not unlike finance a stock broker, a forex broker what money market acct is a banking institution who may buy up considerable amounts of a certain currency. To trade on the forex market, the largest financial market on the planet, ipo money finance one must use a forex broker. Another hidden benefit of trading with a Forex forex trading Mini Account is for wachovia banking center a trader to become familiar with the procedures and the environment of the Forex trading process and how currencies are affected by different things that forex trading system are happening on a global scale. As traders advance and become finance more confident they can increase they?re lot size to 20,000 units. It is also ideal for foreign currency trading beginners who are not yet confident in their abilities and want to test the market with smaller trades. For those who are free forex risk-averse. It forex market has become an essential part for investor’s portfolio as you can gain thousands forex in minutes currency exce forex software by trading currencies.

Forex trading is well known as a lucrative way to make money online.

Hedge funds and other institutions, including those based outside of the US, took advantage of record-low interest rates While these capital one banking are certainly contributing factors, forex signals perhaps they should also look at the repatriation of Dollars that were initially sent abroad over the ashlock finance services last decade in search of loftier returns. In explaining the recent Dollar rally, analysts have tended to focus on the currency byrle of risk aversion that has descended upon global capital free course forex trading markets, coupled with the spread of the credit crisis from the US to the rest of the world. In this harv, however, it is the Dollar that is being driven by a shift away from the popular strategy of borrowing in one currency and investing the proceeds in assets dominated in another. average forex points reports End forex broker of the Dollar Nancee Trade One can usually assume that any talk of the georgena ecn forex broker banking reviews trade is in reference to the Japanese Yen.

ZIRPS CAUSED INTERNATIONAL ECONOMIC CAR CRASH

Periodically, I comment at Seeking Alpha.  Many, many times, the comments on an article are superior to the article itself.  The above story is typical of such things: the writer thinks he is quite clever to ‘figure something out.’  Only he is talking about the most obvious things, stuff we can see as plain as day since it is now utterly obvious.

The Economic Unwind: Speed Kills - Seeking Alpha

Analyzing things to see why they are doing what they are doing is much, much trickier!  President Bush, for example, thinks he is being smart when he describes the obvious.  But talking about causes is utterly beyond his ken.  

 

The debate about what is causing this present, obvious car crash, is raging across the internet as well as in the boardrooms and central banks.  Why, even economics professors are trying to figure this out!  Imagine that.

 

This debate is of utmost importance.  The people at the top, for example, would dearly love to believe that this mess is a glitch, not caused by fundamental problems they created, themselves.  They hope that after a little bit of assistance in the form of trillions of dollars of risk are dumped on taxpayers across the planet, this problem will be fixed.

 

This is because they believe that we are in a liquidity crisis and need more lending.  There are many, many people who see the obvious: we had TOO MUCH credit and we are now in a ‘paying down the debt’ mode.  This is quite correct.  But the real battle now is, who created all this debt? How did they pass it on?  Who is responsible for this surge in debts?  And most important of all, how can we prevent this from happening yet again?

 

I have spent years trying to locate the ultimate wellsprings of this epic debt creation process.  Long-term readers know that I finally, in 2006, felt I had enough hard proof to openly accuse the Bank of Japan for flooding the planet with excess dollars created via the Japanese carry trade lending spree.

 

Further proof of this was the recent G7 and G20 meetings: they demanded that the liquidity well spring restart and even openly said, they wanted the yen to get weaker so lending could flourish again!  In a nutshell, the world leaders said they wanted the status quo to return.  And in addition, they made it totally clear, they also want the international trade status quo to continue or even worsen: the US must suck up all major debts and all major trade losses!

 

Back to Seeking Alpha: Here is my comment about the story as well as other comments following it.  But I do suggest clicking on the story to see the previous comments.  Some of them are quite good and I heartily endorse them, especially Bruce Pile’s summary of the debt crisis.

 

The Economic Unwind: Speed Kills - Seeking Alpha

The first time in history, a major, the #2 economic power on earth decided to create a 0% interest banking system. They clung to this despite inflation in Japan rising to nearly 3%. This is the ultimate source of much of the GLOBAL lending we saw this last decade.

The US used this fake, cheap lending to overspend. We allowed our government to go far over budget, doubling our national debt. We also personally and corporately went deep into debt because the payments of interest were ridiculously low.

Now, the entire manufacturing parts of the planet are going ZIRP. This is total insanity. People talk about how we are ’saving money’ now. But this is obviously FALSE.

We are PAYING OFF DEBTS. Not saving any money. Most discretionary incomes as well as manufacturing profits and asset value rises are gone. There are none of these happening. We see dropping incomes, dropping profits and dropping assets all over the place. 

And the only debts that are now rising are GOVERNMENT. So the great unwinding has barely begun. All negative forces are now at work and will continue. Within my own family, people with good, high paying, productive jobs are now being laid off due to frantic businesses ditching everything overboard, hoping to stay afloat and pay off crushing debts that are not supported by profits anymore.

And as everyone ditches their workers, incomes fall, the ability to even pay mortgages and credit debts collapse and everything gets only worse and worse causing businesses to drop more workers. This is the vicious debt-reduction/depression cycle we saw in 1873, 1892, 1930, 1972 and today.

skopros

Americans are so addicted to spending, only an economic tragedy such as these DC and Wall Street fraudmeisters have visited upon the gutted taxpayers. As many keep saying, this isn’t the beginning of the end but the beginning of the beginning. 

L Moore: great idea! Thanks to both.

Not to be a nit-picker, but here is a nit: you left out 1907. 

John Lounsbury

And of course, it caused the creation of the Federal Reserve. Which was supposed to stop bank crashes. What a great track record that organization has! Every 20 years, off the economic cliff! And the complete devaluation of our currency, the end of our gold based reserves, everything.

 

 

 

 

 

 

 

 

 

 

 

 

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

CLICK HERE TO DONATE TO THIS WEBSITE

ZIRPS CAUSED INTERNATIONAL ECONOMIC CAR CRASH

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The Economic Unwind: Speed Kills - Seeking Alpha

Analyzing things to see why they are doing what they are doing is much, much trickier!  President Bush, for example, thinks he is being smart when he describes the obvious.  But talking about causes is utterly beyond his ken.  

 

The debate about what is causing this present, obvious car crash, is raging across the internet as well as in the boardrooms and central banks.  Why, even economics professors are trying to figure this out!  Imagine that.

 

This debate is of utmost importance.  The people at the top, for example, would dearly love to believe that this mess is a glitch, not caused by fundamental problems they created, themselves.  They hope that after a little bit of assistance in the form of trillions of dollars of risk are dumped on taxpayers across the planet, this problem will be fixed.

 

This is because they believe that we are in a liquidity crisis and need more lending.  There are many, many people who see the obvious: we had TOO MUCH credit and we are now in a ‘paying down the debt’ mode.  This is quite correct.  But the real battle now is, who created all this debt? How did they pass it on?  Who is responsible for this surge in debts?  And most important of all, how can we prevent this from happening yet again?

 

I have spent years trying to locate the ultimate wellsprings of this epic debt creation process.  Long-term readers know that I finally, in 2006, felt I had enough hard proof to openly accuse the Bank of Japan for flooding the planet with excess dollars created via the Japanese carry trade lending spree.

 

Further proof of this was the recent G7 and G20 meetings: they demanded that the liquidity well spring restart and even openly said, they wanted the yen to get weaker so lending could flourish again!  In a nutshell, the world leaders said they wanted the status quo to return.  And in addition, they made it totally clear, they also want the international trade status quo to continue or even worsen: the US must suck up all major debts and all major trade losses!

 

Back to Seeking Alpha: Here is my comment about the story as well as other comments following it.  But I do suggest clicking on the story to see the previous comments.  Some of them are quite good and I heartily endorse them, especially Bruce Pile’s summary of the debt crisis.

 

The Economic Unwind: Speed Kills - Seeking Alpha

The first time in history, a major, the #2 economic power on earth decided to create a 0% interest banking system. They clung to this despite inflation in Japan rising to nearly 3%. This is the ultimate source of much of the GLOBAL lending we saw this last decade.

The US used this fake, cheap lending to overspend. We allowed our government to go far over budget, doubling our national debt. We also personally and corporately went deep into debt because the payments of interest were ridiculously low.

Now, the entire manufacturing parts of the planet are going ZIRP. This is total insanity. People talk about how we are ’saving money’ now. But this is obviously FALSE.

We are PAYING OFF DEBTS. Not saving any money. Most discretionary incomes as well as manufacturing profits and asset value rises are gone. There are none of these happening. We see dropping incomes, dropping profits and dropping assets all over the place. 

And the only debts that are now rising are GOVERNMENT. So the great unwinding has barely begun. All negative forces are now at work and will continue. Within my own family, people with good, high paying, productive jobs are now being laid off due to frantic businesses ditching everything overboard, hoping to stay afloat and pay off crushing debts that are not supported by profits anymore.

And as everyone ditches their workers, incomes fall, the ability to even pay mortgages and credit debts collapse and everything gets only worse and worse causing businesses to drop more workers. This is the vicious debt-reduction/depression cycle we saw in 1873, 1892, 1930, 1972 and today.

skopros

Americans are so addicted to spending, only an economic tragedy such as these DC and Wall Street fraudmeisters have visited upon the gutted taxpayers. As many keep saying, this isn’t the beginning of the end but the beginning of the beginning. 

L Moore: great idea! Thanks to both.

Not to be a nit-picker, but here is a nit: you left out 1907. 

John Lounsbury

And of course, it caused the creation of the Federal Reserve. Which was supposed to stop bank crashes. What a great track record that organization has! Every 20 years, off the economic cliff! And the complete devaluation of our currency, the end of our gold based reserves, everything.

Great job of is, eh?

 

 

 

 

 

 

 

 

 

 

 

 

 

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What to Do

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.

The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. As I was writing this, for example, reports were coming in of the collapse of letters of credit, the key financing method for world trade. Suddenly, buyers of imports, especially in developing countries, can’t carry through on their deals, and ships are standing idle: the Baltic Dry Index, a widely used measure of shipping costs, has fallen 89 percent this year.

What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don’t want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.

The obvious solution is to put in more capital. In fact, that’s a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country’s GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.

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Magnificence of the Tsars (Victoria and Albert Museum)

Though many have been watching the luxury market with anxious eyes in these recessionary times, recent events in London suggest a slightly different perspective. In May it was announced that Fabergé, the imperial Russian jeweller, is to be revived by a group of investors, with Mark Dunhill, formerly president of luxury goods firm Alfred Dunhill, as chief executive and former Tatler jewellery editor Katharina Flohr as creative director. Then, this week, the exhibition Magnificence of the Tsars opened at the Victoria and Albert Museum, displaying the coronation uniforms of seven successive emperors of the Romanov dynasty.

Cynics might suggest these are merely calculated nods towards the eastern money flooding into London, with oligarchs calling the shots in the salerooms, where Fabergé fever has been stoked by the desire to buy back their heritage. But together, they are a potent reminder that for more than two centuries Russia led the world in unimagined sumptuousness and display of wealth. The hedge fund tsars have nothing on the real tsars, and you need look no further than the V&A museum for proof.

The display consists of the coronation uniforms worn by seven successive tsars, the first time they have been seen outside the Kremlin, where each uniform had been preserved immediately after the ceremonies. Especially impressive is an ermine-trimmed mantle with a 23ft train, one of three made for the 1896 coronation of the last tsar, Nicholas II, who was executed with his family in the 1917 revolution.

The dramatic fall of the Romanov dynasty has often overshadowed its 300-year history of sartorial and decorative magnificence. The west has tended to focus on the desecration of the palaces or impoverished emigrés selling their last Cartier tiara in Paris, neglecting the fact that Russia’s collection of imperial jewels and ceremonial dress is older, finer and better preserved than many others, including Britain’s. 

