The Weekend Economist

[Demeter]

A compendium of postings on the US and world economy, for those who don't get enough from the Stock Market Watch during the week.

Feel free to post, comment, and otherwise hang out.

Aplogies for the late start--I had to shear my sheep (school haircut).

[Demeter]

1. Lehman in talks to sell real estate, securities

http://news.yahoo.com/s/nm/20080816/bs_nm/lehman_properties_dc_1




Lehman Brothers (LEH.N) is in talks for potential sale of its $40 billion portfolio of commercial real estate and securities in an effort to bolster its finances following costly credit-related write-downs, the Financial Times said in its online edition.

The investment bank wants to sell the assets either as a whole or in pieces, the FT said, citing people who have been involved in the discussions between Lehman and potential buyers.

Lehman has offered to shoulder the first $5 billion of any losses suffered on the portfolio's assets following a sale, the sources said.

The portfolio includes mortgages and mortgage-backed securities that were valued at $29.4 billion as of May 31, the article said. It also contains real estate assets worth $10.4 billion at the end of May, according to the report.

Lehman officials could not immediately be reached for comment.

(Reporting by Ransdell Pierson; editing by Carol Bishopric)


THIS PARALLELS THOSE SELL "GOLD FOR CASH!" ADS WE'VE BEEN INUNDATED WITH LATELY....

[Demeter]

9. Fed presses Wall Street banks on liquidity

http://www.ft.com/cms/s/0/58910f5e-6703-11dd-808f-0000779fd18c.html

By Francesco Guerrera and Aline van Duyn in New York



US regulators are putting pressure on Wall Street banks to ensure they have enough liquid funds to withstand a financial shock as part of efforts to avoid a repeat of the “run on the bank” that sank Bear Stearns. Bankers say that in the past few months the Federal Reserve has asked them to put balance sheets through a battery of tests to see how they would fare in a major liquidity shortage or sudden downturn in capital markets. Closer regulatory scrutiny of liquidity reserves could diminish investment banks’ ability to reap profits through aggressive use of their balance sheet by forcing them to be more prudent with funding and capital.

After the tests, which simulated financial disruptions from mild to catastrophic, the regulators advised investment banks how to improve liquidity and urged them to review frequently...Investment banks and the Fed and declined to comment but people familiar with the situation said the tests were carried out at all big Wall Street firms.

It could be a harbinger of a new regulatory regime if policymakers extend the Fed’s interim powers and let it take over from the Securities and Exchange Commission as the industry’s main regulator.

Senior Wall Street figures welcomed the move by the Fed, which has provided credit lines to investment banks since March. It was helpful to have more clarity on their liquidity position and capital requirements, they said.

hmmm.....

[Demeter]

27. How Wall Street's watchdog may be muzzled

http://www.independent.co.uk/news/business/analysis-and-features/how-wall-streets-watchdog-may-be-muzzled-897567.html

As Bear Stearns collapsed, the head of the SEC was at a party rather than on the crucial conference call. Is the regulator set to be another victim of the credit crunch? Stephen Foley reports


For Bear Stearns, the end came with a sonic boom. With Fannie Mae and Freddie Mac, there has been a "dead man walking" hush since the Treasury stepped in to prevent their collapse. But for another of the major institutional victims of the credit crisis, we may be only at the start of a slow death.


That victim is the Securities and Exchange Commission, Wall Street's regulator for the past 74 years.

For months, the agency has seemed superfluous to the battle to protect global finance. After the Federal Reserve came to the rescue as a lender of last resort to beleaguered Wall Street banks, the SEC could only watch as the US central bank rode roughshod over its traditional territory. Worse, when the SEC finally did pipe up, its actions against short-sellers were widely damned as a hysterical over-reaction.

Now the SEC's chairman, Christopher Cox, a mild-mannered former Republican congressman, stands accused by some of his own staff for failing to stand up for the agency, as the Bush administration manoeuvres to replace it with something more amenable to Wall Street.

That fraught weekend in March, when the collapse of Bear Stearns threatened to engulf the rest of the financial system, it was the Federal Reserve, under its activist chairman, Ben Bernanke, which stepped in with the billions of dollars in credit needed to keep the investment bank on life support. And it was the Fed which underwrote the cut-price takeover of Bear by extending $30bn in lending to its acquirer, JPMorgan Chase.

Since then, it has agreed to extend credit wherever necessary to investment banks, something it previously only did to the deposit-taking commercial banks directly under its supervision. Since then, the Fed has been arguing that, now everybody knows that it will prop up the investment banks, it needs also to have the power to regulate them – power that currently resides with the SEC.

An uneasy "memorandum of understanding" between the Fed and the SEC, which allows for the sharing of information, is hardly going to be the last word. Whichever party controls Congress and the White House after November, an overhaul of financial regulation in the US is going to be on the agenda.

In this climate, revelations that Mr Cox was not on crucial conference calls between the Fed and the US Treasury during the effort to prop up Bear Stearns are particularly damaging. He was at a birthday party on the Saturday night in question, and went on holiday a week later, with global finance still on life support – and his protestations of having been constantly in touch have done little to improve the perception of irrelevance.

The SEC is vulnerable to losing its powers of oversight over the investment banks, says the former SEC commissioner Roel Campos, now a partner at the law firm Cooley Godward Kronish – and he doesn't reckon that would be a good development.

