Friday, October 31, 2008

Trader error causes crazy swings in EUR/HUF - dealer
While international news were mixed after the closing of Hungarian money markets, the forint is apparently mostly affected by a 50-bp Fed rate cut and similar moves by Far Eastern central banks (Hong Kong, Taiwan, China). After market opening on Thursday, the HUF was relatively steady versus the euro and eased some to around 255 from 253 in the morning session. After that the HUF started to act like a donkey on drugs, kicking and running in all directions.

The larges swings observed around 11:14 local time were the consequence of a trader error. A major foreign investment bank put in a bid on EUR/HUF at around 264 instead of 254 and this has caused the abrupt flip-out, a Budapest-based currency dealer told

The easing of the Hungarian currency may also be linked to rumours about an imminent rate cut in Poland that pushed PLN to 3.58 from 3.45 against the euro since market opening (3.5% PLN depreciation intraday), which dragged the forint along, he added.

The forint hit its all-time low versus the single European currency at 286 last Thursday and firmed by more than 13% since then.

Japan announces stimulus package
HONG KONG: Japan announced a new stimulus package on Thursday that includes $51 billion to help households and businesses, the boldest of several measures that officials took to try to stanch the fallout from the global credit crisis, and prompting shares throughout the region to surge.

Hong Kong and Taiwan cut interest rates, after a cut of half a percentage point by interest rates by the Federal Reserve a day earlier.

And South Korea established a $30 billion currency swap line with the Federal Reserve, a measure expected to ease pressure on local banks needing to refinance foreign debt. President Lee Myung-bak of South Korea also said his government would bring forward budget spending and consider beefing up construction spending.

"A harsh storm seen only once in 100 years is raging," Japanese Prime Minister Taro Aso told a news conference as he introduced the second stimulus package in about two months. "Under such circumstances, I am certain that what is most important is to remove uncertainties from the lives of people."

Thursday, October 30, 2008


Overview of Series 34 Exam Questions

Series 34 – Retail Off-Exchange Forex Examination

The Series 34 exam is broken up into five main parts: definitions and terminology, forex trading calculations, risks associated with forex trading, forex market concepts and theories, and forex regulatory requirements.  Within these five main parts the exam is expected to cover many of the sub-parts listed below.  Please note that the following items are general and are not representative of actual test questions and do not necessarily represent the relative weighting of each of the categories.

Please check back with us soon for a Series 34 Study guide and Series 34 Flashcards.

Definitions and Terminology
•    American terms, European terms
•    Base currency, quote currency, terms currency, secondary currency
•    Bid/ask spread
•    Collateral, security deposit, margin
•    Counterparty, dealer: Futures Commission Merchant,  Retail Foreign Exchange Dealer, other regulated entities listed in the Commodity Exchange Act
•    Cross rates
•    Currency crosses
•    Currency pairs
•    Direct quotes, indirect quotes
•    Exchange rate
•    Exotic options: barrier, double barrier, knock in, knock  out, compound options
•    Forward points
•    Forward rate, bid forward rate
•    Interest rate differential
•    Interest rate parity
•    Mark-ups, mark-downs
•    PIPs
•    Rollovers
•    Spot rate, spot price
•    Tom-next and spot-next
•    Trade date and settlement date
•    Swaps

Forex Trading Calculations
•    Cross rate transactions
•    Effects of leverage calculations
•    Netting of positions
•    Open trade variation
•    Profi t & loss calculations
•    Pip values, price after pips
•    Option and exotic option profit & loss calculations
•    Return on collateral, security deposit, margin
•    Transaction costs

Risks Associated with Forex Trading
•    Country or sovereign risk
•    Credit risk
•    Exchange rate risk
•    Interest rate risk
•    Liquidity risk
•    Market risk
•    Operational risk
•    Settlement risk, Herstaat risk

Forex Market – Concepts, Theories, Economic Factors and Indicators, Participants
•    Balance of payments
•    Balance of trade
•    Bank for International Settlements (BIS)
•    Capital account and current account
•    Central bank activities, intervention, sterilized intervention, interference
•    Clearing House Interbank Payment  System (CHIPS)
•    Discount rate
•    Economic indicators: employment, consumer spending, income, industrial  and inflation indicators
•    Elasticity of exchange rates
•    Exchange rate intervention
•    Exchange rate volatility
•    Federal Reserve Board, Fedwire
•    Fiscal policy
•    Fisher effect
•    Foreign investment indicators
•    Gross national product, gross  domestic product
•    Inflation
•    Interbank funds transfer and  settlement systems
•    International Fisher effect
•    International Monetary Fund
•    Portfolio balance
•    Role of central banks
•    Theory of elasticities
•    Theory of purchasing power parity
•    World Trade Organization

Forex Regulatory Requirements
•    CFTC jurisdiction and jurisdictional limitations
•    Conflicts of interest
•    Disclosures to customers
•    Jurisdictional & regulatory framework
•    Know your customer
•    NFA Interpretive Notice Regarding Forex  Transactions
•    NFA Interpretive Notice      Compliance Rule 2-36(e): Supervision of the Use of Electronic Trading Systems
•    NFA Notice to Members: Supervision of Forex Promotional Materials
•    NFA membership and associate membership requirements
•    Promotional material & solicitation
•    Registration requirements
•    Reports to customers, confirmations, monthly  summaries
•    Security deposit rules
•    Security of customer funds, no segregation

Monday, October 27, 2008

Dubai Mumbai or Goodbye Investment banks following the money trail are shifting some top earners to Dubai to help tap the booming oil-rich Persian Gulf economies and the estimated $1.5 trillion held by sovereign wealth funds there. Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.