“This collection has only recently begun to be studied,” says Elena Gagarina, general director of the Moscow Kremlin Museums. “The majority is kept in the museum’s stores and has been specifically conserved for this exhibition. By introducing costumes and accessories of the greatest historical and artistic significance, we have aimed to introduce the British public to the art of the finest dressmakers, tailors, embroiderers and jewellers working for the Russian imperial court.”

The wardrobe of the boy emperor Peter II forms the centrepiece of this historic show. “Half of the exhibition is dedicated to Peter’s perfectly preserved wardrobe,” says Dr Lesley Miller, senior fashion curator at the V&A. “It is a lucky survivor and a rare, precious story that can be told only because Peter died young of smallpox and his wardrobe was spirited away to storage at the Kremlin.”

The grandson of Peter the Great, Peter II ascended the throne aged 11 in 1727. Three years later he was dead. A large collection of his clothing, including 36 uniforms, 24 dress coats and 21 waistcoats, were packed into pine chests and deposited in the Kremlin, where they remained until now.

On view at the exhibition are scarlet, emerald and silver ceremonial coats that were worn over knee-length waistcoats cut from velvets, brocades and fine wool, and encrusted with baroque raised gold lace foliate and floral motifs. There are satin, taffeta and damask silk nightgowns lined with sable or ermine; shirts made from the finest linen; and stockings embellished with gold.

Every item to touch the emperors’ body was of the finest quality and craftsmanship; this also applied to the items worn by their servants. Coachmen’s and postilions’ tunics were encrusted with heraldic braid, hussar-style frogging, raised embroidered badges and buttons bearing the imperial eagle cipher.

All of this pales in comparison to a fancy dress costume that was worn by Nicholas II in 1903: cuffs, belt, fur-trimmed cap and bodice are embellished with pearls, diamonds, emeralds and rubies from the imperial collection. Even in their wildest dreams today’s oligarchs are unlikely to have imagined such opulence.

Money Matters

An outlet for my bloviating from the safety of my computer screen.

Don

It is interesting how the boogie man of the econalypse keeps changing.  First it was subprime loans, then CDOs and SIVs, then CDSs and other derivatives.  These days Schiff, Taleb and others are warning that the worse is yet to come, in the form of a devalued currency and hyperinflation as the Fed and Treasury keep throwing money at the problem.  As much as I applaud them for forecasting the current storm, I think they’re wrong this time.

Now that the whole derivative legalized gambling scheme has unraveled we are going through a shocking de-leveraging process where every party is unwinding positions, returning to sensible reserve ratios and reassessing risk on every asset.  Hedge funds and SIVs that used to invest at reserves of 40 to 1 are borrowing much less (or closing altogether), either because of the higher risk, or because they can’t find anyone to lend them money.

The cummulative effect is that the multiplier ratio, and the money supply (M3), are dropping at a precipitous rate.  Unchecked, the lowered money flow will result in economic slowdown, or deflation, or both (and both are obviously undesired).

The government’s response has been clear: Pump more money into the system.  The Treasury has done this by injecting money directly into banks through TARP in exchange for equity.  The Fed relaxed their standards and has been buying inferior-quality paper from member banks.

So the argument goes, the Fed (therefore us taxpayers) is going to be saddled with all these toxic paper losses, and, the Treasury (again us) is going to print so many T-Bills we’ll end up owing our shirts to the Chinese.  All these losses and borrowing will erode confidence in the Dollar, which will no longer be used as reserve currency and eventually be dumped and lose its value.

I don’t believe this is the case.

First, let’s not forget that the Fed can print as much money as it wants.  Usually it creates only as much as needed and no more in order to control the money supply and therefore keep inflation in check while stimulating growth.  It’s a perennial tightrope and it is the basis of our monetary policy.  But given the current extraordinary de-leveraging and reduction in the velocity of money (since banks aren’t lending to each other) taking place, aggressively expanding the monetary base is exactly what is needed to keep the M3 supply stable.  The trick of course is to time this right, otherwise we’ll end up with a nasty case of inflation.

Secondly, a large chunk of the treasuries that will be issued will be bought by the Fed to create bank reserves, not so much by China since our imports (and the current account deficit) are slowing down.  This makes a big difference because the Fed, unlike all other creditors, returns all interest paid to the treasury.   When growth resumes they will slowly find their way back to the Treasury.   I wouldn’t be surprised if the Fed ends up with up to 4 trillion of treasuries in their balance sheet before the storm starts dying down.

Third, more treasuries give the Fed more room to grow reserves and expand the base without having to take in lower-grade paper and even toxic loans.

Lastly, because of the worldwide flight-to-safety these days yields are lower than ever, so there has never been a better time in our history to ‘take out a loan’.  We should be very very thankful for this.

Sunday links: dump last year

“It would be nice if investment advice came with warnings like pharmaceuticals.”  (TraderFeed)

Barry Ritholtz gets a little bullish.  (Barrons.com)

Ken Heebner is making a big bet on financials.  (WSJ.com)

We’re all hedge funds now.”  (Aleph Blog)

Fundamentals failed in this bear market.  What about technical analysis?  (Businessweek.com)

It doesn’t get much worse than this.  A graph.  (Mankiw Blog)

What happens after a decade of negative total returns on the S&P 500?  (Clusterstock)

Bottom callers are back out in force.  (WSJ.com)

“Investors are pricing in much higher risk than they have at any time in the last 18 years.”  (Value Expectations)

“‘Tis the season to dump last year’s folly.”  (WSJ.com)

Diversification worked, if you owned bonds.  (NYTimes.com also Random Roger)

Running a short-only hedge fund is no fun.  (Infectious Greed)

Orphan ETFs are rising in number in this bear market.  (WSJ.com)

“Traditional private equity is dead and has been for a year…”  (NYTimes.com)

Why do private firms stay private?  (Alea)

Expect more bad job loss news.  (Odd Numbers also Econbrowser)

Is this a crisis or just a globalized recession?  (Baseline Scenario)

The NBER recession call is pretty clear.  (macroblog)

Econobloggers in the spotlight.  (Boston.com)

Business school applications are on the rise.  (DealBook)

Microsoft (MSFT) just can’t compete with Google (GOOG).  (Fortune.com)

What if Steve Jobs ran one of the Big Three automakers.  (I, Cringley)

The best business books of 2008.  (BusinessWeek.com)

Are you curious what other bloggers are saying about Abnormal Returns? So are we. Feel free to check out a compilation of reviews.

Dallas Flat Fee Broker Predicts Mortgage Conditions in 2009

There has been quite a bit of press given to the financial crisis and it seems clear to me that the solution being  proposed is… Flood the Markets with Cash!

The Federal Reserve has already reduced rates to 1% and there is plenty of talk and expectation that there will be further rate cuts. It is likely that we will see a Fed Funds Rate of .5% by January and it could even go as low as 0% by February or March. The pressure on the Fed to use rate cuts to stimulate the economy will be even greater in the 1st quarter of 2009 due to the worsening unemployment situation and the continuing weakness in the housing markets.

What happened in the 2000 to 2002 time frame will likely happen again. Remember how Greenspan dramatically hiked rates to curb the ‘irrational exuberance’ of the stock markets during the dot.com era? He overreacted and the result was that by 2000 the markets were in a full bear market downturn.  By the time 9-11 occurred we were already suffering dramatic declines in ‘wealth’ due to the downturn brought on by the hike in interest rates.

After 9-11 the Fed scrambled to reverse the market implosion and drastically lowered interest rates. The result was that 2003 through 2006 was saw the greatest growth in real estate speculation and prices ever experienced. This is a direct result of the Fed flooding the market with cheap rates and the U.S. Government encouraging the ‘A House For Everyone’ policy. Rates were low, credit easy to get, buyers flooded the market, and the bubble was in full swing.

Then in 2006 and 2007 the ARM adjustments began to kick in for loans generated in 2003 and 2004 and foreclosure rates began to soar. So many poor quality loans were made that without an ever increasing demand for homes and an ever increasing rise in home values many people were simply unable to keep up with their debt obligations and the house of cards began to collapse.

Now with the collapse of real estate prices causing a domino effect collapse of mortgage lenders, investment banks, and hedge funds there appears to be no end in sight. Consumer giants such as auto makers are suffering from the decline in consumer confidence and now they are hemoraging cash and on the verge of collapse. At a minimum the shock waves of the return to conservative lending practices will continue into early 2009 in the form of more layoffs and the failure of many retailers, auto dealerships, municipalities, etc.

OK… now for the good news… 2010 will be a BOOM YEAR!

Why? Because the continuing flood of cash and easy credit at the Fed level will take between 12 and 24 months to have the desired impact. The Fed began to take action in October of 2008 by the TARP program designed to buttress the major financial markets. That has succeeded but those markets will be slow to begin loosening credit. As we go into 2009 the Obama administration will pressure Congress for 1 - 2 Trillion in stimulus packages that will spread over a 4 - 10 year period with a front end load for quick impact. The stimulus packages will start having an impact in the summer of 2009 but the full impact will not be felt until 2010.

It takes time to gear up. There is talk of rebuilding the nations roads and bridges. Great. What does that mean? Building roads requires that engineering reports be performed. Same thing with Bridges. Engineers will have to be hired and plans prepared and reviewed and approved. That takes time. Then the Contractors will have to be hired after a Bid and Approval and Vetting process. More Time. Then equipment and materials ordered and people hired to run the equipment and manufacture the materials. More Time.

What does that mean? Well, lots of Engineering firms will be making money in 2009. Lots of orders for equipment will be placed in late 2009. Equipment manufacturing will halt layoffs and begin to hire in late 2009 or early 2010. When the equipment and construction materials are ready the contractors will begin to hire, probably in 2010.

As the cash starts to flow in late 2009 and 2010 the unemployment levels will begin to decline and this is when the magic will kick in. The Magic is that it will be late 2009 or early 2010 before the Media begins to report on an improving economy. It is only when the Media begins to report that things are improving that the consumer attitude will begin to change to become more positive. Consumer attitudes will not change overnight. Consumers will keep a tight rein on their purses through all of 2009 making the retail and consumer services segment of the economy the last to see improvement. Christmas of 2009 is likely to be as dismal for retailers as 2008 will likely be.

The foundation of the recovery this time, like in 2002 - 2005, will be the housing industry. As rates come down and as credit eases people will begin to purchase homes again. The mortgage industry will be more tightly monitored and the abuses of the past will not be possible. New abuses will crop up because the pressure to loan for home purchases will be increased since the housing market is the prime economic driver.  The attempts to control abuses will cause new and creative financing vehicles to be developed and gradually the knowledge about how to create such financing instruments will permeate the market.  I expect that the housing market will not figure out how to get easy credit until late 2009 or early 2010. Once the markets figure out how to channel the cash and credit being pumped into the economy by the stimulus packages the housting markets will enter another bubble period. 

I predict that 2010 will be the beginning of the NEXT GREAT BUBBLE in HOUSING!

With all of the above in mind I invite you to provide your comments. I would love to hear what you think.

Money Matters

An outlet for my bloviating from the safety of my computer screen.

Hedge Fund Asset Selling

Hedge Fund Asset Selling & Loss of Leverage. Here is a short video on hedge fund redemptions, performance and trends. It discusses the recession of 2008, how it is affecting hedge funds and how many new hedge funds are being setup to …

Yahoo! Inc. (NASDAQ: YHOO)

Today we continue our “Net Net vs Activist Legend” thought experiment, with Yahoo! Inc. (NASDAQ: YHOO).

YHOO is a stock that is not cheap on an asset basis but it does have a prominent activist investor with a 5.5% stake and two seats on the board. At its Friday close of $11.66, which is around two-thirds lower than Microsoft’s May 2008 $33 bid, YHOO still trades at a 70% premium to our $6.82 per share estimate of its asset value. Activist investor Carl Icahn’s presence on the register, however, indicates that he believes YHOO is worth more. Icahn has paid an average of $23.59 per share to accumulate his 5.5 percent stake. At $11.66, YHOO must more than double before Icahn will see a profit. He’s unlikely to sit idly by to see if that happens.