"I don't think a lot of the criticism is fair, but the SEC has not done as good a job in describing its role and what it was doing immediately prior to the collapse of Bear Stearns. It is not widely understood that the SEC was there with the Fed, looking at the risk management of Bear Stearns on a day-to-day basis for a long period before its demise. The SEC has huge amounts of knowledge about how broker-dealer functions work and about the intricate relationships between counterparties – expertise that is not at the banking agencies and not at the Fed. By pointing that out, the SEC could recover some of its credibility.

"The SEC has not had a champion with the Treasury, and the chairman has chosen not to make his case for the agency loudly. Mr Cox is a team player and doesn't want to be seen as at odds with the Treasury, but the people thinking up policy are naturally favourable to the Fed."

The creation of the SEC in 1934 was part of the effort to rebuild American finance after the horrors of the Great Depression. It was the organisation charged with ensuring that companies and brokers who offered securities for sale to the public actually told the truth about these investments and their risks. To reflect its importance, President Franklin D Roosevelt appointed Joseph Kennedy, President John F Kennedy's father, to serve as the first chairman of the commission.

That easy division, with the SEC looking after the investment banks and the Fed guaranteeing and controlling the commercial banking system, has looked a bit anachronistic since the repeal of the Glass-Steagall Act by the Clinton administration, which allowed investment banks to create their own lending operations and helped to puff up the entire edifice of leveraged lending and complex derivatives that has come crashing about our ears. This has been monitored by the SEC under an informal agreement with the investment banks. The battle over who gets the ultimate power to regulate it, when it gets slowly rebuilt after the current crisis, is a battle the SEC appears to be losing.

"There is growing bifurcation between investor and consumer protection on the one hand, and the safety and stability of markets on the other, and we are at a watershed," says James Cox, a securities law professor at Duke University who is no relation of the SEC chairman. "The debate now is about whether the market stability function will go with the Fed or with a new executive arm.

"One place it is not going to go is the SEC. Frankly, there has never been evidence that the SEC has the tools or the culture to deal with market stability issues. It has an enforcement culture, with strengths in fraud, company filings and disclosure rules.

"As the credit crunch has unfolded, the SEC has looked superfluous. Partly that is because of its remit, but partly it is because of the natural hesitancy and reticence of Christopher Cox and his senior advisers about what is the proper role of governments in markets. They believe in letting institutions shake out. Hank Paulson, US Treasury Secretary, and Mr Bernanke have proven themselves 'survivalists', who have been able to overcome their predilection towards market forces."

It won't have helped the SEC's cause that when it came to the issue of auction-rate securities – the first and most obvious mis-selling scandal of the credit crisis, where hundreds of thousands of ordinary investors were stuffed with impossible-to-sell bonds they thought were the equivalent of cash – it has been Andrew Cuomo, the combative attorney-general of New York state, who has wrung restitution out of brokers thanks to his legal threats, rather than the SEC.

And Mr Cox did not appear to cover himself in glory with regard to short-selling. He surprised the market with an emergency rule that made it much more difficult for hedge funds to bet on declines in the share prices of 19 major financial companies, announced to coincide with an appearance before politicians on Capitol Hill, but the details of which did not emerge for hours, had to be tweaked several times before they could be introduced, have not been proven to have influenced the trading in any of the stocks, and ultimately were left to expire this week, undermining Mr Cox's insistence that they were vital to preventing financial panics.

Christopher Cox has begun pressing his case for regulation of the investment banks to stay with a beefed-up SEC. But he starts an important battle for the soul of US financial regulation several laps behind the Federal Reserve and opponents on Wall Street who see this as the perfect time to take a few teeth out of the SEC.

A blueprint for regulatory reform by Mr Paulson, which envisages the Fed as a super-regulator with only a narrow role for the SEC, was forged out of Wall Street's frustration with SEC red tape and what investment banks complained was their diminishing competitive advantage over London. Britain, they argued, had a risk-based approach to regulation that was light-touch in day-to-day matters and only descended on institutions regarded as risking damage to the financial system. The SEC, with its raft of rules, would be wrapped into a much-diminished third-tier regulator responsible for protecting investors and market participants from fraud and market manipulation.

Supporters of the SEC, such as Mr Campos, argue that the stage is set for a battle between those who favour the current SEC approach, an "enforcement" approach to regulation, and those who prefer a "prudential" approach which, he argues, would "blunt regulators' teeth". It is a battle that can be won in a Democrat-controlled Congress or with a Democrat administration, he says – but only if the SEC starts fighting for its life.

[Hugin]

16. Wasn't there a big gold sale planned?

Thanks for reminding me.

Now, who was it and when... I can't remember. It was one of the big repository types.

[Buttercup McToots]

46. End Times (for Fannie and Freddie)

http://market-ticker.denninger.net/archives/543-End-Times-for-Fannie-and-Freddie.html

Saturday, August 16. 2008
Posted by Karl Denninger at 15:08

End Times (for Fannie and Freddie)

"I told you so, months ago."

Barrons put a nail into the coffin in an article due to show up on newsstands on Monday (subscription required)

"It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?""

Yep.

But before I put forward a prescription for how I believe the government should act (and act it will, in due course), I want to take a look at how this all happened up front.

Let's look at an article in the International Herald-Tribune entitled "How Banks Sold Home Equity Loans":

"Still, "Live Richly" won out. The advertising campaign, which cost about $1 billion from 2001 to 2006, urged Americans to lighten up about money, and helped persuade hundreds of thousands of Citi customers to take out home equity loans - that is, to borrow against their homes. As one of the ads proclaimed: "There's got to be at least $25,000 hidden in your house. We can help you find it.""