Last week, the Reserve Bank of India (RBI) governor said that the monetary policy authority would take conventional and unconventional measures to ensure financial as well as price stability and growth.

The committee, appointed by the finance minister to assess the liquidity situation, has said that a portion of India's forex reserves, aggregating $273 billion, could be used to
invest in securities such as bonds issued by foreign offices of Indian banks, said a person familiar with the issue.

Sunday, October 26, 2008

Currency Crisis brewing

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become "the second epicentre of the global financial crisis", this time unfolding in Europe rather than America.

Austria's bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

It might get the people who run our companies and our regulatory agencies into the business of telling the truth....

In the days leading up to the conference, volunteers in lederhosen draped the village with hundreds of white and blue banners that declared the 38-year-old conclave's purpose: ``Committed to Improving the State of the World.''

WEF organizers often pulled stunts to hoodwink delegates who preferred partying and meeting privately with clients over attending forum sessions.

In the ``Why Do Brains Sleep?'' meeting in 2007, a cadre of eminent psychologists and psychiatrists explored whether financial leaders got enough rest and ``what that tells us about the quality of their decision-making.''

To spur delegates into addressing financial-market alienation, a session in 2004 was held to discuss whether extraterrestrials had taken control of Wall Street: ``Have Extraterrestrials Made Contact With Government Leaders?''

Saturday, October 25, 2008

Currency War with the Dollar

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.

The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.

"The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University. Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.

According to, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.

"They are moving to euros, pounds, Australian dollars or even quoting prices in renminbi," David Wei, chief executive, told the Financial Times. Moreover, he added, prices quoted in dollars were now often valid for just seven days compared with the 30-60 days common previously. Oct. 19 (Bloomberg) -- European Central Bank council member Ewald Nowotny said a ``tri-polar'' global currency system is developing between Asia, Europe and the U.S. and that he's skeptical the U.S. dollar's centrality can be revived.


Thursday, October 23, 2008

Greenspan Concedes to `Flaw' in His Market Ideology (Update2)

Greenspan Concedes to `Flaw' in His Market Ideology (Update2)

By Scott Lanman and Steve Matthews

Oct. 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said a ``once-in-a-century credit tsunami'' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

``Yes, I found a flaw,'' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. ``That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.''

Greenspan said he was ``partially'' wrong in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.

``We cannot expect perfection in any area where forecasting is required,'' he said. ``We have to do our best but not expect infallibility or omniscience.''

Part of the problem was that the Fed's ability to forecast the economy's trajectory is an inexact science, he said.

``If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,'' Greenspan said. ``Forecasting never gets to the point where it is 100 percent accurate.''


The admission that free markets have their faults was a shift for the former Fed chairman who declared in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''

Today Committee Chairman Henry Waxman, a California Democrat, said Greenspan had ``the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.''

``You were advised to do so by many others,'' he told Greenspan. ``And now our whole economy is paying the price.''

Waxman and other lawmakers repeatedly interrupted Greenspan as he answered their questions, in contrast to deference to his testimony while he was Fed chairman.

Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony. Other rules should address fraud and settlement of trades, he said.

Resistant to Regulation

Greenspan opposed increasing financial supervision as Fed chairman from August 1987 to January 2006. Policy makers are now struggling to contain a financial crisis marked by record foreclosures, falling asset prices and almost $660 billion in writedowns and losses tied to U.S. subprime mortgages.

Today, the former Fed chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?''

Greenspan reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

``As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,'' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.

Subprime Lending

Greenspan said the Fed didn't know the size of the subprime mortgage market until late 2005.

Securities and Exchange Commission Chairman Christopher Cox and former Treasury Secretary John Snow also appeared at the House committee hearing.

Snow said the economy is headed down a ``bad, bad path'' and he endorsed consideration of more fiscal stimulus. For the longer term, Snow said the global financial system should be reorganized by focusing on increasing transparency of ``excessive'' leverage to prevent institutions from creating too much risk.

The U.S. needs ``one strong national regulator'' to oversee firms and fix what Snow called ``a fragmented approach'' to regulation. ``Steps to restore transparency and responsibility in the marketplace will go a long way towards restoring stability and confidence,'' he said.

Addressing the trio that oversaw the U.S. financial markets as the housing bubble developed, Representative John Yarmuth, a Democrat from Kentucky, characterized them as ``three Bill Buckners,'' referring to the Boston Red Sox first baseman whose fielding error some fans blame for the team's loss in the 1986 World Series.

