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." http://www.guardian.co.uk/business/2008/oct/04/useconomy.usa/print

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.    http://www.rgemonitor.com/financemarkets-monitor/253763/learning_from_rudi_bogni_the_thin_space_of_financial_activity

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.    http://www.nakedcapitalism.com/2008/10/hypo-bank-rescue-fails-threatening.html

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. http://www.dailymail.co.uk/news/article-1069132/Pressure-mounts-Brown-protect-ALL-bank-savings-Germany-promises-cast-iron-guarantee.html

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.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/05/MNAM13B0M4.DTL&type=printable

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?    http://seekingalpha.com/article/98560-america-needs-a-turnaround-plan?source=headline1

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."    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/03/BUFU13AJK4.DTL&type=printable

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."    http://seekingalpha.com/article/98459-the-die-is-cast?source=headline1

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.    http://www.rgemonitor.com/asia-monitor/253848/will_expanding_deposit_insurance_coverage_prevent_bank_runs

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:....    http://www.marketoracle.co.uk/Article6619.html

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.

http://www.nytimes.com/2008/10/02/education/02college.html?_r=3&oref=slogin&ref=us&pagewanted=print

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.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aMaWyNFImi4o&refer=homehttp://www.bloomberg.com/apps/news?pid=20601039&sid=aMaWyNFImi4o&refer=home

# 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.''     http://www.rgemonitor.com/

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. http://www.eurointelligence.com/article.581+M5c2bd56bf51.0.html

$55 Trillion CDS market

http://money.cnn.com/2008/09/30/magazines/fortune/varchaver_derivatives_short.fortune/index.htm?postversion=2008093012 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?

Payroll freeze

Either the credit markets will seize up in the next few days, or they won't.

Businesses either will get the short-term operating loans they need in the commercial paper market, or they won't. Either they'll get the money somewhere else (old-fashioned banks are back in style), or they won't make payroll and will have to start laying off people.    http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/322AD4416780E956862574D30081D731?OpenDocument

I own a small graphic design company that employs thirty people. We depend on credit for everything from payroll to buying supplies.

I have currently frozen salaries and we are trying to find a way to extend our office supplies.     http://news.bbc.co.uk/1/hi/business/7643244.stm

Kansas City cabinet maker Anthony Gallo is in a similar bind. Eighteen months ago Gallo had no debt. Now he's being forced to borrow just to make payroll – just as his chief lender has cut his credit line from $400,000 to $175,000.

"My line of credit has been cut to nothing," said Gallo. "We're all hurting... and wondering what is going to happen."     http://www.signonsandiego.com/news/nation/20080930-1130-financial-mainstreet.html

A shattering moment in America's fall from power

The global financial crisis will see the US falter in the same way the Soviet Union did when the Berlin Wall came down. The era of American dominance is over

http://www.guardian.co.uk/commentisfree/2008/sep/28/usforeignpolicy.useconomicgrowth/print

And this is where we stand today. The great ship (United States) is sinking. Should we let the band (Hank Paulson) dictate those who get onto the lifeboats first? If we do, we will all face the fate of Jack as he slowly freezes to death in the icy Atlantic. http://www.thecuttingedgenews.com/index.php?article=795&pageid=44&pagename=Slices

We cannot risk another week or another month where American businesses are afraid to extend credit and lend money," Obama said. "That has an impact on housing here in Nevada. That has an impact on a small business owner who has got to make payroll, and if he can't make payroll on Friday, he may lay you off on Monday. If he lays you off on Monday, then that means you may not be able to make your payments to somebody that you just bought something from. It ripples throughout the economy."

http://dyn.politico.com/printstory.cfm?uuid=B4F837FA-18FE-70B2-A818876217230B44

Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to ...    http://www.baltimoresun.com/news/nation/bal-te.bailout30sep30,0,1808693.story

If the credit markets should freeze up--which many say is happening and will continue without massive intervention--everyone that borrows money will face a cash crunch. That means companies that take advantage of short-term loans to get by won't be able to buy raw materials or make payroll. Even businesses that don't need short-term capital may defer purchases to preserve capital. http://news.cnet.com/8301-1001_3-10053693-92.html

Kansas City cabinet maker Anthony Gallo is in a similar bind. Eighteen months ago Gallo had no debt. Now he's being forced to borrow just to make payroll – just as his chief lender has cut his credit line from $400,000 to $175,000.

"My line of credit has been cut to nothing," said Gallo. "We're all hurting... and wondering what is going to happen."     http://www.signonsandiego.com/news/nation/20080930-1130-financial-mainstreet.html

It's not a question of the high cost of credit, there's nothing available out there," said Levin, noting that he hears of sales agencies going out of business almost every week.

"The party's over and people don't want to admit it ... I don't want to admit it, but you had to see it coming." FAL

The money markets have completely broken down

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''.... http://www.rgemonitor.com/us-monitor/253808/libor_surges_to_nearly_7_but_us_stock_futures_rise_on_bailout_bill_revival_hopes

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