"Ads for banks and their home equity loans often portrayed borrowing against the roof over your head as an act of empowerment and entitlement."

"Bankers defend home equity loans by saying they merely give customers what they want: easy credit to buy things they otherwise might not be able to afford." (Ed: you mean "can't afford but we'll make you think you can, right?")

"Live Richly" eh?

Hmmmm.

But back to Freddie and Fannie.

A large part of the trouble they're in is due to the more than half-trillion dollars worth of "ALT-A" - or liar loans - that they bought or guaranteed in the last few years. The GSEs claim that their mission statement is to promote "affordable housing" targets and this is why they got in trouble.

What part of buying loans from people who lied to get them and were demonstrably unable to afford the payments at their full level is about "promoting affordable housing"?

None.

These loans were made to real estate speculators in Florida, Las Vegas and California, in the main, along with pseudo-wealthy "middle class" Americans trying to "Live Richly." There was exactly no connection of any kind to low-income borrowers in the cities, where this mandate does in fact exist.

Nor is there a hint of prudence in Freddie and Fannie's recent actions since the stress became declared in their public statements (never mind that Freddie's CEO disclosed recently that their risk manager warned of this very problem quite some time ago.)

In the last quarter Freddie Mac's growth of on-balance sheet exposure exploded higher by 11% - all out of proportion to the declared "risk" they claim they now see, and in addition, they have taken down hedging costs, which means they're now even more exposed to interest-rate changes than they were before.

What prompted that? Both Fannie and Freddie went to OFHEO and The Bush Administration early in the year and told them they'd raise more capital in exchange for loosening their "excess capital requirements" and removing portfolio size caps. Fannie did raise the capital, but then lost nearly all of the additional capital in just one quarter; Freddie welshed on the deal and still hasn't raised jack, citing "market conditions", but they still got their loosened capital requirements and used the expanded capacity to lever up even higher!

This amounts to walking into a Casino, betting (literally) half your house, losing, and then doubling down. You either are a zero or hero, and the odds favor the zero.

Why is such behavior tolerated?

Because management believes they can blackmail Congress and Paulson into bailing them out - in short, they believe they can take these sorts of risks on purpose, not for their chartered and proper reasons in helping Americans but to enrich their shareholders and management, and get away with it - "heads we win, tails you lose."

Then there's the issue of exactly how they're valuing things. I've written about this many times in the past, and now Barrons is blowing the whistle on it as well. Is there any reason to believe that their "marks" reflect trading reality? No.

I believe both firms are intentionally overstating the marks on their assets, thereby making them appear to be in much better health than they really are, not to mention counting "deferred tax assets" that can't be spent (they're only "assets" to the extent you have taxable income in the future!) As written about in The Ticker in the past, this isn't my opinion alone - many have opined that under any sort of real "Fair Value" assessment both of the GSEs are insolvent right here, right now.

In addition we now know from both firms filings that they are intentionally refusing to take repurchases of defaulted mortgages from securitizations they guaranteed, instead choosing to make the interest payments themselves on those bonds. This is simple chicanery in that these defaults will not cure themselves; the GSEs are doing nothing more than pushing forward the day of recognizing the impact of these losses, which have already in fact happened. This sort of artifice and accounting trickery is an outrage.

What's even worse is that banks are and have been offloading paper to the GSEs as fast as they can, and the GSEs are still more interested in flooding their balance sheet than scrutinizing what comes in the door for sustainability and payment capacity. Anyone care to take a guess at what sort of real credit quality is behind that recently-acquired paper?

It is clear that both of the GSEs will and must fail.

I believe their failure from a market perspective is unavoidable as a consequence of their conduct and the resulting "quality" of their book.

I also believe they must be allowed to fail to set an example for all the banks, brokerages and others who have engaged in similar conduct - to point out that such sort of willful abuse of the taxpayer will not be permitted.

Here is what must happen now:

The government must force full, public, outside audits. The recently-announced Treasury action in this regard is a nice start, but not having access to the GSE's internal books is an outrage. Give us a full, public accounting.
All marks must be documented and defended. This, I believe, will force both firms into immediate receivership (bankruptcy.)
To the extent that management is implicated in intentionally falsifying reporting (if any), they need to be indicted, tried, and if convicted locked up.
The Government should then step in and forcibly purchase a large (~$10 billion each) interest in super-senior preferred stock, granting them the right to:
Replace the board of directors and management
Supersede all other classes of stock, suspending dividends across the board.
Support the super-senior and senior coupon to the extent possible, until that capital is depleted.
The government then places both firms in rundown, fires management, and brings in outside parties to operate this process. All acquisition and forward funding ceases. The debt in the non-originated portfolio is sold off for whatever it brings and each class of debtholder is retired as the portfolio runs off, category-by-category. End of GSEs.
To take over the GSE's former function, Ginnie is authorized to guarantee the issue of mortgages to the general public (not just VA and FHA), but under strict, 20% down, 36% DTI, 30 and 15 year fixed term underwriting criteria. These notes are issued with the Ginnie explicit government guarantee. Note that Ginnie has never engaged in the sort of "hedge fund" nonsense that got the other two GSE's in trouble. This provides the mortgage liquidity function that Paulson and others believe is "critical." It puts the desired "floor" under housing, but at an actual sustainable price, which is, incidentally, quite a ways down from where we are now.
Most bondholders under this action would take no or very little loss.