To contact the reporter on this story: Scott Lanman in Washington at; Steve Matthews in Atlanta at

Last Updated: October 23, 2008 14:14 EDT

Thursday, October 16, 2008

Bretton Woods 3

EU leaders weigh overhaul of Western financial foundations

BRUSSELS: Shaken by the financial meltdown and plunging markets, leaders of the world's economic powers said Wednesday that they favored an ambitious campaign to revamp the structures that have governed global finance for more than 60 years.

Officials from Britain, France and Germany, meeting before a summit meeting here of European Union leaders, said they approved of convening a conference in November or December aimed at revising the system put in place toward the end of the World War II.

In a statement issued Wednesday, the Group of 8, which also includes the United States, Japan, Canada, Italy and Russia, said it looked forward to a meeting "to adopt an agenda for reforms to meet the challenges of the 21st century."

Prime Minister Gordon Brown of Britain, regarded as the architect of a rescue package agreed upon Sunday by the euro-zone countries, said the world needed to alter the institutions that were created by the 1944 Bretton Woods conference and that have governed global finance. Brown also called for reviving the talks on global trade that broke down in July.

President George W. Bush has said he was in favor of a summit meeting on global financial institutions and wants to attend even if it takes place after the presidential election on Nov. 4, said European diplomats who asked not to be identified. The thinking was that the main economies would also hold a separate meeting with the U.S. president-elect if he were available before Inauguration Day on Jan. 20.

The EU meeting Wednesday was dominated by the fallout from the banking crisis and by fears of a recession. One consequence of that concern was a growing threat to Europe's ambitious plans to cut carbon dioxide emissions by 20 percent by 2020.

Poland led a rebellion by a group of nations threatening to block the conclusions of the meeting unless there was an agreement to abandon the December deadline for reaching an accord on a climate-change package. Eight East European nations want the EU to ease targets for greenhouse-gas cuts because of the economic crisis. Italy has also aired concerns, calling for an impact study of the effects on the real economy.

The meeting began with a bizarre feud between Prime Minister Donald Tusk of Poland and the country's euro-skeptic president, Lech Kaczynski. Denied a seat on Tusk's plane, Kaczynski chartered his own and crashed the meeting, provoking a diplomatic incident.

But the meeting saw consensus on the need to make financial changes. France, which holds the EU's rotating presidency, said it hoped that almost all 27 nations would endorse the principles agreed on by the euro-zone on Sunday.

Big nations rallied behind the notion of a "Bretton Woods II" conference. "I think there is a general agreement there should be an international leaders' meeting," Brown said before the start of the meeting. The agenda, he added, would be "far-reaching reform of the international financial system" and global trade talks.

Brown also called for changes at the International Monetary Fund and the World Bank, which he said were "built for the circumstances of 60 years ago." He urged the creation of an early warning system for the international economy and greater supervision of multinational companies.

He suggested that the IMF work more closely with the Financial Stability Forum, which was convened in April 1999 to promote the exchange of information and international co-operation in financial supervision and surveillance.

Prime Minister François Fillon of France, meanwhile, said, "The financial system is suffering a heart attack" and added that it would be "irresponsible" not to consider ambitious international changes "after the financial hurricane that has been hitting the world."

As the effort Sunday to coordinate European action in the financial crisis appeared to calm the markets for a time, José Manuel Barroso, the president of the European Commission, argued Wednesday that attention should shift to longer-term changes.

"We see light at the end of the tunnel but we are not there yet," he said. "Once we have put financial markets back on their feet, we must ensure that in the future they function properly for the benefit of citizens and businesses, rather than themselves."

The European Commission, meanwhile, has proposed changing accounting rules so assets do not have to be revalued so often, and plans to pass laws that will legalize the commitments made to guarantee bank deposits in Europe of up to €50,000, about $67,000, rising to €100,000 in time.

Proposals to govern executive pay and to regulate hedge funds are also being weighed.

But there was no indication Wednesday that Britain would drop its opposition to one important proposal from the European Commission - a so-called capital requirements directive. The proposal would require financial institutions to retain at least the equivalent of 5 percent of the capital value of an asset that they securitize.

Several EU officials, meanwhile, said they were worried that some countries might use the crisis to try to change long-established rules that block state aid to ailing companies, a central pillar of the EU's internal market.

Inside Details of Sequoia Capital’s Doomsday Meeting With its Companies

Inside Details of Sequoia Capital's Doomsday Meeting With its Companies

Om Malik

, Thursday, October 9, 2008 at 11:27 AM PT Comments (68)

Updated with the Sequoia powerpoint: Last night I reported on a special meeting held by Sequoia Capital for its portfolio companies, warning them about the fiscal hurricane that was going to hit them, and how they'd better figure out ways to survive what could be a big downturn.

There were some gaps in the details about that meeting, but I have since been able to piece together the minutes and what folks there essentially said. Since these are second-sourced details, I cannot say they are a 100 percent accurate, so please view them with a degree of skepticism. Nevertheless, I still feel confident enough to share them.