About YHOO

According to the Overview section of the company’s most recent 10Q*, YHOO “is a leading global Internet brand and one of the most trafficked Internet destinations worldwide.” Clear enough, but here is where the 10Q gets weird:

We are focused on powering our communities of users, advertisers, publishers, and developers by creating indispensable experiences built on trust.

We have no idea what “indispensable experiences built on trust” means. We’d be keen to hear your thoughts in the comments (but we digress):

We seek to provide Internet services that are essential and relevant to these communities of users, advertisers, publishers, and developers. Publishers, such as eBay Inc., WebMD, Cars.com, Forbes.com, and the Newspaper Consortium (our strategic partnership with a consortium of more than 20 leading United States (”U.S.”) newspaper publishing companies), are a subset of our distribution network of third-party entities (referred to as “Affiliates”) and are primarily Websites and search engines that attract users by providing content of interest, presented on Web pages that have space for advertisements. We manage and measure our business geographically. Our geographic segments are the U.S. and International.

According to Wikipedia, YHOO:

…provides Internet services worldwide. The company is perhaps best known for its web portal, search engine, Yahoo! Directory, Yahoo! Mail, news, and social media websites and services. Yahoo! was founded by Jerry Yang and David Filo in January 1994 and was incorporated on March 1, 1995.

According to Web traffic analysis companies (including Compete.com, comScore, Alexa Internet, Netcraft, and Nielsen Ratings), the domain yahoo.com attracted at least 1.575 billion visitors annually by 2008. The global network of Yahoo! websites receives 3.4 billion page views per day on average as of October 2007. It is the second most visited website in the U.S., and the most visited website in the world.

* We usually link to a company’s own description of its business on its website. We didn’t for YHOO because we couldn’t find on its website a concise description of the company or its business. While this may speak more to our own ineptitude, it might also be a telling sign for a “leading global Internet brand” that has struggled lately, no?

The value proposition

Before we launch into our analysis of YHOO, we have to state up front that Greenbackd’s focus is on undervalued asset situations, and preferably undervalued tangible assets. One would think that with YHOO, a “leading global Internet brand”, one would find a great deal of value in its intangible assets. Our bias for tangible over intangible assets will almost certainly lead us to a lower valuation for YHOO than another investor with a preference for intangible assets which generate earnings or cash flow.

Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

Ordinarily, when we discount a company’s assets we get a much lower liquidating value than carrying value. In YHOO’s case, most of the tangible asset value is in the Cash and Short Term Investments which we don’t write down ($3.2B or $2.32 per share) and Long Term Investments (carried at $3.2B or $2.31 per share), which we’ve only written down to $3B or $2.19 per share for reasons we’ll explain below. We’ve written down the Property, Plant and Equipment by 85%, but it only represents a small proportion of the total tangible assets and so doesn’t have a meaningful impact on the valuation. Our usual liquidation valuation - the armageddon scenario - for YHOO is $5.4B or $3.91 per share.

We believe that the armageddon scenario substantially undervalues YHOO because it excludes the Goodwill in the Investments in Equity Interests (which is included in the Long Term Investments above). Including the Goodwill, YHOO’s Investments in Equity Interests amount to the following:

Including the Goodwill figures in the Investments in Equity Interests above (but deducting the Deferred Income Tax) gives us an asset valuation for YHOO closer to $9.5B or $6.82 per share.

Icahn said in an interview with CNBC last Wednesday that he believes YHOO is undervalued and that he “opposes breaking up the company in a piecemeal sale” (NY Times’ Dealbook has the transcript). While we can only speculate as to Icahn’s investment thesis for YHOO, that statement leads us to believe he is valuing it on an earnings or cash flow basis. YHOO’s Cash from Operating Activites is impressive at $1.9B in 2007 and $347M in the most recent quarter to September. Even more impressive is that it achieved that operating cash flow on only $9.5B of equity (up from $9.1B in the prior year), which means it returned around 21% on average equity. We’ve got no idea about the future economics of YHOO’s businesses or the industry as a whole, so we can’t predict whether YHOO can continue to generate these types of returns and we won’t be speculating as to its value on an earnings or cash flow basis.

The catalyst

Icahn, who currenly sits on the board and holds 5.5% of the company, will be the driving force in any deal involving YHOO. His decisions will likely be informed by the fact that he has paid an average of $23.59 per share to accumulate a 5.5 percent stake (according to this filing with the SEC). There are a number of suitors seeking to consumate a marriage with YHOO. This Wall Street Journal article (subscription required) suggests former AOL chief Jonathan Miller is talking to investors about raising money to purchase all or part of YHOO. Icahn has said that he would be opposed to a partial bid “even at a premium.” He also expressed doubts about Miller’s ability to raise the money but would be willing to listen if Miller made a “bid at a very high price”. Another possibility is Microsoft, which has recently engaged a former YHOO search and advertising executive, but Microsoft CEO Steve Ballmer told the Wall Street Journal Thursday (subscription required) that there were no talks to acquire YHOO’s search business.

Icahn has a long history of succesful activist investment, with recent high profile campaigns against  Blockbuster, Imclone, XO Communications, Mylan Laboratories and Time Warner. According to this 2007 Fortune profile, he is renowned for taking on the biggest targets while generating exceptional returns:

In its less-than-three-year existence, Icahn Partners has posted annualized gains of 40%, investors told Fortune. After fees, the investors pocketed 28%. That 40% gain trounces the S&P 500’s return of around 13%, as well as the 12% for all hedge funds calculated by research firm HedgeFund.net. Icahn Partners boasts a string of big wins in short periods. The acquisition of energy producer Kerr-McGee gave the fund a $300 million gain, or a 100% return in just nine months. Icahn Partners achieved gains of $100 million and $230 million, respectively, both in less than three months, on forcing the sales of Fairmont Hotels & Resorts and drugmaker MedImmune.

The same Fortune article suggests that Icahn’s biggest strength is his knack for picking targets:

His skill at prospecting is so well honed that in most cases he’s destined to make money from the day he buys the shares. Then it’s a matter of squeezing management to sweeten the inevitable gains.

This is high praise indeed. Given that has paid an average of $23.59 per share for YHOO, he clearly sees value well in excess of that number and will be agitating for it to be realised.

Conclusion

YHOO is not cheap on any theory of value we care to employ. It is trading at a substantial premium to its asset backing, which means the market is still generously valuing its future earnings. It is generating substantial operating cash flow and earnings, which in a better market might be worth more, but it’s not obviously cheap to us.

The best thing about YHOO from our perspective is the presence of Carl Icahn on the register. His holdings were purchased at much higher prices than are presently available and he is unlikely to sit idly by while the stock stagnates.

Buying YHOO at these prices is a bet that Icahn can engineer a deal for the company. Given his legendary status as an activist investor earned through canny acquisitions over many years, we think that’s a good bet. And a bet is what it is - it’s speculation and not investment. If speculation is your game, then we wish you the best of luck but know that the price might fall a long way if he sells out. If you’re an investor, the price is too high.

[Disclosure: We do not have a holding in YHOO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

How To Beat the Stock Market

A very good friend of mine asked me last week. “If you know what everyone else knows, how do you beat the market?”

It’s a great question and more often than not, this is how most people lose money and believe that the stock market is a giant roulette wheel, sometimes falling in the green sometimes falling on red, and sometimes, sometimes, it hits the 1 in 37 chance of zero or double zero (huge rallies in either direction of the market causing investors to think they are geniuses or idiots for making or losing money that particular day).

There are several ways you can beat the market

Leveraging up is the easiest ways you can “outperform” the market.  If the markets have been going up 10%, borrowing 100% of the capital in your trading account should net you 20%.  You’ve just earned a return twice the market.  This seemed to have been the magic formula that a large percentage of the hedge fund industry had been implementing.  They found a strategy that generated 2-3% almost consistently from year to year. however nobody is impressed with a 2-3% return, so these hedge funds borrowed money from their prime broker of upwards of 8x (some hedge funds were able to borrow up to 100x their trading capital (think Long Term Capital Management). Viola, the hedge funds were trading gods that were generating double digit returns that “outperformed” the market.  This however is a double edged sword.  Lets say the hedge funds got the direction wrong with leverage, they stood to lose a massive amount of money (This is what happened in 2008 and sparked a massive sell-off in the markets through hedge fund selling and the ensuing redemptions from investors).

A 2nd way to generate returns

Accurate information is hard to come by since you have teams of investment professionals who do their due diligence on wagering in aggregate tens and hundreds of billions dollars a day.  Accurate information alone doesn’t help you make excess returns, accurate information that nobody expects is what will help you beat the market.

Microsoft, a widely followed stock that everyone in the world watches. It is often hard to know what the future earnings will be on this company.  “Analysts” expect it to earn between 2.08-2.43 earnings per share next year.  Having accurate information between that range will not help generate excess returns since these returns are “expected”.  Knowing that Microsoft will lose or earn a substantial amount above consensus is information that would be useful to generating excess returns.  This obviously is very hard without detailed knowledge and possible insider information.

Not only do you need accurate information, you need timely information, information that you know and realize before anyone else does. you have to be able to put in your bets before the market goes against you.

Being too early is the same as being wrong in the financial markets.  You may see the markets going down in the long run but if you are too early in shorting the market, you may get hurt on the huge rally before the crash.

This leaves the last choice for investors to generate returns that beat the market.  Having better understanding of the market.  A favorite quote of mine from the famous Warren Buffet:

” Be fearful when others are greedy, and be greedy when others are fearful”

This doesn’t mean you should go out and do opposite of what everyone else is doing. Like all good poker players know, you need to pick your spots on when you can take entire stacks from the table. (I wouldn’t be picking up any old company just because it’s trading below its book value)

There are numerous ways to generate excess returns but this is theoretically one of the safer ways.  This isn’t a surefire way to make money in all markets (I wouldn’t be posting this if I had the magic formula to the market).

Some people call it value investing, others call it , buying low, selling high, some people call it market timing, others call it luck, whatever it may be.

To me, its pouncing on opportunity when you see one.

Causes: Maybe People Are Just Like That

What happened to the global economy and what we can do about it

This is the second in my new occasional series of reflections on some of the root causes of the global economic crisis. As is probably evident from the first one, I’m not going to try to identify the cause of the crisis, or even render particularly analytical judgments about the relative importance of various contributing factors. Instead, I’m more just presenting and thinking about some of the forces that were at work.

One of the singular features of the last decade was the U.S. housing bubble (replicated elsewhere, such as the U.K. and Spain, but nowhere on such a grand scale), which was accompanied by a broader though not quite as frothy bubble in asset prices overall, including the stock market. One of the standard explanations is that bubbles are created when greed takes over from fear: people see prices rising, and at first their fear of getting burned keeps them on the sidelines, but as the bubble continues and other people get rich their own greed increases until it wins out over fear, and they buy into the bubble as well. As a result, some say, we are bound to have bubbles periodically, especially when new investors (young people), who have never experienced a crash, come into the market.

There is psychological research that not only backs all of this up, but goes even further and says that bubbles are a virtual certainty. Virginia Postrel has an article in The Atlantic that centers on experimental economics research by people such as Vernon Smith and Charles Noussair. In one experiment, investors trade a security that pays a dividend in each of 15 periods and then vanishes; the dividend in each period will be 0, 8, 28, or 60 cents with equal probability, so the expected dividend is 24 cents, and there is no time value of money (the whole experiment takes an hour). Despite the fact that the fundamental value of the security is absolutely, completely, easily knowable, bubbles develop in these markets . . . 90% of the time. When the same people repeat the same experiment, the bubbles get gradually smaller; but simply change the spread of dividends and the scarcity of the asset, and the bubbles come back with full force (so much for experienced investors).