Those who bought bonds from the far-riskier hedge-fund like activities, or the open-market purchases of ALT-A "assets" that are in fact worth far less than they're being carried at would be partially exposed, but this was a choice - if you look at what sorts of debt Fannie and Freddie have issued, it is not just single-family residential mortgage-backed debt, it is many different classes of bond linked to many different sorts of retained, purchased and guaranteed assets. You choose what you want to buy, and each has a very nice prospectus detailing what's in there.

If you bought bonds backing ALT-A liar loans to speculators in Nevada, then expecting the taxpayer to back up your bad purchase is beyond ridiculous and into the realm of theft and, if you threaten someone (like Paulson) over it, blackmail.

The preferred stockholders in this scenario would be in serious trouble while common equity holders would be just plain wiped out. Preferred holders might be able to (depending on how the quality of that retained portfolio actually works out over time) to recover some of their investment, but almost certainly not all.

The important point here is that the longer the government waits to do this the worse the losses will get for everyone, as housing prices remain in decline and they will continue to do so until they reach 3x incomes, on average, in each market area.

It is now CLEAR to anyone who has even a double-digit IQ that Bernanke and Paulson's ideas from last year of allowing financial institutions to lie, cheat, and try to borrow their way around telling the truth and selling off this debt to deleverage has only led to more losses as the value of the collateral has continued to decline.

As I said originally last summer the right move was (and still is) to force these people to sell off the debt NOW for whatever it will bring, because its value today is higher than it will be tomorrow.

We must force resolution of this problem now as we are headed straight for the result that Japan got by allowing their institutions to lie and fail to report their losses honestly, declaring their "marks" by fantasty, wish and dream instead of the market.

Today, more than ten years on, the Nikkei stock market has still not recovered from the loss of 2/3rds of its value, and the Japanese economy still has failed to bottom and recover.

Goodbye Fannie and Freddie, it was nice knowing 'ya.

Oh, and for my fellow Americans?

Exactly what will it take before you will get off your butts and start demanding that The Government stop allowing people to lie to you about matters financial?

Go back and read this whole thing. This mess did not happen in a day and you have consistently sat on your tush and bought your plasma TVs and iPODs, without regard to whether you could afford them.

You listened to those who intentionally deceived you for their profit and your loss, and you still are.

Do you hear the alarm clock in your head yet?

If not, how much more of your standard of living do you have to lose before you do?

[Hugin]

48. This is the first realistic estimate of a 'bottom' I've seen...

"... as housing prices remain in decline and they will continue to do so until they reach 3x incomes, on average, in each market area." Notice how there's no time frame? It's tied to a multiplier? So, things over time are only going
to get worse unless we choose to do something about it now.

And that's only in a very limited category... Once again we see the way out of this is somehow tied to 'wages'
and 'income' of the consumers.

Thanks for the post, Buttercup.

[Demeter]

51. Stunning. Cannot Be Said Too Loudly or Too Often: Carthago delenda est!

http://en.wikipedia.org/wiki/Carthago_delenda_est

The liars and their tools must be destroyed.

[Demeter]

2. UBS certain will be independent in 2 years

http://news.yahoo.com/s/nm/20080816/bs_nm/ubs_dc_1



ZURICH (Reuters) - UBS AG's (UBSN.VX) chairman is sure the troubled Swiss bank will still be independent in two years' time, according to an interview published on Saturday.


"I am certain about that," Peter Kurer told Swiss newspaper Basler Zeitung.

"We have now laid the foundation for a new future. The risks have been reduced, costs lowered, strategy changed, the management board renewed, managers replaced," Kurer said.

UBS is Europe's hardest hit victim of the credit crisis having written down some $42 billion of investments.

It said this week it will separate its troubled investment bank from its prized wealth management arm.

"We are tackling our problems with great speed and we will come out of the crisis successfully," Kurer said.

(Reporting by Sam Cage; Editing by Gerrard Raven)


SOUNDS LIKE PHIL GRAMM DIDN'T GET ANY GOLDEN PARACHUTE....

[Demeter]

8. UBS chiefs knew of rule breaches By Haig Simonian in Zurich

http://www.ft.com/cms/s/0/1400cc34-68a3-11dd-a4e5-0000779fd18c.html


Senior executives at UBS, the Swiss bank being investigated by US authorities, knew some of their bankers had acted in a way that meant they risked breaching American securities laws at least a year before the US inquiries began, a letter seen by the Financial Times shows.

The May 2006 letter, now in the hands of the US Department of Justice, was written by Peter Kurer, UBS chairman and then the bank’s general counsel, and copied to Marcel Rohner, then head of private banking and now group chief executive, as well as Lawrence Weinbach, a UBS director who sits on the board’s audit committee. It was written to Bradley Birkenfeld, a former UBS banker at the centre of US inquiries into whether the bank helped its wealthy American clients evade taxes by transferring their money to European tax havens.

Mr Birkenfeld, who admitted this year to helping a billionaire US businessman evade millions in tax while at UBS, has been co-operating with the authorities.