These were the four speakers:

Mike Moritz, General Partner, Sequoia Capital, who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital, who until recently ran the $26-billion Stanford Endowment Fund, and Michael Partner, Sequoia Capital, who was Sequoia's very first hedge fund manager and worked at Maverick Capital and Robertson Stephens. The last speaker was, as I mentioned before, Doug Leone, General Partner, Sequoia Capital.

Moritz Musings

Mike Mortiz kicked off the proceedings by saying that these are drastic times and that means drastic measures must be taken to survive. His message to companies was don't worry about getting ahead, instead, "We're talking survive. Get this point into your heads." He warned that companies need to be cash-flow positive, and if they are not, then they need to get there now, because raising capital without being cash-flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.

Upin Says

Upin, who knows a thing or two about money and markets, told the room that we are in the beginning of a long cycle, what he called a "secular bear market." This could be a 15-year problem, he said. This comment was accompanied by many slides that showed historical charts of previous recessions averaging 17-year cycles. He pointed out that the issue here is not the equity markets but the credit market, and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, it is not a normal time, and is a significant risk not just to growth but to personal wealth.

He advised startups to make drastic changes, to cut expenses and to cut deep, but to still keep marching. "You can't be a general if you turn back," he apparently said. The point he hammered on was that since you can't manage the economy, manage everything else, including your business. He had some interesting advice for startups.

  • Cut spending. Cut fat. Preserve capital.
  • Throw out the models and spreadsheets, because all assumptions will be wrong.
  • Focus on quality.
  • Reduce risk.

Michael Beckwith

Michael Beckwith's presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in the fourth quarter and the first quarter of 2009, and pointed to eBay as an example.

Leone's lessons

Doug Leone told the group that this downturn was a different animal and one from which it would take "years to recover." He was clear in pointing out that:

  • Unprofitable companies would have a tough time raising cash, so get cash-flow positive as soon as possible.
  • Go on the offensive and pound on your competitors' shortcomings.
  • Be aggressive with your messaging and be out there. In a downturn, aggressive PR and communications strategy is key.
  • Decline in M&A will mean that only lean companies with sales models that work will get bought.
  • When it comes to deciding between capital preservation and grabbing market share, he advised that everyone should be preserving capital.

Leone's other tips for companies, especially the Sequoia portfolio companies, were something like this:

  • Start with zero-based budgeting.
  • Cutting deeper is the formula to survive, and this is an era of survival of the quickest.
  • Make sure you have one year's worth of cash.
  • If you have a product, reduce expenses around it and boost sales. If the product is ready, cut the number of engineers.
  • Focus on building the absolutely essential features in your product.
  • Be brutal when it comes to marketing — anything that isn't working, cut it.
  • Don't burn through your cash, for cash is king.
  • Cut base salaries on sales people and leverage them with upside.
  • Most importantly, be true to yourself.

Wednesday, October 15, 2008

Liquidity Troubles, Volatility Bedevil Currency Markets Liquidity Troubles, Volatility Bedevil Currency Markets     

We begin by pointing out the obvious. A bounce in a bear market does not give cause for celebration. It gives cause for selling. Sell the rallies, buy the dips. Buy low, sell high, in other words. We're selling stocks, generally. And this bounce is a good occasion to do so…because we think this market could go a lot lower. Dow 5,000 is our target. When the Dow gets below 5,000 we might be tempted to buy. Until then, it's sell…sell…sell......

State-controlled enerprises, the present owners and creditors of which will receive income bonds . . . . There is no real difference between being a yes-man official of a billion dollar bank and being an official of a State bureaucracy . . ."

From the pro-fascist American author Lawrence Dennis, in his 1936 book, The Coming American Fasicsm, p. 176, in the chapter entitled "Why Fascism Instead of Communism?".

Perhaps the time for self-delusion is passed. The grand new plan, just replaced the $700 billion plan, that replaced the $80 billion plan to bail out AIG, that replaced the Bear Stearns bailout which was just pocket change.

Forgive me for being skittish but it seems like every time you blink the number goes up by a factor of ten. The way it looks now is that combined USA , Europe and UK , the damage could easily be $7 trillion.

Monday, October 13, 2008

Fed announces unlimited supply of Dollars NEW YORK ( -- The Federal Reserve announced Monday it will offer an unlimited amount of dollars to three other central banks in an unprecedented move to provide liquidity to the global banking system.

You say the dollar has been soaring recently? Well, yes, it has. But that doesn't mean it is worth anything. In fact, the dollar is valueless, and the $1 bills in your wallet are worth no more intrinscially than the $100 bills. Those who do not understand why this is so or who would argue otherwise are simply ignorant or delusional. As we explained here a couple of weeks ago, the dollar is rallying because it is caught in a short squeeze. Short-term borrowers, unable to keep rolling their loans, have been forced to settle up in cash. This has created a made scramble for cash dollars, as opposed to credit dollars. And although the Fed has attempted to keep the system liquid with unprecedented infusions of new cash, the amounts pale in comparison to a global financial deflation that has already caused tens of trillions of dollars worth of financial and real estate assets to vanish from the economy.