The implication is that if you put people in front of a market that is behaving a certain way, you are going to get a bubble. It’s not simply a question of not understanding the fundamentals, or getting suckered by real estate brokers, or trying to keep up with the Jones’s new McMansion (although all of these can help amplify the bubble); people are just wired to create asset price bubbles. The fact that we have so few of them is probably a reflection of the size of asset markets (it takes longer to get millions of investors bought into a bubble than a few dozen) more than anything else.

Certainly there are things that we (or policymakers, rather) can do about bubbles. If they see a bubble building, they can try to talk it down, or try to make money more expensive, or start selling lots of the thing that is appreciating quickly. But this hinges on two things: the ability to spot the bubble, and the will to do something about it. It’s not helpful to have a belief on principle that asset prices are always rational, because then you will never do anything about them. (As an aside, perhaps one solution would be to have some form of market intervention that is automatically triggered when some class of assets accelerates beyond a predetermined threshold - precisely to eliminate the ability of policymakers to convince themselves that “things are different this time.”)

But the broader point, I think, is that it’s not that useful to say the bubble happened because people were stupid, or greedy, or irresponsible. Yes, people can be stupid, greedy, and irresponsible, but you have to take people the way they are; mass psychological reeducation is not an option. And even if you could reeducate them to the point where they all fully understood the assets they were trading, there would still be bubbles.  The issue to focus on is what regulatory policies or systemic changes can limit the incidence and cost of bubbles. (There’s an argument to be made that individuals should not be managing their own investments, since on average they just destroy value. But in an individualist, free-market society like ours, that argument will never fly.)

Besides the greed of the common man, though, much more has been made of the greed of the Wall Street banker. One argument, heard often around the time of the voting on the initial bailout bill, was that the financial crisis was caused by greedy bankers (and mortgage brokers, and hedge fund managers, and anyone else involved in the securitization chain) who created exotic new financial instruments and took on excessive risks in order to make lots of money for themselves. This has never satisfied me as an explanation. As I read somewhere, greed is like gravity. (I tried to look that phrase up to see whom to attribute it to, but apparently it’s a commonplace with no known source.) Blaming a financial crisis on greed is like blaming an airplane crash on gravity. Sure, there may be some correlation between greediness and working in certain parts of the financial services industry. But take people randomly off of Main Street and put them in that position - where most of your compensation is in a year-end bonus, and your bonus depends on the volume of business you do that year, not on the long-term profitability of that business, or on the success and satisfaction of your customers, and no one can take that bonus away from you in the future - and I wouldn’t bet that they would behave any differently.

Henry Blodget - yes, that Henry Blodget - has a variant of this argument in an article also in The Atlantic (yes, I’m a subscriber, and I finally found a few minutes to look at the latest issue). After the usual explanation of bubbles, he looks at things from the Wall Street perspective.

This is similar to my earlier theory about why banks won’t lend. It’s also similar to Andrew Lo’s explanation of why chief risk officers didn’t clamp down during the bubble. Basically, the incentives are such that it is more valuable to you or your company to be doing roughly what everyone else is doing than to do what you think is right (not in the moral sense, but in the profit-maximizing sense). We thnk the capitalist system is wonderful because all firms act to maximize their profits (and I do think that capitalism is the best economic system around, if that phrase even means anything), but the fact is that firms are made up of people, and the connection between the interests of those people and the interests of their firms is indirect at best. OK, I’ll cut off the tangent there; the rest of that thought will have to wait for another post.

In any case, the question isn’t how to make bankers less greedy, but how to create incentives that better align their personal greed with the interests of their firms and their clients. And how to do it without doing things that are possibly unconstitutional - like simply banning certain forms of compensation - or that have all sorts of unanticipated consequences. Maybe strict limits on executive compensation would do the trick. I know the argument that this will deter talented people from entering the industry, but - and the business world is one place where I do have a lot of experience - the difference in “talent” between CEOs and people one or two levels down is minimal if not negative. (Rakesh Khurana has a book on the distorted market for CEOs, and either he or Jim Collins - can’t remember which - has evidence that companies would be better off promoting people (who have never been CEOs) from within than shopping on the CEO market.) Put another way, I think there are plenty of hardworking, bright, experienced people in banks today who would be happy to be senior executives for a mere $1 million per year.

In the end, this is all probably pretty obvious: don’t blame people for being the way they are, and instead try to create structures and incentives that will protect them (in general) from themselves (in particular). More on that another time.

December 7, 2008 at 11:47 pm

Obama and the World Crisis by Richard C. Cook

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

December 7, 2008

We Hold These Truths by Richard C. Cook

Even as preparations are underway for Barack Obama to assume office as the 44th president of the United States on January 20, the U.S. military juggernaut that is roaring toward global conquest hasn’t missed a beat. This is shown by the team of hawks—including holdover Robert Gates at Defense and Hillary Clinton as Secretary of State—that Obama has assembled to handle the levers of the war machine and its diplomatic front.

WESTERN DRIVE TOWARD WORLD DOMINATION

The horrors of the George W. Bush administration may only have been one chapter, though it was the actions of Bush and his cronies—starting with 9/11— which removed all doubt that the intent of the Western ruling class is to dominate the world by any means possible.

Behind this intent are the people David Rockefeller famously identified at a 1991 meeting of the Bilderberg Group, when he said: “The supra-national sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.” No one needs conspiracy theories when the perpetrators are this blatant.

Rockefeller and his internationalist associates have not just made untold fortunes. They have also immeasurably damaged the nation our forefathers created and which offered them the freedom to become rich and powerful. Ironically, it was John D. Rockefeller, Jr., who restored the Virginia colonial capital in Williamsburg where on May 15, 1776 the Virginia Convention instructed their delegates in Philadelphia to enter a motion for independence.

But 1776 was another era, when our ancestors really believed that “all men are created equal” and that “life, liberty, and the pursuit of happiness” were “inalienable rights.” Today, the globalist financiers are trying to shore up the world’s failing financial institutions. But they are doing nothing to stem the slide into a worldwide depression that is starting to destroy the livelihoods of huge numbers of people.

MIS-DEFINITION OF CREDIT A ROOT CAUSE OF THE CRISIS

What this really means is that the financial controllers are robbing the world of the peace and prosperity that could be in reach through economic democracy and the fair distribution of resources. It would not be that difficult for us to engage in mindful cultivation of the Earth’s bounty in order to provide a decent living for all.

It could be done by changing the way money is created–from the debt-based system where credit is introduced only through bank lending to grassroots systems of credit creation advocated by the monetary reform movement. This could be done if credit were treated as a public utility, like clean air, water, or electricity, not the private property of the financial elite. Two good examples of this movement are the ideas of Social Credit based on providing citizens’ dividends similar to the Alaska Permanent Fund and the American Monetary Act of the American Monetary Institute that advocates direct payment by government for public expenditures  as with the Civil War Greenbacks.

It is the mis-definition of credit that allowed the banks to create the massive speculative bubbles in housing, commercial real estate, equity and hedge funds, commodities, and derivatives that have exploded. These bubbles can never be re-inflated, no matter how many trillions of dollars the government injects into the failed trickle-down system. The bubbles cannot be re-inflated because the public cannot afford to repay the loans they are ultimately based on. Consumer purchasing power is spiraling downward practically by the day as jobs disappear.

The banking system and the military machine work hand-in-hand, because the financial system is so unbalanced and exploitative that it can only be maintained through brutal force, both within and among nations.

LESSONS OF HISTORY

The mailed fist of Western military might is the embodiment of the drive toward global dominance that goes back at least to the 15th century. It was then that the emerging nations along the Atlantic coast of Europe—Spain, Portugal, France, the Netherlands, and England—began to send armed soldiers abroad on sailing ships bristling with cannon. The purpose? To conquer the territory and secure the wealth of older cultures which lacked the military means to defend themselves.

These swashbucklers were bolstered by two ingredients essential to any such large-scale undertaking. One was a source of money to finance the enterprise, and the other was an ideology that could be used to assuage the nagging of conscience which naturally arises whilst taking the lives and stealing the property of fellow human beings.

The first requirement—money—was initially met by looting the indigenous cultures of the Americas of their gold and silver, then using it to capitalize the fledgling banking system. Similar looting has continued until today.

Stops along the way included the British takeover of the fabled wealth of India, the plantations of America being worked by slaves dragged from Africa, the Chinese Opium Wars, and the Anglo-American conquest of the Middle East and its oil. Facilitating the mayhem was creation of the fractional reserve banking system overseen by the Bank of England, founded in 1694, and the Federal Reserve, which dates to 1913.

The second need was for an ethnocentric religion–Christianity–that justified the killing and enslavement of non-believers who in most cases had never even heard of it before. This was satisfactorily met by the Christian churches which adopted the geopolitical exigency that white men who worshiped at their altars were entitled to rule the Earth.

The nations so fortunate as to find themselves in the forefront of progress acquired the wherewithal to add to their wealth through an ideology based on exclusive ownership of the fruits of science and technology. As the Industrial Revolution developed, the only choice seemed to be control of the means of production either by the capitalist elite or the totalitarian state.

The white man’s greed propelled them into countless wars of aggression around the globe along with two fratricidal wars—World Wars I and II. In these wars tens of millions of were slain. These calamities left standing the greatest white Western nation of all—the United States.

This was both just and natural, since it was the U.S. with its melting pot that blended denizens of all the warring European nations, including the Jews who arose from the Khazar region of Russia and, moving to the West, came to dominate high-finance.

The U.S. enjoyed the size, resource wealth, and geographic situation—North America being a natural fortress—to serve as headquarters for what is now the final assault on the regions still not entirely subdued—namely the giant mainland nations on the continent of Asia. Along the way, America’s minority races, most notably its African-Americans, demanded and were granted at least a semblance of equal rights under the law. To their credit, many Jewish-Americans were instrumental in securing the victories of the civil rights movement.

THE SCENARIO FACING BARACK OBAMA

So Barack Obama was elected. Now president-elect, he has stepped into a scenario where the actors in the drama—the generals, arms merchants, and spies who do the dirty work—are poised for the final step in the scenario. This could go so far as instigating a Third World War to be launched against Russia and China. The military planners are preparing for it.

A flanking movement is going on in space through NASA’s new manned lunar program aimed at setting up what could be a military base at the Moon’s south pole. Russia and China, along with the European Space Agency and India, are competitors in the race to colonize the Moon and use it for military advantage.

This culminating phase of world disorder began in earnest with the Reagan military build-up in the 1980s and the “Reagan Doctrine” of proxy-wars against supposedly left-leaning nations, including the funding of Osama bin Laden’s Islamic mujaheddin who fought against the Soviets in Afghanistan.

Reagan took the first steps toward weaponizing space through his Strategic Defense Initiative—“Star Wars”—program announced in 1983. This failed when the Air Force’s test platform—the space shuttle—was grounded after the Challenger disaster of January 28, 1986. (Richard C. Cook, Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age)

In 1991 the Soviet Union broke apart, with George H. W. Bush taking advantage of the confusion by launching an attack on Iraq. But there was unfinished business in Europe. Yugoslavia was a Slavic nation with ties to Russia. Presto, during the Clinton administration the Serbs were identified as engaged in “ethnic-cleansing,” and through 38,000 bombing sorties by NATO over a 78-day period, the Balkans were re-Balkanized and the bankers who ran the European Union were able to move in for the takeover of that sorrow-filled region.

With the Balkan front secured, the military under George W. Bush next used the 9/11 attacks as an excuse to invade Afghanistan and—again—Iraq. Israel was along for the ride, though it is often difficult to tell which of the two—the U.S. or Israel—is the pilot and which the co-pilot.

By the end of the Bush administration, Obama, in his presidential campaign, was calling for escalation of the conflict in Afghanistan, possibly intended by the script writers as a flanking movement to cut off Russia from Iran. This appears to be the start of the final Western assault on South Asia. Pakistan in particular is now high on the list of U.S. targets, with Obama saying he will send in U.S. forces whenever warranted.

WILL THEY START WORLD WAR THREE?

