How EU banks were gaming their regulators through AIG

It's less well known than it should be, but Europeans banks have long been gaming their regulators, having far less than the actual capital reserves that they needed given their balance sheets. AIG filled the hole, selling credit defaults swaps to European banks via which they could tell regulators that they were adequately covered -- at triple-A, no less -- while carrying less cash than required.    http://seekingalpha.com/article/97958-how-the-u-s-saved-europe-s-banking-system?source=more_author_recent_similar_articles

In New York, investment firm executive Marc der Kinderen said that collapsing trust in US financial institutions was potentially the most damaging aspect of the crisis.

"The worst thing that is happening right now is that there is absolutely no trust, no faith in the system as a whole," der Kinderen told AFP.

"That makes a horrible way for companies to do business with each other ... Banks are the infrastructure of finance, like a highway system, and right now, every ramp to the highway system has effectively been shut down."     http://www.breitbart.com/article.php?id=080930072942.bkkh6c8f&show_article=1

Market rebounds

Lawmakers scramble to revise bailout bill...
Obama calls on Americans to support rescue plan...
Bush warns of 'painful and lasting' damage...
Many vulnerable lawmakers said 'no'...
Clinton: 'It Sounds Dire, But Commerce Could Stop'...
Corporate America lost value size of Indian economy....
Western world will become significantly less wealthy...
WSJ: Congress Lives Up to Its 10% Approval Rating...
Harvard economist: Bankruptcy is right answer...
PAPER: 'Bailout marks Karl Marx's comeback'...
Talk radio holds firm over 'socialist' bailout...
EU Bank rescues spread...
FDIC asks for temporary hike in $100,000 cap on insured deposits...
Euro Declines Most Against Dollar Since Inception...

Euro drops by largest since inception on EU bank failure fear

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXeu_kATieSo&refer=home Sept. 30 (Bloomberg) -- The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe.

Sept. 30 (Bloomberg) -- U.S. stocks rose as growing expectations that lawmakers will salvage a $700 billion bank- rescue package helped the Standard & Poor's 500 Index recover more than a third of yesterday's 8.8 percent plunge.http://www.bloomberg.com/apps/news?pid=20601087&sid=a.lG6SHwRN2o&refer=home

Fed pumps record 630 billion

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9MTZEgukPLY&refer=home Fed Pumps Further $630 Billion Into Financial System

http://www.marketoracle.co.uk/Article6530.html "A well-known cynical New York short-seller observes: "This morning, Mr. Buffett referred to the 'economic Pearl Harbor ' that would occur if the Federal government did nothing. Well…given that Mr. Buffett's Berkshire Hathaway has written almost $40 BILLION in equity puts…one Pearl Harbor would certainly arrive in Omaha !"

http://www.rgemonitor.com/roubini-monitor/253801/the_us_and_global_financial_crisis_is_becoming_much_more_severe_in_spite_of_the_treasury_rescue_plan_the_risk_of_a_total_systemic_meltdown_is_now_as_high_as_ever

Hedge Funds reel in losses – should Fed defend the dollar?

There are advantages to the depreciation option for the US: foreign debt is denominated in US currency so that a depreciation does not cause valuation effects on the stock or the service of the debt, and the economy is relatively closed which considerably mutes the effect of the exchange rate on inflation.

After a depreciation, US assets would seem extraordinarily cheap from a foreign perspective, but current holders of US assets would be wiped out (measured in currencies different from the dollar) and this in itself could discourage them from dumping these assets onto the market.    http://www.rgemonitor.com/latam-monitor/253761/should_the_united_states_defend_the_dollar_or_let_it_go

That's just "collateral damage".

It's because if they do, the $68 Trillion chain reaction could start.

What does this mean?

• The $700 billion WILL be approved, there is no question about that.

• The Fed will keep interest rates far below the rate of inflation, to stimulate an increase in house prices.

• House prices will rise.

• The US Government will effectively guarantee all RBMS's against default.

• So, no more defaults on RMBS's.

• The dollar will fall

• Disaster will have been avoided.

http://www.marketoracle.co.uk/Article6495.html

One hedge fund said: "We've produced 15 per cent returns for 10 years. This year has been bad and our funds under management have been reduced from $2billion to just $300m. This is decimation."