...In the letter, Mr Kurer acknowledged he had received information from a whistleblower, who had drawn attention to the problems the bank faced because of the inadequate securities registration. Mr Kurer writes that the information prompted an internal investigation in which UBS interviewed 12 of its private bankers who had been dealing with wealthy American clients and he would be recommending procedural changes to management...UBS officials stress the whistleblower referred only to possible breaches of securities law, and not the tax evasion issues being investigated. UBS also said Mr Kurer acted swiftly to tighten procedures after investigating the whistleblower’s allegations, and introduced measures to ensure the procedures were properly implemented and observed...

UBS last November decided to close its offshore banking business for US clients after growing concerns about risks to the bank’s reputation in an ever-tougher regulatory climate.

[antigop]

3. Thanks, Demeter -- did I miss anything? I can't seem to find any FDIC takeovers announced on Friday

Were there any?

[Demeter]

5. I'm Just Getting Started

Check back tomorrow if not later today

[Hugin]

12. 'Bout time.

:hi:

[Hugin]

13. I didn't see any announced.

Hmm...

[Demeter]

15. They Could Be Doing It Privately

It could be a matter of national security and be classifeid. How the hell can we know anything that goes on anymore?

By whistleblowers, gossip, and inference! Oh, and the foreign press.

[Hugin]

17. It's really a shame we have to infer what's going on to make financial decisions.

How do they expect us to pull up our bootstraps! For crying out loud!

[Demeter]

4. China to overtake US as largest manufacturer By Peter Marsh in London

http://www.ft.com/cms/s/0/2aa7a12e-6709-11dd-808f-0000779fd18c.html

China is set to overtake the US next year as the world’s largest producer of manufactured goods, four years earlier than expected, as a result of the rapidly weakening US economy. The great leap is revealed in forecasts for the Financial Times by Global Insight, a US economics consultancy. According to the estimates, next year China will account for 17 per cent of manufacturing value-added output of $11,783bn and the US will make 16 per cent. Last year the US was still easily in the top slot and accounted for a fifth of the total. China was second with 13.2 per cent.

John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of the projections. It was “inevitable” that China would take over on account of its size, he said. “This should be a wholesome development for the US, for it promises both political stability for the world’s largest country and continuing opportunities for the US to export to, and invest in, the world’s fastest-growing economy.”

As recently as last year, Global Insight economists predicted that the US would retain the top position until 2013, but a large downward revision in likely output this year and next is expected to cause the US to slip more quickly than had been expected.

The expected change will end more than a 100 years of US dominance. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world’s biggest manufacturer after its Industrial Revolution.

[Demeter]

6. Alert as Japanese economy contracts

http://www.ft.com/cms/s/0/5fef0b16-68d9-11dd-a4e5-0000779fd18c.html


By Chris Giles in London



Advanced economies received a wake-up call on Wednesday that none were immune to the effects of the credit crisis stalking financial sectors on both sides of the Atlantic.

In Japan, new data showed the world’s second largest economy contracted by 0.6 per cent in the second quarter, its worst quarterly performance for seven years. The quarterly decline makes Japan the biggest economy yet to experience economic contraction this year. The difficulties hitting the Japanese economy were matched in the UK where sterling plunged to an 11-year low on Wednesday as the Bank of England gave its bleakest economic assessment for more than a decade and financial markets priced in a series of interest rate cuts.

On Thursday the first estimate of eurozone second quarter growth is expected to show the first contraction since the single currency was launched in 1999.

With the US economy already having contracted at the end of last year, none of the world’s rich economies appears to be able to sustain continued expansion as the credit turmoil progresses. This anaemic performance is not, however, matched in much of Asia’s emerging economies and oil producers, where expansion has barely dimmed.

[Demeter]

7. Gloom descends on US finance executives By Joanna Chung and Justin Baer in New York

http://www.ft.com/cms/s/0/4a85340c-64a7-11dd-af61-0000779fd18c.html


US finance chiefs’ outlook for America’s economy sunk to a four-year low amid mounting concern over high oil prices, waning consumer demand and inflation, according to a study. The findings, which are to be released on Friday, follow a spate of US economic data and corporate earnings reports in recent weeks that fuelled fears of a recession and damped hopes of an easing of the financial crisis. Optimism among chief financial officers has also faded this year, and in the second quarter touched its lowest point since June 2004, a survey by Financial Executives International and Baruch College’s Zicklin School of Business showed.

At least half of those surveyed believed that the price of crude oil would climb to at least $160 a barrel in six months, or about a third higher than where it traded on Thursday. Many have taken steps to insulate their companies from the jump in fuel costs, raising prices, cutting corporate travel or investing in more energy-efficient gear. Controlling expenses is among the top challenges for the rest of the year...

However, the study also showed that more than two-thirds of the 200 CFOs surveyed remained optimistic about their own companies’ prospects. Some even planned to increase technology and capital spending in the next year....

The US unemployment rate rose last month to its highest level for four years. Recent data, including this week’s Institute for Supply Management’s index of new export orders in the services sector, have also painted a worrying picture of the health of US exports.

LIGHT DAWNS ON MARBLEHEAD....

[Demeter]

10. Bulls throw weight behind dollar By Peter Garnham

http://www.ft.com/cms/s/0/6f037ea6-6786-11dd-8d3b-0000779fd18c.html



The dollar hit a six-month high against the euro amid a growing realisation that the US economy was not deteriorating as quickly as others across the globe.

The dollar rose to a peak of $1.4881 against the euro, its strongest level since February, and hit a 21-month high of $1.9070 against the pound... while US economic data had been surprising on the upside recently, the deterioration in other economies had been dramatic.

“This does not necessarily mean that the US economy is in good shape, just that relative to expectations the economy is improving.”