The Muslims of Pakistan were once among the most highly cultured people on Earth. But the West never gave up on control of the Indian Subcontinent, even after independence. The British had adopted a divide-and-conquer strategy by supporting the 1946 partition between India and Pakistan, and Pakistan’s aspirations were destroyed in the 1970s when the Western intelligence agencies attacked the great nationalist modernizer, Zulfikar Ali Bhutto. They did this by instigating a fundamentalist revolt, followed by a military coup by Pakistan’s U.S.-backed generals.

Now, with the recent attacks on Mumbai by Islamic assailants and India refusing to relinquish Kashmir, Pakistan and India can be managed separately, even as India becomes more dependent on the U.S. for nuclear technology. Iran, which is being surrounded, will likely soon find that its number has finally come up.

It is unclear the extent to which South Asia can and will maintain its self-determination. But once the region is controlled,  the war against Russia and China can start in earnest. However, a parallel attempt is being made to absorb Russia through rapprochement between it and the E.U. If this feint succeeds, the wealth of Siberia may fall into the hands of the Western bankers without a shot ever being fired, though the European financiers will enjoy a clear advantage in reaping the spoils over the Americans. Such an attempt to bring Russia under Western financial control took place in the 1990s but failed when Putin took over.

Today, military planners likely assume that China, the West’s great bogeyman for the 21st century, will be backed into a corner. But the Chinese, who know that a strong economy sooner or later will translate into military power, grow stronger all the time. Of course the inscrutable Russians may have surprises up their sleeves. They may not be holding tight to all those nukes for nothing.

Some might object that the Western military planners, especially those within the U.S., are skating on thin ice due to the financial crisis. But the crisis has not stopped the war effort. It is funneling more of the wealth into the hands of the bankers than ever before, thereby enriching the ones who are in charge and providing them with increased material security from which to rule. U.S. military leaders have lobbied for budget increases, and Obama appears poised to accommodate them. Because investors are flocking to Treasury securities as a save haven from stock market losses, there is no shortage of borrowed money.

Granted, the financial crisis has reduced the income security of huge swaths of people both in the West and the developing nations and has put them ever deeper in debt. But the stressed population desperately needs jobs so will continue to provide cannon-fodder for the military and willing minds and hands to work in the defense factories and think tanks. Obama’s plan to pump money into infrastructure spending may help, but even a $600 billion stimulus is only $2,000 per capita and will take time to show results. This too is a deficit spending program based on money borrowed through the banking system.

OBAMA’S DILEMMA

Is there any way Barack Obama can do anything substantive to resolve the crisis?. As Australian author Omna Last recently wrote on his website (www.omnadeLight.com) and gave permission to reprint:

“In 2008 Barak Obama appeared from the wings, front-stage in the midst of the American melodramatic psycho-drama. He was also half-Negro and half-white. A majority of Americans were so fed up with the rule of the white-man-machine, they were willing to vote in a half-black man as president. The question was: would he have the integrity and strength of character not to compromise his principles? Would he be able to break through the ruling white-man paradigm and start an American dialogue with the rest of the world, and leave behind its incredible blind arrogance that permeates right through the culture, resulting in a subconscious belief that America’s manifest destiny is to be the arbiter of the world’s tastes, immorality and non-values?

“And would he be able to take advantage of the wisdom and strength provided by his black genes to bring a new ruling hybrid dispensation to the world? Would he be the symbol for a new type of Earth person – a true planetary representative? Would the ruling white secret brotherhood allow him to use his presidential power?

“Or would they need to worry? As a senator, Obama voted to renew the Patriot Act, supported the death penalty, affirmed Bush’s secret surveillance of the American people, and called for a cut in the corporate tax rate. He wanted to expand the war in Afghanistan, failed to call for a reduction in defense spending, and, as a tool of the Zionist lobby, was insisting that Iran even stop enriching uranium. Obama’s selection of Rahm Emanuel as White House chief of staff is a signal that Obama is either incredibly naive or has been forced by his minders to play ball with the devil.

“Obama is probably an idealistic, courageous man, who persuaded a majority of Americans to believe in their own better natures. Obama’s place at the pinnacle of official power lifts a veil that has obscured the world for a thousand years. It signifies the end of white supremacy, imperialism, racism. Every tribe and race of people, just as with each animal species, has something unique to add to the genetic and cultural brew of humanity. Although Obama was supported and promoted as a tool of the insider establishment, it may be that he will turn his back on the sleaze of his secret backers and try to institute a new paradigm. Perhaps Barack Obama is a symbol of a change in the wind, and the emergence of a new kind of man - an Earth man - one who encompasses many facets of the jeweled organism that is this planet.

“Zawahiri issued a tape declaring Obama to be a House Negro. Was Obama a naïve fool, who had been set up to sup with the devil? He is probably a good man, but naive and misguided, probably with more ambition than good sense. The chimera of power, of rubbing shoulders with the insiders of the money-power-tree had been the bait. Had the new brown fish been reeled in to shine as front-man for the men of the purveyors of an old wine in a new bottle? Was a bright new label to placed on the old bottle of American capitalism, a wine already turned sour in 1929 – but in 2008 turned quickly from unfettered free market capitalism to the secret cartel’s intervention in every pie?

“An incredibly clever game had been played. As Russia in 1917 had been secretly taken over by a Jewish financier-backed conspiracy, so in 2009 the wheels that had been set in motion by Greenspan in 1987 had been geared up. The Zionization of America was no longer a banker’s wet dream. It was now possible…people tracked by computer chip…the masses in permanent debt, desperate and afraid. Or would Obama prove to be a man of the quality of Jack Kennedy? Would he stand up to the amorphous establishment? Would he change their hearts and minds, just by the power of his convictions?”

WHAT THE CONTROLLERS LEAVE OUT

Good questions. Only time will tell. The only thing that seems to be left out in the conniving of the financial controllers and the plans they are calmly working out on their underground supercomputers is consideration of what really is the objectively conscionable way for us to behave as human beings on this planet.

Perhaps at the cellular level the controllers have the nagging suspicion that maybe there really is a God who is not entirely comfortable with a world civilization based on exploitation, pollution, and a mad compulsion to force society to engender enough “growth” to outrace the exponential increase of compound interest.

Perhaps the controllers fear that the billions of people on Earth who are not white Western males of Judeo-Christian extraction might also have a place in His/Her heart. Perhaps Obama, despite all the compromises he has made, makes them feel a little bit uncomfortable.

Copyright 2008 by Richard C. Cook

see

Cook-Richard C.

The Economy Sucks and or Collapse 2

Obama-Barack

Citizens’ Economic Stimulus Plan: Stop Paying Credit Card Debt by Richard C. Cook

War or Peace? By Richard C. Cook

The G20 Won’t Change This Financial Crime Scene by Richard C. Cook

How to Save the U.S. Economy by Richard C. Cook

Michael Hudson: We Let The Crooks Take Over (2007)

Apocalypse? by Omna Last

Mumbai India Terrorist Attacks November 26 2008

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[...] Obama and the World Crisis by Richard C. Cook [...]

Obama, Wall Street and the US Automakers by Michael Hudson

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

Dandelion Salad

Weakening the economy, leaving it even more debt-strapped.

I think that the Big Three U.S. automakers have made repeated strategic mistakes. They have not managed that industry the way they should have. … What we have to do is to provide them with assistance, but that assistance is conditioned on them making significant adjustments. They’re going to have to restructure, and all their stakeholders are going to have to restructure. Labor, management, shareholders, creditors - everybody’s going to recognize that they have-they do not have a sustainable business model right now. And if they expect taxpayers to help in that adjustment process, then they can’t keep on putting off the kinds of changes that they, frankly, should have made 20 or 30 years ago.

… if taxpayer money is at stake … we want to make sure that it is conditioned on a auto industry emerging at the end of the process that actually works, that actually functions. … But I’m also concerned that we don’t put 10 or 20 or 30 or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, “Give me more.” Taxpayers, I think, are fed up.

What is important to understand is that the bad-loan problem is concentrated at the top layer (the 15% or so wealthiest banks), the big Wall Street conglomerates created after the Clinton Administration embraced the Republican policy of repealing Glass-Steagall and letting banks form non-bank conglomerates. The bailouts do not end up with these banks or with A.I.G. itself, but with their counterparties on the winning side of bets made against the banks and A.I.G. who now want to collect from financial institutions that can’t pay. It’s like gamblers in a casino that’s gone broke, asking the government to bail them out or “the system” will collapse.

What is this system that Congress and Mr. Obama are rushing to strenuously to rescue? Essentially, bank officers and A.I.G. insurance salesmen behaved like casino dealers who did not mind losing as long as they got a paycheck enabling them to live very, very well.

Not all casinos go broke, and the vast majority of U.S. banks and insurance companies avoided making big gambles. The bailout has little to do with them. And it has little to do with “the economy.” It has to do with crooked mortgage brokers working for crooked banks who corrupted the political process with their campaign contributions, to make losing bets against clever financial gamblers who borrowed huge enough sums at interest from these banks to leverage their bets that the banks now hold to at least let investment bankers and commercial bankers become the highest paid individuals in human history. But should one say that this unique historical event really is “the economy”? Or is it an excrescence? Would the economy be better off WITHOUT these bank and A.I.G. debts being “made whole”?

Is it not hypocritical for Mr. Obama to criticize the auto companies for producing gas guzzlers that pollute the physical environment, without criticizing the big Wall Street campaign contributors for doing the same to the economic environment? “I’ve had my team have conversations with these folks to see how can you keep the automakers’ feet to the fire in making the changes that are necessary,” Mr. Obama explained to Tom Brokow, “some people have said let’s just send them through a bankruptcy process. Well, even as large a company as GM, in ordinary times, might be able to go through a Chapter 11 bankruptcy, restructure, and still keep their business operations going. When you are seeing this kind of collapse at the same time as you’ve got the financial system as shaky as, as it is, that means that we’re going to have to figure out ways to put the pressure on the way a bankruptcy court would, demand accountability, demand serious changes.”

Mr. Obama finished up by saying that “we have to put an end to is the head-in-the-sand approach … And what we still see are executive compensation packages for the auto industry that are out of line compared to their competitors,” adding that “it’s not unique to the auto industry. We have seen that across the board. Certainly, we saw it on Wall Street.”

But he seems not to understand what the problem is. Turning explicitly to the financial crisis, Mr. Obama said, “you, you had a huge amount of debt, a huge amount of other people’s money that was being lent, and speculation was taking place on-based on these home mortgages. And if we can strengthen those assets, then that will strengthen the financial system as a whole.”

Mr. Obama’s second part of his sentence recommending reform proposes to do just the opposite. He has thrown his support fully behind Treasury Secretary Henry Paulson, by pretending that the way to revive the economy and banks it to inflate a debt-fueled real estate boom once again. Prospective home buyers are supposed to go even further into debt in order to provide the banks with enough extra interest charges to earn the money to become solvent again. (They are as deep in Negative Equity as are the subprime mortgage debtors they and their affiliates have victimized.) When Mr. Obama speaks of “strengthen[ing] those assets,” namely, homes and office buildings, “then that will strengthen the financial system as a whole.”

But it will weaken the economy, leaving it even more debt-strapped.

© Copyright Michael Hudson, Global Research, 2008

The url address of this article is: www.globalresearch.ca/index.php?context=va&aid=11321

see

Automakers Return to Capitol Hill + Ralph Nader and Medea Benjamin on Obama’s Cabinet

Michael Hudson: We Let The Crooks Take Over (2007)

Obama and the World Crisis by Richard C. Cook

“Oops, We Meant $7 TRILLION!” by Ellen Brown

The Economy Sucks and or Collapse 2

Obama-Barack

I am Canada’s WAR CRIMES coordinator and I deserve protection.

I am Canada’s WAR CRIMES coordinator and I deserve protection.

KABUL, Afghanistan — Taliban insurgents carried out a bold assault on a remote base near the border with Pakistan on Sunday, NATO reported, and a senior American military official said nine American soldiers were killed.