Not a single hedge fund strategy has produced positive returns so far this month, with convertible arbitrage and distressed securities down an estimated 7.96 per cent and 7.34 per cent, respectively, according to Dow Jones Hedge Fund Indexes. Equity market-neutral funds, which often short a stock in one sector and go long on another in the same sector, are down 1.85 per cent.    http://www.nakedcapitalism.com/2008/09/hedge-funds-face-record-redemptions.html

http://www.dailymail.co.uk/news/article-1063356/Credit-crunch-banker-leaps-death-express-train.html The City was in shock last night after the apparent suicide of a millionaire financier haunted by the pressures of dealing with the credit crunch.

WaMu collapses

http://www.fdic.gov/news/news/press/2008/pr08085.html

JPMorgan Chase Acquires Banking Operations of Washington Mutual

FDIC Facilitates Transaction that Protects All Depositors and Comes at No Cost to the Deposit Insurance Fund

FOR IMMEDIATE RELEASE September 25, 2008

Media Contact: Andrew Gray (202) 898-7192 angray@fdic.gov

 

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

"WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses," Bair said.

Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of $307 billion and total deposits of $188 billion.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver. WaMu customers with questions should call their normal banking representative, service center, 1-800-788-7000 or visit www.WaMU.com. The FDIC's consumer hotline is 1-877-ASK-FDIC (1-877-275-3342) or visit www.fdic.gov.

# # #

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 8,451 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200). PR-85-2008

 

http://www.nytimes.com/2008/09/26/business/26wamu.html?_r=1&hp&oref=slogin

Regulators Said to Broker Rescue of WaMu

U.S. financial institutions borrowed a record $187.75 billion per day

NEW YORK (Reuters) - U.S. financial institutions borrowed a record $187.75 billion per day on average directly from the Federal Reserve in the latest week, showing the central bank went to extremes to keep the financial system afloat amid the biggest crisis since the Great Depression.    http://www.reuters.com/article/ousiv/idUSTRE48O98920080925

China halts capital flows to US

http://www.reuters.com/article/companyNewsAndPR/idUSPEK16693720080925 The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092402799.html?nav=hcmodule "Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number." http://www.forbes.com/home/2008/09/23/bailout-paulson-congress-biz-beltway-cx_jz_bw_0923bailout.html

Since 1981, 423 U.S. companies with assets of more than $500 million filed for bankruptcy

"Since 1981, 423 U.S. companies with assets of more than $500 million filed for bankruptcy," with total assets exceeding $1.5 trillion.

http://online.wsj.com/article/SB122221497204869357.html?mod=googlenews_wsj#printMode

"Billion-Dollar Lessons" is an insightful and crisply written book, one that offers wisely chosen and well- narrated case studies but also good advice, such as urging companies to appoint an in-house "devil's advocate" to challenge the unhealthy unanimity that accompanies many major decisions.

US President George W. Bush, who is also attending the UN General Assembly, had telephoned Chinese President Hu Jintao on Monday to brief him about the financial turmoil and his administration's bid to stage a 700 billion dollar Wall Street bailout to stem the crisis.

Hu told Bush that China welcomed Washington's efforts to stabilize the US financial markets and hoped they succeed, according to Beijing's state media.

But as Wen spoke Wednesday at the United Nations, the Bush administration remained locked in a dispute with the US Congress over the massive bailout package aimed at buying distressed mortgages and mortgage-related securities from financial institutions.    http://afp.google.com/article/ALeqM5icLgpv_1Z5eHh6UMqzSDY-6v8bRQ

How Wall Street Lied to Its Computers

How Wall Street Lied to Its Computers

New York Times (09/18/08) Hansell, Saul

Most Wall Street computer models radically underestimated the risk of complex mortgage securities, partially because the level of financial distress is "the equivalent of the 100-year flood," says Capital Market Risk Advisors president Leslie Rahl. Rahl, and others, say that the people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to provide those systems with oversimplified data, preventing the systems from detecting the problem before it was too late. Top bankers cannot simply ignore computer models, because after the last round of significant financial losses, regulators required financial institutions to monitor their risk positions. If a model says a firm's risk has increased, the firm must either reduce its risk or provide more capital as a cushion should things turn south. "There was a willful designing of the system to measure the risks in a certain way that would not necessarily pick up all the right risks," says RiskMetrics' Gregg Berman. "They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable." Berman says one way this was accomplished was to make sure the computer models looked at several years of trading history instead of just the last few months, which made the computers slow to report that risk had increased as defaults started to rise because the markets had been placid for several years.