He said that, in the US, the policy response to the global slowdown had already occurred, with the Federal Reserve slashing interest rates and the government providing a fiscal stimulus...


Maurice Pomery, of IdeaGlobal, said there had been a fundamental shift in attitude towards the European economy, and both interest rate expectations and the potential for a global slowdown were positive for the dollar.

Longer-term “real money” FX investors – such as pension funds and asset managers – would have some decisions to make very soon over asset allocation following the dollar’s sharp rise that could prompt further gains in the currency.

“We remain bullish on the dollar,” Mr Pomery said.

IF THIS ECONOMY IS GOOD, I'D HATE TO SEE WHAT "BAD" LOOKS LIKE!

[Dr.Phool]

32. Tampa Bay jobless rate surges to 6.6% in July

Once a job-generating machine, Florida led the nation in job losses in July. For the third straight month. And Tampa Bay is the state's hardest-hit metro area.

Thousands of Florida private sector workers lost their jobs last month as the unemployment rate jumped to 6.1 percent, its highest level in 13 years, state officials said Friday. That's a dramatic increase from the previous month's 5.5 percent and a sharp rise above the U.S. average of 5.7 percent.

"It's the credit crunch that's prolonging Florida's misery," said Sean Snaith, an economist at the University of Central Florida. "That's preventing this excess housing from being absorbed at a faster rate. Until that balance is restored, we're going to be in this downward trend."

The state had 96,800 fewer jobs in July than it did a year ago, largely because of the falloff in construction, which lost 79,200 jobs over the past year. Manufacturing, business services and finance and insurance also have suffered. The state trend of negative year-over-year job numbers began in September and shows no sign of easing.

(snip)
http://www.tampabay.com/news/business/article772227.ece
______________________________________________________

I guess maybe they'll hire a lot of people to clean up the mess if Fay hits us Tuesday, as expected.

[Demeter]

11. Insight: Oil prices have peaked By Ed Morse

http://www.ft.com/cms/s/0/99e4c70a-6944-11dd-91bd-0000779fd18c.html

Published: August 13 2008 15:58 | Last updated: August 13 2008 15:58

Thanks in no small degree to a drop in global demand, oil prices, after breaching $147 per barrel, have tumbled more than 23 per cent to below $113. Barring a big hurricane in the Gulf of Mexico or a disruptive geopolitical event, oil prices appear to have peaked.

World oil consumption is now growing at a significantly lower pace than had been imagined a year ago. Last October, the International Energy Agency was forecasting global demand growth for 2008 of 2.1m barrels a day, with 750kb/d from the OECD and 1.33mb/d from emerging markets. In their latest monthly report, the IEA has slashed this by more than 60 per cent to 800kb/d, with OECD demand actually forecast to decline by over 600kb/d and emerging markets demand to grow by 1.4mb/d.

In our judgment, the IEA’s forecasts for emerging markets will turn out to have been far too optimistic by year’s end and OPEC countries will again complain about the inability of oil importers to guarantee sufficient demand growth to warrant investments in expanded production capacity.

Pointing fingers about who is responsible for the uncertainty of global demand may be futile. Clearly, higher prices and lower economic growth are taking a toll on US and other OECD country petroleum product demand. But now two other articles of faith are being challenged. First, the consensus thinking that emerging market oil demand has decoupled from industrial countries will be severely tested over the next half year. Second, the growing consensus that lower prices and higher economic growth will result in a rebound in global demand growth is wishful thinking.

Let’s look at both of these arguments in more detail....

The old adage that “nothing cures high prices like high prices,” is as true today as in the 1970s. Those cures don’t only involve the supply side; the response from demand is as critical. We expect prices to stabilize at $90-100 per barrel but to still stimulate structural demand adjustments – we don’t foresee world demand growth exceeding 1mb/d per year for some time.

The writer is chief energy economist at Lehman Brothers

WELL, IS THIS A CREDIBLE MAN AND A CREDIBLE ANALYSIS?

[Demeter]

28. Western oil demand set for biggest fall in 25 years / Robin Pagnamenta, Energy and Environment Edito

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4535431.ece

Oil demand in Western countries is set for its biggest fall in 25 years as the global economic slowdown intensifies and consumers respond to high prices.

Demand in the economies of the Organisation of Economic Co-operation and Development (OECD) countries is set to average 48.6 million barrels per day this year, a decline of 1.3 per cent or 620,000 barrels from 49.2 million in 2007, the International Energy Agency says.

Gareth Lewis-Davies, director of commodities research at Dresdner Kleinwort, points out that this represents the largest fall since 1983, when OECD demand fell by 684,000 barrels per day in the years after the Iranian revolution. He cited growing evidence that high prices were forcing basic shifts in consumer behaviour in these countries as people used fuel more sparingly and reduced car use.

The US Transportation Department said this week that Americans drove 4.7 per cent, or 12.2 billion, fewer miles in June compared with a year earlier. It was the eighth consecutive monthly fall.


Mr Lewis-Davies said that collapsing demand from Western economies had been a key factor driving a rapid fall in oil prices, which have dropped almost 22 per cent since reaching a record high of $147 per barrel on July 11. Yesterday, the price of a barrel of crude was about $115. He said an exit of speculative money betting on rises in the oil price had amplified the drop.