There are no attractive options, but compulsory adjustment might not be the most unattractive option. If it worked, it might at least offer greater certainty. Already US Treasury bond yields are RISING as the market fears a future flood of issuance and holders scramble for cash. The other alternative, of course, is a big burst of inflation to erode the real value of the claims surreptitiously, and offer debtors relief.

Inflation has been the solution to widespread over-indebtedness in the past for many countries. But even if the Fed COULD generate inflation amid a contracting economy, that would simply expropriate creditors in a different fashion.

Sunday, October 12, 2008

Tobin tax on FX?

Finally, instead of tax incentives and tax cuts many see that what is desperately needed at this point in time is the introduction of a new tax. This tax would be a tax on investments, akin to the Tobin tax. The Tobin tax is the suggested tax on all trade of currency across borders. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

In a sign of how worried companies have become about getting credit, General Electric Co (GE.N: Quote) considered seeking a bank charter that would give it access to government lending channels, sources familiar with the company's thinking told Reuters last week.

Now we are starting to get anecdotal evidence that this extremely vital market is also freezing up. If you think the problems stemming from a meltdown with the commercial paper markets are threatening to the world economy, they are small potatoes when compared to a seizure in the letter of credit markets..... "'There are all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit,' said Bill Gary, president of Commodity Information Systems in Oklahoma City. 'The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy.'...... That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begin to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM."..... China stiffing America for $100 billion in debt

Yet U.S. taxpayers helping Beijing as part of trillion-$ credit bailout

Thursday, October 9, 2008

Big discounts fail to lure shoppers and other articles

"In 2005, my wife and I retired," Carl says. "We went to a Merrill Lynch financial advisor and had about $200,000 to put away for our retirement. We told them at the time that this was all the money we had for retirement and we wanted it to be secure. We didn't want risk. ...

"Big discounts fail to lure shoppers," reports the Wall Street Journal . Restaurants are empty. Shopping malls are not even attracting strollers and gawkers – let alone people with money to spend. Auto lots are so quiet the salesmen take turns pretending to be customers – just to keep their skills at-the-ready. Even the private jet business is in a tailspin." (The Daily Reckoning)

The US and advanced economies' financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

On the real economic side all the advanced economies representing 55% of global GDP (US, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

We are in the midst of an unfolding debacle. It is happening about us. I am not sure how or when it ends, but the end, when it arrives, will radically alter the way we live for a long time.

Whoever wins the US election and takes office in January will need prayers and divine intervention.

This article by Stratfor founder and Chief Intelligence Officer George Friedman accompanies an upcoming series on the geopolitics of the global financial crisis. Here, he discusses Stratfor's geopolitical method for analyzing economic issues, which has a different focus and purpose from the models used by economists.

Canada's Banking System World's Soundest

Roubini: At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally include:
1) another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
2) a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
3) a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
4) massive and unlimited provision of liquidity to solvent financial institutions;
5) public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
6) a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
7) a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
8) an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

U.S. President George Bush will take the unusual step of meeting at the White House on Oct 11 with G-7 finance ministers and the heads of the International Monetary Fund and the World Bank. 

Current EU President Sarkozy: ``Only coordinated action by central banks and governments is able to stop the systemic risk and ensure the financing of economies,'' said Sarkozy, who now holds the EU's rotating presidency. 

IMF Global Financial Stability Report, October 2008 (GFSR):

- total U.S.-originated assets loss estimate increased to $1.4 trillion, an increase April number of $945bn;
- over the next few years, five years, around $675 billion of additional capital is needed to keep credit growing, even modestly, in the face of the current shocks [as of October, global bank writedowns have reached $592bn vs. $442bn fresh capital raised of which in the U.S. $340bn ($245bn), and Europe $227bn ($175bn) and Asia $25bn($23bn)]
- the restoration of financial stability requires a decisive and internationally coherent set of policies in 3 areas: 1) strengthening the capital base of viable institutions, 2)  buttressing troubled assets by using public sector balance sheets; and 3) improving funding availability, mainly term funding, to stabilize bank balance sheets.
- orderly resolution of nonviable financial institutions;
- reduce counterparty risks through centralized clearing organizations
--> The most significant risk remains a worsening of the adverse feedback loop between the financial system and the real economy.