Although military investigators determined within days that the onetime NFL player was killed by his own troops in Afghanistan following an enemy ambush, five weeks passed before the circumstances of his death were made public. During that time, the Army claimed Tillman was killed by enemy fire.

The panel acknowledged Monday it had fallen short of this goal. The committee received a flurry of White House e-mails sent as the Bush administration responded to Tillman’s death, but no documents about friendly fire. The committee interviewed several top White House officials about the case, but “not a single one could recall when he learned about the fratricide or what he did in response,” it said in its 48-page report.

“As the committee investigated the Tillman and Lynch cases, it encountered a striking lack of recollection,” the report said.

The panel concluded that the lack of information “makes it impossible for the committee to assign responsibility for the misinformation in Corporal Tillman’s and Private Lynch’s cases.”

Jim Wilkinson, a onetime White House official who was communications director for U.S. Central Command, told the committee he did not know where the false information on Lynch originated, or who disseminated it.

In the case of Tillman’s April 22, 2004, death, White House officials generated nearly 200 e-mails on the matter the day after, the committee found. Politics seemed to fuel the administration’s interest: Several of the e-mails came from the staff of President Bush’s re-election campaign, urging Bush to respond publicly.

The White House “rushed” to release a public statement of condolence at about noon on April 23.

But in doing so, the White House violated a military policy enacted into law by Bush himself in 2003, the committee found. The Military Family Peace of Mind Act bars the announcement of a casualty until 24 hours after a family is notified.

The Defense Department, adhering to the policy, had not yet publicly confirmed Tillman’s death when the White House released Bush’s statement of condolence.

Realizing this belatedly, White House spokewoman Claire Buchan warned her colleagues in an e-mail: “alert — do not use Tillman statement.” But news services were already running the White House statement.

The White House also failed to determine whether information about Tillman’s death was classified, the committee found. Tillman’s Ranger unit was routinely involved in sensitive operations along the Afghanistan-Pakistan border.

In a chain under the subject line “H-E-R-O,” Rove replied to an e-mail from Fournier by saying, “How does our country continue to produce men and women like this?”

Fournier replied, “The Lord creates men and women like this all over the world. But only the great and free countries allow them to flourish. Keep up the fight.”

Fournier, now the AP’s acting Washington bureau chief, said Monday: “I was an AP political reporter at the time of the 2004 e-mail exchange, and was interacting with a source, a top aide to the president, in the course of following an important and compelling story. I regret the breezy nature of the correspondence.”

The story of Tillman, a man who gave up a lucrative career in professional sports to serve in the Army, “made the American people feel good about our country … and our military,” Bartlett told the committee. But he acknowledged the statement might “set a precedent.”

While Bush and other presidents have often delivered humorous remarks to the gathering, Bush had “got singed pretty bad” the previous year for making what some critics perceived as inappropriate joking remarks during wartime, Bartlett said. So the White House made a deliberate decision to “pay tribute to the troops,” and made Tillman’s death the week before the centerpiece, he said.

“The report contains no evidence that the White House said anything incorrect or misleading regarding the death of Corporal Tillman,” Bohn said. “Our thoughts and prayers remain with the Tillman family.”

The authors of the new report carefully avoided assigning blame or intent in either the Tillman or Lynch cases. But, they concluded: “In both cases, affirmative acts created new facts that were significantly different than what the soldiers in the field knew to be true. And in both cases, the fictional accounts proved to be compelling public narratives at difficult times in the war.”

Buryj’s parents accepted an invitation to meet Bush at a July 2004 campaign rally. They told investigators they had pressed Bush to help them find answers about their son’s death, and said Bush agreed to help.

“A few months later, a Bush-Cheney campaign official contacted the family,” the congressional investigators found. “Rather than offer assistance, the official asked Specialist Buryj’s mother to appear in a campaign commercial for the president. Mrs. Buryj refused.”

___

On the Net:

By Randall Mikkelsen

(Editing by David Wiessler)

The representatives of the French people, organized as a National Assembly, believing that the ignorance, neglect, or contempt of the rights of man are the sole cause of public calamities and of the corruption of governments, have determined to set forth in a solemn declaration the natural, unalienable, and sacred rights of man, in order that this declaration, being constantly before all the members of the Social body, shall remind them continually of their rights and duties; in order that the acts of the legislative power, as well as those of the executive power, may be compared at any moment with the objects and purposes of all political institutions and may thus be more respected, and, lastly, in order that the grievances of the citizens, based hereafter upon simple and incontestable principles, shall tend to the maintenance of the constitution and redound to the happiness of all. Therefore the National Assembly recognizes and proclaims, in the presence and under the auspices of the Supreme Being, the following rights of man and of the citizen:

Articles:

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Darius the Great: In the late sixth century BC, much of the country was absorbed into the Persian empire of Darius the Great. However, plagued by constant uprisings, the Persians never established effective control.

Alexander the Great: In the third century BC, Alexander the Great invaded. The harsh, mountainous terrain and brutal weather were only part of the challenge. The Afghans themselves were no less formidable. Constant revolts undermined whatever glory he could claim.

Genghis Khan: In 1220, the Islamic lands of Central Asia were overrun by the armies of this Mongol invader. But even Genghis Khan failed to destroy the strength of Islam there. By the end of the 13th century, his descendants were themselves Muslims.

Britain: There were three major interventions by the British Army between 1838 and 1919. Each one ultimately failed.

Soviet Union: In 1979, the Soviets rolled in about 115,000 troops. The Afghans responded with an extended guerrilla war, and in 1989 the Soviets withdrew.

Sources: The Claremont Institute, encyclopedia.com, CNN, espritdecorps.ca, channel4.com, BBC, NYT

Recent

– “Engaging and enfranchising local populations and power centres is of critical importance.”

– “Building Afghan security forces is vital.”

From the comments

ITEM: The survey, conducted between July 12-16 for CTV and The Globe and Mail, suggests the level of intensity for Canadians strongly opposed to the mission is far greater than those who are in firm support: (percentage point change from a July 12-15, 2006 poll in brackets):

Funny how there are no more recnt poll results than from 2007…

Last updated at 4:00 PM on 11th July 2008

Google Earth is a fascinating addition to anyone’s browsing pleasure, so good on you Google for making it even better.

Do you think Canada will be out of Afghanistan by 2011?

Yes

No

NEW YORK (MarketWatch) The U.S. Securities and Exchange Commission said Sunday that it and other regulators are firing up new examinations to prevent stock-price maniplation by short sellers and others.The agencies’ goal is the “prevention of the intentional spread of false information intended to manipulate securities prices.”

http://www.faulkingtruth.com/Articles/Investing101/1062.html

NOT SHORT SELLING

How about investigating pump and dump? How about BSC CEO assuring the public everything is fine and it went belly up the next couple of days?

And what do you call that? Naked pumping as opposed to naked shorting?

This is totally pathetic.

Now doesn’t this sound like manipulation?

“WASHINGTON (Reuters) - U.S. Treasury Department officials are trying to make sure that Freddie Mac, one of two troubled U.S. giant mortgage firms, will be able sell $3 billion in securities this week at a previously scheduled sale, the Washington Post reported on Sunday.

The Post said Treasury Department officials on Saturday spoke by telephone with major banks that normally purchase such securities to ensure that these firms still plan to place bids, and they were optimistic the sale would be a success.”

He was referring, of course, to the Palestinians trapped there - but that’s the most tacit apology for terrorism that I’ve ever heard. And it got worse. One person in the room was adamant that bin Laden didn’t exist, that he had been invented by the Americans as an excuse to attack Afghanistan. Three of them recounted, with straight faces, that old chestnut about 9/11 being an American conspiracy.

It’s the same cultural evolution that has allowed Harold and Kumar’s Escape From Guantanamo Bay to shoot to the top of box-office hits. The surprise success of the R-rated stoner flick that features the arrest of two hapless Americans carrying a bong on an airplane – not a bomb. There’s a pot-smoking and insecure U.S. President George W. Bush, sodomizing prison guards and a selection of xenophobic American stereotypes – all of which draw plenty of giggles.

But the growing popularity of post-9/11 satire is about more than laughs.

Political pop culture is also playing an important role in creating the legacy of the Bush administration’s Guantanamo Bay war-crimes trials. And that’s shaping up to be a far different picture than history paints of the World War II Nuremberg trials.

Guantanamo is largely being portrayed as a bad joke – especially on shows like The Daily Show with Jon Stewart and Stephen Colbert’s The Colbert Report.

“I think we’re in a period now because of people like Colbert and Jon Stewart, where comedy is really an important part of the civic equation,” said Bob Thompson, a professor and director of the Bleier Center for Television and Popular Culture at Syracuse University.

“What’s going on in those comedy shows is a pretty good treatment of some of these stories,”

Take for instance Stewart’s waterboarding last month of the supposedly long-forgotten Sesame Street character called “Gitmo,” who looks startlingly like Elmo, the red, fuzzy puppet known for his high-pitched giggle on the children’s TV program.

The Daily Show segment titled “Guantanamo Baywatch” also featured a captured photo of Gitmo made to look like the famous shot of a dishevelled Khalid Sheikh Mohammed, an alleged mastermind of the 9/11 attacks captured in Pakistan in 2003.

The clip was quickly passed around the Internet and mocked what the Pentagon had hoped would be a flawless start to the trial of the prized captive.

(The CIA has admitted Mohammed was subjected to waterboarding, a process whereby suspects are made to believe they’re drowning, which many argue amounts to torture.)

“Humour can be used to point out the absurdity of something. It has a very definitive purpose in our culture and The Daily Show does that on various levels. That’s the purpose of satire,” American comedian, writer and actor Aasif Mandvi said in an interview.

“We live in a democracy, and often humour is a way to deal with incredible, really macabre, grotesque violations and behaviour.”

Mandvi is best known as The Daily Show’s fake news “Middle Eastern affairs correspondent” and made headlines when he joined Stewart’s team in 2006.

His first segment was a mock stand-up report from Beirut during which he said people were buzzing with excitement about America’s plans for the Middle East.

When Stewart questioned him about the violence, Mandvi brushed it off: “You can’t get hummus without smashing some chickpeas.”

Though Mandvi is known best for his comedy, he’s also a playwright and serious stage actor.

Much of his recent work has been political, including the 2004 off-Broadway production of Guantanamo: Honor Bound to Defend Freedom, in which Mandvi played British Guantanamo detainee Moazzam Begg, who was freed in 2005 after the British government intervened on his behalf.

The point of the play was to highlight the illegality of holding terrorism suspects indefinitely without trial, Mandvi said. Just last month, four years later, the U.S. Supreme Court agreed in a landmark decision granting detainees access to U.S. federal courts.

“We were there to agitate the audience and make them do something,” explained Mandvi. “I think there’s a sense of, ‘Well that’s happening over there in Cuba and I guess eventually we’ll get around to doing the right thing.’

“I think most people sort of feel that the Supreme Court is on the right track, it’s going through the process of doing the right thing but that seems absurd to me – that there’s this kind of patience about it.

“When you make the argument that it’s okay for us to do something illegal because we are under attack, then you throw the entire book out. Then, everything is up for grabs and you’re in a very dangerous situation, which is where America is right now.”

Mandvi is also a Muslim American and 9/11 ushered in a sense of urgency and responsibility that he said he didn’t feel before the attacks.

Born in India as Aasif Mandviwala, he moved with his family to England as a baby, and then on to the United States when he was a teenager.

“Listen, I’m not even a devout Muslim,” he said. “I don’t always go to the mosque. I have my own issues with my religion just as Jews and Christians do.

“But I think 9/11 changed everything, obviously, and suddenly artists like myself, who were raised Muslim . . . suddenly you find yourself in this position where you’re defending and speaking up for this thing that is part of your culture and your heritage. You find yourself in the position where you’re politicized as an artist.”

Actor Kalpen Suresh Modi – better known by his stage name Kal Penn or his movie character’s moniker, Kumar – also has an intellectual and political life that couldn’t be more different from his movie persona’s.