Falling Western demand for crude has been largely offset by strong demand from developing countries such as China, where fuel is still subsidised. Globally, oil consumption is expected to grow slightly this year by 760,000 barrels per day to an average of 86.8 million barrels, the weakest global growth rate since 2002.

In 2004, explosive demand from China triggered a 2.9 million barrel rise in global demand compared with the previous year. All of the growth this year is expected to come from developing countries. Some analysts believe that oil demand in non-OECD countries will fall to its weakest level for years and could brush close to zero.

Iain Armstrong, a Brewin Dolphin analyst, said that China's decision to shut down large tracts of its industrial base during the Olympics to help to cut pollution was likely to reduce significantly non-OECD demand for fuel.

Beijing's push to stockpile fuel in the run-up to the Games to ensure there are no shortages is likely to lead to a fall in demand over the next few months as those supplies are used up.

Weaker economic growth driven by falling demand for manufactured goods from developed countries is likely to be another factor dragging on non-OECD oil demand for the remainder of this year.

Mr Lewis-Davies said that it was harder to make accurate predictions about non-OECD oil demand because of a lack of reliable, up-to-date data.

[Demeter]

29. Quelle Surprise! Speculators May Have Had Something to do With Oil Price Runup

http://www.nakedcapitalism.com/2008/08/quelle-surprise-speculators-may-have.html

Since roughly February, a solid minority of commentarors, including this blogger, have questioned the thesis that the rapid increase in oil prices was solely the function of supply and demand. It was disconcerting to see what reactions this stance elicited. There was often an unwillingness to read what was written, and instead turn the post into an exercise in projection. Use of the word "speculator" is taken to mean the author 1. thinks speculation is bad (no, depends on circumstances), 2. is economically illiterate and 3. is a Peak Oil denier (a lot of vitriol here).

When oil sprinted to its $147 a barrel summit, there was plenty of commentary supporting the price as a function of fundamentals (despite quite a few oil company presidents and industry greybeards begging to differ), save some short-covering when the price rose above $140. But when I came back from Alaska and prices were continuing to fall, the explanations had at least as much to do with, um, speculative factors, like investors dumping oil and commodities for the dollar, as demand destruction.

It seems ironic that now that prices are falling, the CFTC has reclassified its data to show that some traders on exchanges that were previously designated as commercial are now classified as "non-commericial". The role of weight of non-traditional money in the market now lends support to the notion that demand from new players looking for an inflation hedge or simply participation in a different asset class played a role in the sudden price move.

MUCH MORE AT LINK

[Demeter]

14. Insight: A crisis of similar ingredients By Frank Partnoy

http://www.ft.com/cms/s/0/2107332c-67b4-11dd-8d3b-0000779fd18c.html



A little over a decade ago, I published a book called F.I.A.S.C.O.: Blood in the Water on Wall Street. I described the antics of the finance industry and criticised some egregious market excesses. Back then, the derivatives market was worth a quaint $50,000bn, collateralised debt obligations (CDOs) contained mostly corporate bonds and loans, and credit default swaps had just been invented.

Most people say the financial world today has been transformed radically since then.

But how much is really new? As the current crisis nears its end, or at least the beginning of the end, it is worth reflecting not only on the novelty of today’s markets, but also on the themes that have remained constant.

Of course, the recent credit crisis dwarfs the collapses of the 1990s. Then, billion-dollar losses at Orange County in California and Barings bank were startling front-page news. Today’s writedowns are dozens of times larger and far more frequent. The notional value of derivatives values is nearly a quadrillion dollars ($1,000,000bn).

The banking culture has changed, too, thanks to sexual harassment litigation and a brain drain. Today, a trader who wanted to pay a sales assistant $500 to eat a pickle covered with hand lotion would probably do so privately, not in the middle of the trading floor. Moreover, the best traders now are not at banks but at hedge funds, where they care more about making a billion dollars than demonstrating machismo.

Yet the same factors that dominated past markets rule today. The first is informational asymmetry, the knowledge gaps that perpetually lead to inefficiencies and crises. In the 1990s, flawed mathematical models were used to model prepayment risk. This time flawed models were used to model credit and liquidity risk. The markets were stunned in 1994 when Askin Capital Management marked its positions to market instead of model, and was suddenly insolvent. The same kinds of surprises emerged from financial institutions as they re-marked their derivatives positions. Not very many people can price complex financial risks accurately, especially those related to mortgages. Then or now.

Moral hazard also is a common theme. The 1990s structured note market flourished as banks used government-sponsored entities as studs to issue bonds linked to every financial variable imaginable. Today, subprime mortgage lending exploded because of the same implicit GSE guarantees.

A third commonality is regulatory arbitrage, the manipulation of legal rules for financial advantage. Here, credit rating agencies play the central role, just as they did a decade ago. Orange County in California bought inverse floating structured notes that were rated AAA but carried far higher risks. The same is true of modern purchasers of AAA-rated CDOs and SIVs. Today’s alphabet soup has a few new ingredients, but the recipe is the same. Highly rated structured finance instruments are incomprehensible to most investors. Then or now.

Even some of the players are the same today as before, and not just mortgage traders who graduated from losing money on IOettes and inverse floaters to, more recently, losing even more on super-senior CDO tranches. John Mack, one of the stars of F.I.A.S.C.O., plays the same role today that he played then, as head of Morgan Stanley. When the 1990s crises hit, Mr Mack rallied the troops with a cry of “There’s blood in the water, let’s go kill someone.” Today he advocates a similar response, although he is more careful about how he describes it.