http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/

The financial system indeed lies in ruins

The financial system indeed lies in ruins. In the last year, Wall Street has shed 200,000 jobs. The bailout comes on the heels of the failure of the nation's investment banks, including Bear Stearns (purchased by J.P. Morgan Chase), Lehman Brothers (bankruptcy), Merrill Lynch (purchased by Bank of America), Morgan Stanley, and Goldman Sachs (both converted to bank holding companies). ....200,000 JOBS!!!!    http://www.marketoracle.co.uk/Article6428.html

Lehman Brothers in Britain collapsed with a mammoth £100 million black hole in its staff pension fund, it emerged last night. The deficit means that many former staff in Britain may not have their retirement promises met in full. Trustees of the fund wrote to the Pension Protection Fund (PPF), the industry lifeboat, last week seeking assistance, as The Times revealed on Saturday. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4806169.ece

WASHINGTON (AP) -- The Federal Reserve made it easier Monday for private equity firms and other types of investors to take minority stakes in banks, a move that could usher new capital infusions to cash-hungry banks and help them cope with credit stresses. http://biz.yahoo.com/ap/080922/fed_banking.html

The news that Goldman Sachs and Morgan Stanley are in the process of becoming Bank Holding Companies (BHCs) doesn't come as a complete surprise. If these firms were to remain independent, they had to radically reposition their balance sheets by bolstering capital and lengthening debt maturities. Further, the trend towards greater transparency is already afoot, so the kinds of disclosures required under the BHC Act were in the offing, anyway. Finally, by become a BHC you have access to the Fed window, access of some consequence given today's tumultuous market conditions. So by becoming a Bank (with a capital B) in the regulatory sense of the word, Goldman and Morgan Stanley are choosing life, with the chance of remaining independent. The question is - what kind of a life will it be? http://www.informationarbitrage.com/2008/09/on-bank-holding.html

Chaos has descended on Wall Street

The death of the investment banks. The ban on short selling. The unrelenting pain for anyone who needs to borrow money. Chaos has descended on Wall Street, and at least one hedge fund manager isn't going to take it anymore.

Cliff Asness, managing partner of AQR, a $30 billion hedge fund firm,..... http://dailybriefing.blogs.fortune.cnn.com/2008/09/22/hedge-fund-guru-strikes-back/

"This is a major realignment on Wall Street and we are going back to the days of the merchant banking of the 1800s," said Bob Ellis, senior vice president of the wealth management group at Celent, a Boston-based financial research and consulting firm.    http://www.independent.co.uk/news/business/news/wall-st-capitulation-marks-end-of-an-era-939141.html?service=Print

"This is a major realignment on Wall Street and we are going back to the days of the merchant banking of the 1800s," said Bob Ellis, senior vice president of the wealth management group at Celent, a Boston-based financial research and consulting firm.    http://www.independent.co.uk/news/business/news/wall-st-capitulation-marks-end-of-an-era-939141.html

New paradigm for finance

"A generation grew up that has been very well trained in this new finance theory, very well educated to apply it on a broad scale with the necessary computing power, and off we went," Mayer said.

Recent events, he said, have shown that the basic assumptions that have held sway for a generation or two no longer hold. "This will leave us with a different paradigm," he added. "If I could give it to you, I'd win the Nobel Prize."

http://www.iht.com/articles/2008/09/19/business/crisis.php?page=2

http://seekingalpha.com/article/96519-what-700-billion-could-buy

"And I'm furious when I see the pictures of Americans who thought they were on the sunny side of life and now have lost their homes and have to live in their cars," Evers said. "I definitely do not feel sorry for the bankers who lost their jobs in the last couple of days. I can't believe that a country like the U.S.A. could have been so careless on a money issue!"

"I was taught that the U.S.A. is the motherland of moneymaking," she added. "And now all I can see is a herd of headless chickens running around on Wall Street." http://www.latimes.com/business/la-fi-euromood20-2008sep20,0,7535469.story

Roubini personally moves funds out of USD

ALERT

With the current economic and financial turbulence, Roubini Global Economics is providing additional extended analysis of ongoing and breaking events.

Click here to receive full access for a limited time.

http://www.rgemonitor.com/financemarkets-monitor/253652/the_unitary_federal_reserve_-_crisis_choreography

Sept. 20 (Bloomberg) -- The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1hr1v2FUeAg&refer=home

Government bailout

On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the events of the last 14 months. He said, ""We are in new territory, this is a different game...No one knows what to do." http://www.counterpunch.org/whitney09192008.html