While he said he recognizes the importance of satire in shaping public opinion, he is quick to downplay any importance of his Harold and Kumar film.

“The only real intention or motivation behind the film was to make people laugh,” Modi said in an interview.

“With that said, we each obviously have a personal opinion on this type of subject matter.

“I remember Jon Hurwitz (one of the writer-directors) saying something to the effect of, `Sometimes the greatest sources of comedy come from the greatest tragedy.’ … If that humour gets people talking about the reality of Guantanamo, wiretapping or the war, then I think that’s great – no matter what the result.”

Modi said he’s registered as an Independent voter but has campaigned for Democratic presidential hopeful Barack Obama, his first venture into political campaigning.

He also became a guest instructor this spring at the University of Pennsylvania’s Asian American Studies Program.

“Out of a class of 125, we had 20 drop the course after the first lecture because they realized that I wasn’t ‘Kumar’ and the course was actually challenging,” Modi said. “The remaining 105 students were driven, motivated and passionate about the subject material.”

Guantanamo Bay’s days are now numbered following the U.S. Supreme Court ruling last month that granted detainees the right to challenge their incarceration in civil courts, and with both Obama and Republican presidential hopeful John McCain vowing to shut down the detention centre if elected.

“The question is how much credit do you give the comedians for all that has happened” to discredit Guantanamo and other Bush post 9/11 policies, said Thompson.

“One has to acknowledge, they are certainly part of the recipe. Comedy’s popular, it goes down smoothly and a lot of comedians have been really hammering a lot of these issues in ways that people can understand because they’re not framed in complex political arguments, they’re framed in funny little bits.

“There isn’t a sense now that if comedy deals with these important issues that it’s somehow being disrespectful or trivializing it. These days, in fact, comedy, in more and more people’s eyes, is not that trivial.”

http://afp.google.com/article/ALeqM5hSlhjwupypkLwC1iOm2cCElJK7KQ

That startling allegation is in court documents released this week which show that former Qwest CEO Joseph Nacchio — the head of the only company known to have turned down the NSA’s requests for Americans’ phone records — tried, unsuccessfully, to argue just that in his defense against insider trading charges.

Nacchio was sentenced to 6 years in prison in 2007 after being found guilty of illegally selling shares based on insider information that the company’s fortunes were declining. Nacchio unsuccessfully attempted to defend himself by arguing that he actually expected Qwest’s 2001 earnings to be higher because of secret NSA contracts, which, he contends, were denied by the NSA after he declined in a February 27, 2001 meeting to give the NSA customer calling records, court documents released this week show.

AT&T, Verizon and Bellsouth all agreed to turn over call records to an NSA database, according to reporting in the USA Today in 2006. At that time, Nacchio’s lawyer publicly stated that Nacchio declined to participate until served with a proper legal order.

The government has never confirmed or denied the existence of the program, but is trying to win legal immunity for telecoms being sued for their alleged participation in the call records program and the government’s warrantless wiretapping of Americans. Turning over customer records to anyone, including the government, without proper legal orders violates federal privacy laws.

Nacchio’s attempt to depose witnesses and present the classified defense was declined by Colorado federal district court judge Edward Nottingham, a decision that is playing a role in Nacchio’s pending appeal to the 10th Circuit Appeals court.

The allegation is peppered throughout the highly redacted documents released by the lower court today, but are most clear in the introduction to this filing (.pdf) from April 2007.

Defendant Joseph P. Nacchio … respectfully renews his objection to the Court’s rulings excluding testimony surrounding his February 27, 2001 meeting at Ft. Meade with representatives from the National Security Agency (NSA) as violative of his constitutional right to mount a defense. Although Mr. Nacchio is allowed to tell the jury that he and James Payne went into that meeting expecting to talk about the “Groundbreaker” project and came out of the meeting with optimism about the prospect for 2001 revenue from NSA, the Court has prohibited Mr. Nacchio from eliciting testimony regarding what also occurred at that meeting. [REDACTED] The Court has also refused to allow Mr. Nacchio to demonstrate that the agency retaliated for this refusal by denying the Groundbreaker and perhaps other work to Qwest.

By being prevented from telling his full story to the jury or from fully and properly cross-examining any rebuttal witnesses, Mr. Nacchio has been deprived of the ability to explaoin why - after he came out of the February meeting with a reasonable, good faith, expectation that Qwest would be receiving significant contracts from NSA in 2001 … Qwest was denied significant work.

[ed note. James Payne, Qwest's government liason who was also at February 27, 2001 meeting, later spoke with government agents in 2006].

In the interview, Mr. Payne confirmed that, at the February 27, 2001 meeting, “[t]here was some discussion about [redacted]. Mr. Payne also stated: Subsequent to the meeting the customer came back and expressed disappointment at Qwest’s decision. Payne realized at this time that “no” was not going to be enough fro them. Payne said they never actually said no and it went on for years. In meetings after meetings, they would bring it up. At one point, he suggested they just them, “no.” Nacchio said it was a legal issue and that they could not do something their general counsel told them not to do. … Nacchio projected that he might do it if they could find a way to do it legally.

There was a feeling also, that the NSA acted as agents for other government agencies and if Qwest frustrated the NSA, they would also frustrate other agencies.

The Groundbreaker contract, reportedly worth $2 - $5 billion dollars, outsources the NSA’s IT management, but at least one lawsuit charges the project was cover for a domestic spying program.

Notably, after the USA Today story ran , Nacchio’s lawyer Herbert Stern, who argued his case before trial, released this statement:

In light of pending litigation, I have been reluctant to issue any public statements. However, because of apparent confusion concerning Joe Nacchio and his role in refusing to make private telephone records of Qwest customers available to the NSA immediately following the Patriot Act, and in order to negate misguided attempts to relate Mr. Nacchio’s conduct to present litigation, the following are the facts.

In the Fall of 2001, at a time when there was no investigation of Qwest or Mr. Nacchio by the Department of Justice or the Securities and Exchange Commission, and while Mr. Nacchio was Chairman and CEO of Qwest and was serving pursuant to the President’s appointment as the Chairman of the National Security Telecommunications Advisory Committee, Qwest was approached to permit the Government access to the private telephone records of Qwest customers.

Mr. Nacchio made inquiry as to whether a warrant or other legal process had been secured in support of that request. When he learned that no such authority had been granted and that there was a disinclination on the part of the authorities to use any legal process, including the Special Court which had been established to handle such matters, Mr. Nacchio concluded that these requests violated the privacy requirements of the Telecommunications Act.

Accordingly, Mr. Nacchio issued instructions to refuse to comply with these requests. These requests continued throughout Mr. Nacchio’s tenure and until his departure in June of 2002.

Note that Stern says a request was made in the Fall of 2001. Stern does not say “first approached” in the statement, though that clearly seems to be the implication. But it’s not what the four corners of Stern’s statement says. And finally, the redactions in the documents make it impossible to say what the February 21, 2001 requests from the NSA were. It could have been a request from NSA to do some other eavesdropping thing that Nacchio felt uncomfortable with, but I’m very doubtful.

See Also:

P & T; BS! - B1G BR0THER

Penn and Teller, two US comedians, lay it out.

The other lie held by those at State is that the Oligarchy and its paramilitary and military forces never kidnap or murder anyone, particularly anyone who expresses dissent within territory under their control, in the cities and the countryside. FARC opposes these activities, because unlike most Americans, they’re capable of courage and sacrifice. They aren’t perfect, and they have needless blood on their hands too. This is how a civil war works. The regime’s crimes are far-and-away greater.

But that story doesn’t fit when you’re trying to extend your influence in the South American nation, especially when American “drug interdiction” troops and advisers are being misused for counterinsurgency purposes. You need a pretext. The State Department has had to make-due with the line that “FARC is to blame for everything bad happening in Colombia.”

The former hostages are right to be angry, and wrong to point their fingers in one direction at FARC, implying that the power structure to the North is blameless. For a number of them, it’s nothing new. Recent years have amply illustrated through the atrocities of right-wing paramilitary employed by the regime that this is a lie. It’s a lie that the former hostages are willingly perpetuating, but hey, don’t they look svelte? Name one that looks fat.

Let

There are two things that I agree on with the traditional financial planning community.

1. You should have reserves to help you through the tough times, because there will be tough times; and

2. Whatever strategy you choose (or allow someone else to choose for you), there is no reason to allow your fear/nervousness to get the best of you and change or eliminate that strategy based on fear.

Now, here is the Shafer Financial Way:

1. Create reserves first.  Save money inside a liquid fixed rate investment like a mutual fund until you have 6 months worth of expenses.  But this is a short term strategy to get started with.  Develop a long term strategy.  Perhaps start funding an Equity Indexed Universal Life Insurance policy, or use the money market account as both a reserve account and a pool in which to periodically buy Berkshire Hathaway stock.  In short, long term create reserve accounts that also will hedge against inflation for you;

2. Build a wealth creation plan.  This plan must be specific to where you are currently, where you want to be, and when you want to be there.  For example. your current working net worth is $40,000 and you want to have a working net worth of $3m in 25 years.  Then you need to create the investment(s), which will give you the best chance of getting to your goal with the least amount of inherent risk.  For example, if you need to get a 15% rate of return to reach your goal, then you need to build inside the plan the right investments that can accomplish that for you, using historical rate of return data as your guide.  You simply can’t build a reasonable plan based on beating the market, or based on financial instruments that have historically underperformed your needed rate of return;

3.  You need to fully understand the risk of failure to reach your financial goals; 

4.  You need to put all your resources to work for you.  If you have over 50% of home equity in your home, and you can take out equity to get you to the 80% mark, do it and put those dollars to work for yourself.  Don’t waste precious cash flow on luxury items until you can do so and still remain on goal.  That means buy cars that are over two years old, and don’t buy gas guzzlers.  Put off buying that entertainment center/50 inch flat screen, etc. until you can do so without having to put it on your credit card (unless it is only for payment convenience).  Concentrate on how you can increase your cash flow by starting a business, changing your job, etc.;

5. Make sure you take into consideration taxation.  It is most peoples #1 expense;

6. Don’t be afraid to take reasonable risks in order to invest in projects you are sure about, change your life to a wealth building life, and create the life you want to live.  It won’t happen if you don’t assume some risk;

7.  Find a mentor who has made his/her wealth or preferably pay for a wealth coach.  A wealth coach can make you hundreds of thousands of dollars (or millions if you have enough time) by just keeping your eyes on your goals.  Yes, this is self serving, but it is also true.  Think that Warren Buffett, Tiger Woods, Michael Phelps, etc. didn’t have coaches/mentors?   Of course they did.  Financial services sales people are not necessarily wealth coaches (usually they aren’t).  Wealth coaches might also offer financial products for sale, but they must not mix the two roles at the same time.  Look for a wealth coach that will refer you out to purchase financial products, therefore maintaining the integrity of the wealth coaching role ;and

8.  Now is the time to start.  Build your plan before the end of the year.  Implement it as soon as you can.  Change your life for the better! 

 

 

 

Rescues and Remedies:Deteriorating Balance Sheet at the Fed

Think back to those initial estimates of the Iraq War’s likely cost–No more than $50 billion! It will practically pay for itself!–and you will be in the right frame of mind to assess current governmental expectations. 10/16/08

In early November the Fed Balance Sheet Surpassed $2 trillion, and Dallas Fed President predicted it could surpass $3 trillion by January 2009.

Lee Hoskins, a former president of the Cleveland Federal Reserve Bank, sums up why Bernanke will win no plaudits in the Central Bank Hall of Fame: “The Fed has violated two principal tenets of central banking. First, don’t lend to insolvent institutions, and second, don’t lend on anything but the most pristine collateral — and at a penalty rate.”

“What we are seeing at present is not a reduction of the debt structure of the economy, but a shift from [private to public] hands. That can lead to four results, when the debt of the US Treasury is so large that it cannot be serviced:

“Mr. Paulson said the Treasury would make $250 billion available to banks to help recapitalize those banks and to get them lending again, among themselves and to businesses and consumers.