World Economic Outlook, October 2008:

- global response needed to global problem;
- The IMF now expects the world economy to grow 3.9% pace in 2008, down from the last estimate of 4.1% in July. It also cut expected 2009 growth from 3.9% to 3%, which would be the weakest level since 2002;
- effects of rate cuts are limited in the current crisis (i.e. pushing on a string). Monetary policy needs to be combined with fiscal policy.
- The U.S. 2008 forecast edged up to 1.6% from 1.3% in July. However, the U.S. economy is expected to contract in the fourth quarter of 2008 and early 2009, prompting the fund to downgrade next year's growth estimate to 0.1% from 0.8%. A U.S. recovery is expected to begin in the second half of next year as housing prices bottom out.
- IMF expects a "a significant slowdown in activity across western Europe followed by a very gradual recovery beginning in the second half of 2009.". The 2008 forecast for euro-zone growth was cut to 1.3% from 1.7% in July, and to 0.2% from 1.2% in 2009. Italy's economy is expected to contract this year, and it will be joined by Spain in 2009
- The U.K. economy is also expected to go from 1.0% growth in 2008 to a 0.1% contraction next year.
- the 2008 forecast for Japan was cut to 0.7% from 1.5% in July, with the 2009 estimate lowered to 0.5% from 1.5%. Canada's 2008 estimate was cut to 0.7% from 1.0%, and its 2009 forecast fell to 1.2% from 1.9%.
- Emerging and developing economies as a whole are still expected to expand at a solid 6.9% clip this year, though the IMF trimmed its 2009 forecast to 6.1% from 6.7%.

Wednesday, October 8, 2008

Police will not enforce foreclosures in Chicago area CHICAGO (AP) - Residents of foreclosed properties in Chicago and other parts of Cook County don't have to worry about deputies forcing them out. Sheriff Tom Dart says that starting Thursday his office won't take part in evictions.

Dart says he's concerned that many of the people being evicted are renters who were unaware that their landlords have been failing to pay their mortgages. He says his deputies have no way of knowing whether they're removing someone who has defaulted on a loan or someone who has been faithfully paying rent.

Dart says he thinks he's the first sheriff in a major metropolitan area to stop such evictions during the ongoing foreclosure crisis.

Dart says the number of mortgage foreclosures in Cook County has skyrocketed and will probably keep rising.

Tuesday, October 7, 2008

Will the Bretton Woods 2 (BW2) Regime Collapse Like the Original

The principal technique employed in the US is to get people so busy that they don't have time to think about anything, and it is important to remember that with one person, one vote, this doesn't have to be everyone, just the majority.

For these reasons it is thought wise to have some cash stashed away and a supply of tradable gold and silver in a safe place or safe places.

Soon we will consider the likely impact of all this on gold and silver prices, both on the paper prices and on the prices for real physical gold and silver that you can hold in your hand, and consider the merits of gold and silver versus gold and silver stocks. Another subject we will turn our attention to is measures to improve security in conditions of anarchy or near anarchy.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely....

Central banks meanwhile keep trumping themselves over who will create more money without a correspondent value. But the pinstriped inflationistas have only a single strong card left in their hands. It is the card of public ignorance and the blessing that nobody can remember the last period of hyper-inflation.....

* The Federal Reserve is bankrupt. The U.S. Treasury Department quietly rescued — actually, took over — the world's largest Central Bank on September 17.

* The idea that Federal Reserve Chairman Bernanke could fly his helicopter was a fraud; the Fed simply didn't have any helicopter fuel.

* The U.S. Treasury Department, on the other hand, has copious amounts of helicopter fuel in the form of undiscounted government debt, and this fuel has now been made available to Mr. Bernanke. The more fuel the Treasury provides, the closer the U.S. dollar will get to its death.

* Just released Fed data confirms that initial test flights of Ben's helicopter have been spectacularly successful. Up to $150 billion has been loaded on the helicopter so far and may already be fluttering down into the Monetary Base as I write this. The inflation of "high power" money by more than 15% in the course of 2 weeks (an annual rate of 300% or more) is unprecedented.

* Inflation of the Monetary Base is leveraged by fractional reserve lending. Should the banks actually start to lend again, we could very well see hyperinflation in the U.S. over the next 18 months.      * The Federal Reserve is bankrupt. The U.S. Treasury Department quietly rescued — actually, took over — the world's largest Central Bank on September 17.

* The idea that Federal Reserve Chairman Bernanke could fly his helicopter was a fraud; the Fed simply didn't have any helicopter fuel.

* The U.S. Treasury Department, on the other hand, has copious amounts of helicopter fuel in the form of undiscounted government debt, and this fuel has now been made available to Mr. Bernanke. The more fuel the Treasury provides, the closer the U.S. dollar will get to its death.

* Just released Fed data confirms that initial test flights of Ben's helicopter have been spectacularly successful. Up to $150 billion has been loaded on the helicopter so far and may already be fluttering down into the Monetary Base as I write this. The inflation of "high power" money by more than 15% in the course of 2 weeks (an annual rate of 300% or more) is unprecedented.

* Inflation of the Monetary Base is leveraged by fractional reserve lending. Should the banks actually start to lend again, we could very well see hyperinflation in the U.S. over the next 18 months.

The increase in the size of the Term Auction Facility, from $150 billion a month ($75 billion per two 28 day auction) as of its last auction to $900 billion today (with an interim plan to go to $450 billion that was blown past in this announcement) is an admission that the banking system is not functioning. The size of the TAF, a single facility, now exceeds that of the Fed's entire recent balance sheet size.

Many of us in the US are focused on our own woes. But this is a global credit crisis. In today's Outside the Box, we take a look at the currency markets, which are in an historic upheaval and also look at what is going on in Europe. I suspect that Europe is in for a period of much distress, as the world begins to deleverage That is why one government after another will back the deposits of banks within their countries, for otherwise capital will flee to countries like Ireland and Germany which ARE guaranteeing the deposits for all banks in their borders. . Many European banks are leveraged 50 to 1 (not a misprint). I suspect that more government will do like Belgium and the Netherlands and inject capital directly into their local banks deemed too big to fail.

Thus to begin, we say here this morning, mincing no words whatsoever, we are more frightened now for the future of the global capital markets than we have been at any time in our thirty+ years of watching, commenting upon and taking part in them. We are fearful... and we mean this fully... that we have passed the tipping point; that things are now spinning out of control; that forces have been unleashed that cannot be stopped without some truly massive, truly strong-handed, governmental action including the closure of markets and limits upon bank withdrawals, et al. These are troubling times, and our fear is palpable and growing. Worse, these concerns are giving rise to the likelihood that the Left shall be in ascension, and that manifestly left-of-centre, interventionist government lies ahead here in the US and in Europe. Higher, rather than lower taxes will be the end result. Greater... indeed very much greater... intervention in the capital markets lies ahead. Trade and act accordingly.

"If money isn't loosened up," warned the president during negotiations on the bill, "this sucker could go down." (DRUNK) One wonders how much our prospects have improved now that the money has been loosened up, i.e., whether or not "this sucker" might go down anyway.     

In addition, household net worth, which greases spending, fell $6 trillion over the last year, with $1 trillion of that in just the last four weeks, said Mark Zandi, chief economist at Moody's

For instance, a report last year from consulting firm Greenwich Associates found that hedge funds were responsible for nearly 30% of all fixed-income trading in the U.S. That market, and others, could take a hit as hedge funds shrink, said Mr. Nichter.

Will the Bretton Woods 2 (BW2) Regime Collapse Like the Original

Bretton Woods Regime Did? The Coming End Game of BW2

by Nouriel Roubini,

July 6, 2008

"Continuity of Government" (COG) Provisions activated in 2001

"I still don't believe the dollar can maintain this strength going forward, as the funding requirements on the deficit continues to be the Sword of Damocles hanging over the dollar. But for now… I have to go to the corner and sit…"

When the dollar can rally in the face of news like it received on Friday, even me, the biggest fundamental trader you've ever seen, can see the writing on the wall… This dollar rally goes against everything I've ever known or studied regarding fundamentals. I still don't believe the dollar can maintain this strength going forward, as the funding requirements on the deficit continues to be the Sword of Damocles hanging over the dollar. But for now… I have to go to the corner and sit, for I have been wrong about how the dollar would react to all of this.

Pimco's Bill Gross has out his latest missive, and if recent history is any evidence then it has a solid change of being causal, as opposed to being merely predictive. The key part is this:

A systemic delevering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past. [Emphase mine]

Sunday, October 5, 2008

Where are the Masters of the Universe now?

Where are the Masters of the Universe now? As the financial tsunami rolls out across the world, crushing seemingly invincible institutions in its path and threatening the livelihoods of millions, the blame game has begun.

But there's a problem. The most obvious candidates for pillorying have disappeared. Lehman Brothers and Bear Stearns have gone up in smoke. Merrill Lynch has been consumed. Morgan Stanley and Goldman Sachs have been turned into high street banks, the kind with plastic pot plants in the corner and bowls of sweets to entice the kids. In short: how can you vent your spleen at a ghost? As Bill Clinton, out on the campaign trail for Barack Obama this week, summed up the conundrum: "The Wall Street you are mad at doesn't exist anymore. It vanished."

The bravest decision he took was in 1995, following the collapse of Barings Bank, as he explained in The Prospect:

I am a 47-year-old banker - chief executive of Swiss Bank Corporation in London, to be precise - and I have just decided that I need to go back to university for two years to study mathematics. Some of my friends think I am mad, and perhaps they are right. But perhaps something strange has happened to banking too.

It is hard to imagine that there is anything really new in banking. The tools of the trade have been around and in use, pretty much unchanged, for hundreds of years. Yet within the span of my own career, the world of international finance has enjoyed a renaissance-a spurt of creativity in the 1970s and 1980s, when new techniques emerged which have transformed the conduct of many banks and bankers. These techniques-collectively known as derivatives-have spawned a new jargon (would you know what to do with a Jellyroll, or an Alligator Spread?), huge new sources of profit, and mystifying new types of risk.

Imagine devoting yourself to the study of advanced mathematics in your mid-40s from the lofty heights of CEO of a Swiss bank! I wouldn't be so noble, from more modest altitudes.

Hypo Real Estate on the verge of Collapse, Europe’s biggest non-deposit bank

The euro is in serious trouble with this Hypo Real Estate collapse. Germans remain completely in denial. The French get it, largely because their clever finance minister, Christine LaGarde, was educated at the University of Chicago and consequently understands something about markets. Sarkozy, to his credit, appears to be listening to her. The Germans are about to destroy EMU with their pigheadedness, and this will be the stuff of revolution, given that the German people were never consulted on abandoning the DM (if there had been a referendum, the euro would have never been accepted in Germany) and were forced to get rid of arguably the most successful post-war monetary institution, the Bundesbank.