In addition to injecting money into the banks, according to the plan, the United States would also guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers.

The F.D.I.C. would also offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Another $125 billion is allocated for thousands of small and midsize banks. They will be eligible for government investments reflecting a similar proportion of their assets.” (NYT, 10/14/08)

Update, 10/19/08:

The intellectual failure to offer rebuttals to competing plans or to give them serious consideration is a pathetic commentary on the quality of US economic leadership. Scare-mongering and threats of economic terrorism just about exhaust their arsenal of argumentation.

Congress ought not to have given Paulson what is essentially a blank check. It is their failure, too.

As compared with the Paulson plan, Zingales’s proposal is a much better deal for the public, more respectful of basic principles of free enterprise, and more efficient in returning to a more normal credit environment.

The essence of the Zingales approach is to facilitate a process whereby insolvent firms are recapitalized in a two step process: existing shareholders are wiped out, as is the basic rule in treating with insolvent firms, and bondholder claims are converted from debt to equity. That constitutes an immediate recapitalization, addresses the fundamental problem of the debt overhang, and would allow a faster return to credit market stability than the approach the US government has favored. It is also far more consistent with elementary principles of justice and law. It is only a sort of “money grows on trees” attitude, and the ability of policymakers to confuse the public with a shell game in which true costs are minimized, that allows this to proceed. It has enormous opportunity costs.

“The core idea is to have Congress pass a law that sets up a new form of prepackaged bankruptcy that would allow banks to restructure their debt and restart lending. Prepackaged means that all the terms are pre-specified and banks could come out of it overnight. All that would be required is a signature from a federal judge. In the private sector the terms are generally agreed among the parties involved, the innovation here would be to have all the terms pre-set by the government, thereby speeding up the process. Firms who enter into this special bankruptcy would have their old equity-holders wiped out and their existing debt (commercial paper and bonds) transformed into equity. This would immediately make banks solid, by providing a large equity buffer. As it stands now, banks have lost so much in junk mortgages that the value of their equity has tumbled nearly to zero. In other words, they are close to being insolvent. By transforming all banks’ debt into equity this special Chapter 11 would make banks solvent and ready to lend again to their customers.

Certainly, some current shareholders might disagree that their bank is insolvent and would feel expropriated by a proceeding that wipes them out. This is where the Bebchuk mechanism comes in handy. After the filing of the special bankruptcy, we give these shareholders one week to buy out the old debtholders by paying them the face value of the debt. Each shareholder can decide individually. If he thinks that the company is solvent, he pays his share of debt and regains his share of equity. Otherwise, he lets it go.

My plan would exempt individual depositors, which are federally ensured. I would also exempt credit default swaps and repo contracts to avoid potential ripple effect through the system (what happened by not directing Lehman Brothers through a similar procedure). It would suffice to write in this special bankruptcy code that banks who enter it would not be considered in default as far as their contracts are concerned.

How would the government induce insolvent banks (and only those) to voluntarily initiate these special bankruptcy proceedings? One way is to harness the power of short-term debt. By involving the short-term debt in the restructuring, this special bankruptcy will engender fear in short-term creditors. If they think the institution might be insolvent, they will pull their money out as soon as they can for fear of being involved in this restructuring. In so doing, they will generate a liquidity crisis that will force these institutions into this special bankruptcy.

An alternative mechanism is to have the Fed limit access to liquidity. Both banks and investment banks currently can go to the Federal Reserve’s discount window, meaning that they can, by posting collateral, receive cash at a reasonable rate of interest. Under my plan, for the next two years only banks that underwent this special form of bankruptcy would get access to the discount window. In this way, solid financial institutions that do not need liquidity are not forced to undergo through this restructuring, while insolvent ones would rush into it to avoid a government takeover.

Another problem could be that the institutions owning the debt, which will end up owning the equity after the restructuring, might be restricted by regulation or contract to holding equity. To prevent a dumping of shares that would have a negative effect on market prices, it is enough to include a norm that allows these institutions two years to comply with the norm. This was the standard practice in the old days when banks, who could not own equity, were forced to take some in a restructuring.

The beauty of this approach is threefold. First, it recapitalizes the banking sector at no cost to taxpayers. Second, it keeps the government out of the difficult business of establishing the price of distressed assets. If debt is converted into equity, its total value would not change, only the legal nature of the claim would. Third, this plan removes the possibility of the government playing God, deciding which banks are allowed to live and which should die; the market will make those decisions.”

That’s actually the second part of the Zingales plan. The first part addresses how to deal with the housing bust, which finds so many homeowners “underwater,” that is, owing more on their homes than they are worth. In the old days, renegotiation could take place between a bank and a mortgage holder, but that is not possible today because of “securitization.”

Here’s the key element in the plan: “Congress should pass a law that makes a re-contracting option available to all homeowners living in a zip code where house prices dropped by more than 20% since the time they bought their property.”

Utilizing the Case-Shiller index measuring house price changes at the zip code level, “the re-contracting option will reduce the face value of the mortgage (and the corresponding interest payments) by the same percentage by which house prices have declined since the homeowner bought (or refinanced) his property.”

In exchange, “the mortgage holder will receive some of the equity value of the house at the time it is sold. Until then, the homeowners will behave as if they own 100% of it. It is only at the time of sale that 50% of the difference between the selling price and the new value of the mortgage will be paid back to the mortgage holder.”

“The reason for this sharing of the benefits is twofold. On the one hand, it makes the renegotiation less appealing to the homeowners, making it unattractive to those not in need of it. For example, homeowners with a very large equity in their house (who do not need any restructuring because they are not at risk of default) will find it very costly to use this option because they will have to give up 50% of the value of their equity. Second, it reduces the cost of renegotiation for the lending institutions, which minimizes the problems in the financial system.

Since the option to renegotiate (offered by the American Housing Rescue & Foreclosure Prevention Act) does not seem to have been stimulus enough, this re­contracting will be forced on lenders, but it will be given as an option to homeowners, who will have to announce their intention in a relatively brief period of time.

The great benefit of this program is that provides relief to distressed homeowners at no cost to the Federal government and at the minimum possible cost for the mortgage holders. The other great benefit is that it will stop defaults on mortgages, eliminating the flood of houses on the market and thus reducing the downside pressure on real estate prices. By stabilizing the real estate market, this plan can help prevent further deterioration of financial institutions’ balance sheets.”

My comment: I have a child-like enthusiasm for Zingales’ plan to recapitalize the banks. About his plan to re-negotiate mortgages I am not so sure. I am thinking it could probably be improved, but am sure I am not the fellow to improve it.

11/01/08

Buiter argues that the US taxpayer is getting a “terrible return” from Paulson’s promise to supply $250 billion to the banks, “bound to rise to probably around twice that amount.” It is basically a “free gift.” In Paulson’s program, “the injection of capital is through non-voting preference shares yielding a ridiculously low interest rate (5 percent as opposed to the 10 percent obtained by Warren Buffett for his capital injection into Goldman Sachs).” There are also no attractively valued warrants; the shares “can be repurchased after three years, at the banks’ discretion, on terms that are highly attractive to the banks.” Unlike in Belgium, the government gets no vote even as it ponies up the funds. Unlike in Britain, whose preference shares get a 12 percent yield and board members, the US taxpayer gets a 5 percent yield and no say in the running of the firm.

The major scandal, as Buiter notes, is that neither in the latest iteration of the Paulson Plan nor in the bailouts of AIG and Freddie and Fannie did unsecured senior creditors have “to take an up-front haircut. Worse than that, even holders of junior debt and subordinated debt could come out” of each bailout whole. “There were no up-front haircuts, charges or mandatory debt-to-equity conversions.”

Buiter emphasizes the “moral hazard” objection to proceeding in this vein, arguing that “we are laying the foundations of the next systemic crisis” by this conduct. That may be—it is indeed a horrible precedent–but the far larger point is simply that the whole proceeding upends and makes a total mockery of basic principles of bankruptcy law. It’s as if the shareholders of an insolvent firm decided that they were going to simply make off with all the excess cash and potted plants, stiff their creditors, and waltz away unimpaired. You can’t do that. There is an order to these things. There are several laws on the books against it. That shareholders must suffer first from insolvency, with the creditors picking up the scraps, is like some sort of first principle, is it not? Yet the US government’s policy violates this principle and allows both shareholders and creditors to gain unfair advantages at the expense of the public.

The shareholders are the principes, the creditors and bondholders the hastati, and the government’s lender of last resort function is the triarii. The idea is to let the first two lines bear the brunt of the fighting in the first and second instances, carefully husbanding one’s strategic reserve.

It is interesting to think about the “last resort” function across a variety of fields. It is important not only in central banking but also (as with Bolingbroke) in military strategy. The concept plays an important role in theories of the just war. Someone could do a dissertation comparing the last resort function across these various domains. That would make a good book. Good luck finding a job!

11/01/08

In a world of uncertain values, we need a new standard of value. So to hell with the gold standard and the Dow:gold ratio favored by bears. Gold is a barbarous relic. Until January 20, 2009, at least, the coin of the realm is the Goldman standard.

10/26/08

“Rather than spending a trillion dollars on buying toxic derivatives, or on a war, these funds would be better spent in helping private enterprise jump-start the above referenced conservation techniques and alternate energy research and implementation. The use of our hard-earned tax dollars to help accelerate these initiatives would create jobs and new businesses. The bottom-line is that solving the energy problem - which must be dealt with anyway, and soon - is the perfect solution to solving the consumption- and credit-induced economic dislocation we are now beginning to experience. There would be a third, important benefit. Energy conservation, increased natural gas use and alternate energy implementation all help lower CO2 emissions.”

One of these days I will track down that link, but this passage gets to the core of the issue. 1 or 2$ trillion here cannot be $1 or $2 trillion there. There has been little discussion of opportunity costs in discussion of the financial bailout, but it pretty obviously forecloses just about every other policy initiative one might fancy.

“If the core problem leading to the current seizure of the credit markets is the misallocation of credit into unproductive works during the boom years, then no amount of new credit will solve the problem unless the distortions promoting misallocation are redressed through fiscal and regulatory policy changes. Bailouts and recapitalisation of failed policies of the past are only digging a deeper hole, betraying more capital of younger generations into the unproductive works financed by the current generation.”

10/27/08

Note also that the public has an insatiable appetite for short term Treasury bills, whose yields have practically disappeared in the “flight to safety.”

Note in the chart above, finally, that investors have also rushed to the apparent safety of long term government bonds, which offer interest rates from 3.5 to 4.0 percent.

The bond conundrum, circa 2008, is simply this: How can the government take on all this bad debt without fatally impairing its own credit rating?

As investors have fled from all else besides government debt, the government has taken on the “all else.” Its guarantee makes its own debt equivalent in value to the debt it has taken on, does it not? That strongly suggests that long term government borrowing rates are going up. Every other asset class has crashed; why not government bonds?

Important as the crisis is in its own right, it is the response of the government—its way of molding into stone in ten days measures that will have consequences for ten years—to which I draw attention. After 9/11/01, the mind of the Bush administration was made up quickly. They were going to war, first with Afghanistan, then with Iraq. Public discussion of alternatives, and criticism of the administration, was virtually non-existent in the mainstream media. Most Americans have reconsidered the Iraq War and think it was a big mistake. But we’re still there.

The mood now is different, but there is the same essential dynamic, in which great crisis produces the demand that something be done immediately, foreclosing the opportunity for deliberation. It follows inexorably that the executive must be entrusted with the details, because circumstances change and confidentialities must be preserved. Voila! There you have your ill-considered, secret, untransparent decisions, made in a rush, entailed upon the subsequent generation. The collective response is something like: We Need to Act! No Time to Think!

This is hardly the model of republican deliberation for which American political institutions were once renowned. It is very unbecoming to a polity that purports to respect constitutional valu