ALERT - Pressure was mounting on Gordon Brown tonight to put unlimited guarantees on British savings after Germany became the third European country to make the drastic move.

Consumer will change his behavior

Foreclosures, bank failures, layoffs and bailouts may dominate the headlines. But the decisions that will make or break the economy won't be made on Wall Street but on your street, where American consumers contribute 70 cents of every dollar spent in the U.S. economy........ Of course spending hasn't stopped. People may even indulge their tastes for luxury, Rist said, but where and how they spend has changed. Instead of dinner at a fine restaurant, they might cook a candlelit dinner at home. Or if they shop for a couch, they'll do more research and perhaps even spend more, to buy a quality product for the reassurance of value.

Rist said impulse buying and conspicuous consumption are out - at least for now.

Nathan also wanted to know if the US needed loans from foreign governments to finance the splurge and our ongoing budget deficits. And he wondered if America's government was still AAA credit. I've been wondering that myself. But it was eye opening to be asked that from a journalist from one of America's strongest allies. If the Israelis are wondering if our country's credit is any good, what are the Chinese and the Sultans thinking?

Will the rescue plan now pending in Congress solve the crisis? "My answer is no," Eichengreen said. "It is best seen as a holding action. We have had a year of holding actions so far where the Federal Reserve has flooded the markets with liquidity and that hasn't solved the problem. The credit markets have shut down. The commercial paper market has imploded; inner bank markets have disappeared; companies are meeting their payrolls by charging their credit cards ... Maybe TARP (troubled asset rescue plan) gives Treasury the wiggle room to surreptitiously do what is necessary - recapitalize the banking system by paying too much. It would be better to be up front about what they're doing. I think there will have to be a Plan B."

Friday, October 3, 2008

Market crisis deepens

"Cutting short rates as close to zero as possible," writes Ian Shepherdson of High Frequency Economics in a note to clients today, "is a key ingredient of the policy mix required to prevent a pre-depression economy becoming a real depression economy."

On addition to the package this time is the expansion of deposit insurance coverage. It increases the coverage limit of deposit insurance from $100,000 to $250,000, and allows FDIC to request the government to cover unlimited amount of losses. The protection of bank liabilities is another tried and failed policy to deal with the financial crises in many countries.

You see folks; as Mr. Rubin was well aware, the federal trust funds DO NOT AND NEVER DID CONTAIN ANY MONEY . These accounts exist in the minds of accountants and lawyers [ledgerdom] only. So here's what was going on:....

Thursday, October 2, 2008

University payrolls affected

In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.

Wachovia, the North Carolina bank that agreed this week to sell its banking operations to Citigroup, has held the money in its role as trustee for a fund used by colleges and universities and managed by a Connecticut nonprofit, Commonfund.

That brings us to this question: Why would a smart guy like Hank Paulson -- the former boss of Goldman Sachs -- advance such a dumb, shady plan? Let us count the reasons:

No. 1: It delays our national reckoning until after the presidential election.

Paulson first floated a bailout Sept. 18, at the very hour when shares of Goldman Sachs Group Inc. and Morgan Stanley looked like they might go into a death spiral. It's not so much a bailout, as it is a timeout. He had to follow up with something, anything, to stop the freefall from resuming. It didn't have to make sense.

So it doesn't. The plan is about creating the illusion of stronger financial institutions, not strengthening them.

# High-risk, high-yield loans posted their worst monthly performance on record as prices tumbled to new lows after Lehman filed for bankruptcy: The Standard & Poor's/LSTA Leveraged Loan Index returned a negative 6.15 percent in September, almost double the previous record loss of 3.35 percent set in July 2007. Leveraged loan prices tumbled 8.57 cents in Sept ember to a record low of 79.8 cents on the dollar as financial companies failed and hedge fund managers sold assets anticipating client withdrawals. (CreditSights via Bloomberg)BIS: Defaults on leveraged-buyout loans may rise to 4% this year as firms struggle to refinance about $500 billion of debt used to fund the takeovers--> ``The risk of a significant increase in LBO firm defaults in the next few years may have risen substantially.''

Europe debates their own bail out

Nicholas Sarkozy jumps on the TARP bandwagon, and proposes we imitate the US; German finance minister expresses reservations, "to put it mildly"; US Senate approves bailout package; European Commission proposes very strange banking regulation; Moody's cuts Iceland's credit rating on the grounds that Iceland bailed out a bank (just imagine that); a group of well-known European economists, meanwhile, has written an open letter to EU leaders, calling for a systemic response to the crisis.

Wednesday, October 1, 2008

$55 Trillion CDS market The financial crisis has put a spotlight on the obscure world of credit default swaps - which trade in a vast, unregulated market that most people haven't heard of and even fewer understand. Will this be the next disaster?