We will emerge from this crisis, and then another will hit in a few years. The cycle will continue. Meanwhile, finance will remain one of the most lucrative professions, for the same reason it is one of the riskiest. Risk and return are related in industry as well as investments.

Indeed, the above three common themes, then and now, are the central reasons finance industry employees will continue to out-earn just about anyone else. Information asymmetry, moral hazard and regulatory arbitrage are the basic ingredients of high-margin finance. Soon the markets will be booming again, and the people who exploit these three themes will do the best, as they always have.

The writer is a professor at the University of San Diego School of Law

I CONCUR WITH EVERYTHING EXCEPT THE LAST PARAGRAPH--BEING PAID BIG BUCKS TO GAMBLE WITH OTHER PEOPLE'S MONEY IS ROBBERY OR FRAUD

[Hugin]

19. I also disagree with the "beginning of the end" BS at the top...

But, it's always good to hear alternative views of what's going on... Don't want to suffer from the idealogical driven
tunnel vision hampering the Supply-side.

[Tansy_Gold]

44. My usual question. . . . . . .

"The notional value of derivatives values is nearly a quadrillion dollars ($1,000,000bn)."


In November of 2007 -- what's that, nine months ago? -- the notional value of derivatives was a mere $516 or $517 trillion.

HOW DID IT NEARLY DOUBLE IN LESS THAN A YEAR?

And especially how did it increase when we are seeing all these write-offs and write-downs and buy-backs?

Are we completely in never never land, oz, down the rabbit hole and across the bridge to terabithia? (By the way, I've never read that last one, so maybe I screwed up the metaphor, but you know what I mean. . .. )


What in fact are we talking about here? Where are these quadrillion dollars? Are they all there at once, on someone's balance sheet under "assets," or is this a total number of derivatives traded, only a portion of which actually exist? How is their value determined? I mean, someone came up with this figure of almost a quadrillion dollars so it has to come from SOMEWHERE.

This bullshit is affecting the lives of real people. Here in Apache Junction, Arizona, seven families are being evicted from the houses they were renting because the owner defaulted on the mortgages. (The article is available at http://www.newszapforums.com/forum7/64873.html, discussion board run by the AJ Independent weekly newspaper. Editor's post is first if scroll down.) These are not people who are speculating on oil futures. They are not sub-prime borrowers who lied about their incomes.

Did anyone here watch Bill Moyers Friday night? His hour-long interview with Andrew Bacevich was riveting. Oh, I know, it's PBS and it's preaching to the choir and the people who need to hear the message have their fingers in their ears or can't hear anything above their own whines for bail-outs.

I was never much for hard science and just barely made it through the required biology, chemistry, and physics classes in high school. The only thing I remember from my semester of physics was 30ft/sec/sec -- the acceleration rate for falling bodies. Now, I'm sure someone here knows much more about this than I do, but I hope you'll forgive my awkward and clumsy comparison. Falling bodies move increasingly fast. The further they have to fall, the more time they have to accelerate. The more they accelerate, the harder their impact when they finally reach bottom.

And I think that's what we're seeing now. The fall is starting at a mere 30 feet per second, but in another second it will be falling at a rate of 60 feet per second, and a second after that it will be 90. So maybe it's two banks this week, a bank and a small credit union next week, three banks the week after, a hedge fund and a bond trader tomorrow. If we don't get a handle on it, and that means understanding just what it is we're dealing with, I don't think we can stop it. Once it gets started, our only hope is to survive.


Tansy Gold

[Demeter]

52. The Holders and Processors of This Junk Are Serial Liars

I don't think anyone has accurate numbers because they are afraid to look, and the government hasn't made them. I think the post upthread by Buttercup McToots on "End Times" says it all.

Worse yet, they haven't stopped. Every Tom Dick and Harry (funny how that works in this case) is making his last play for the last dime Fannie and Freddie can squeeze out. It's madness.

[fedsron2us]

54. I am not so sure the cycle will continue quite as it has done in the past

This time the money has gone for good.

[Joe Chi Minh]

55. In the light of this, our UK newspapers' tut-tutting that this "threatened" recession looks as

if it could get as bad as the one in the 90s, sounds more comical than ever.

[Demeter]

18. Many Former Wall Street Employees Exiting Finance

http://www.nakedcapitalism.com/2008/08/many-former-wall-street-employees.html


The problem with having narrow skills, like being able to structure CDOs, is that if you lose your job, your employment prospects are limited. Unless you have personal connections that are willing to give you a chance at something where your skills might be distantly relevant (say being the CFO of a small company), most employers, especially large companies, want to hire someone who is already doing precisely what the job calls for. I've seen enormously talented senior people (and I don't mean from Wall Street) unable to land jobs because employers write the job specifications so narrowly.

Recall that in the dot-com bust, those who lost jobs in Silicon Valley faced similarly bleak situations, and stories abounded of principals of failed companies seeking work at the likes of Home Depot.

It is hard to be sympathetic with people who made so much money in the fat years. Nevertheless, naivetee, optimism, peer pressure and (of course) big bucks lead young people to chose these high paying careers and not consider how risky they are. Even though Wall Street's cyclicality is well known, many assume the cuts will happen to someone else, and if something bad were to happen, they could always find a job on the buy side. They are learning otherwise.

As Bloomberg reports, many former masters of the universe are looking far afield for there next gig:


Wall Street professionals are trying new careers, and fetching smaller salaries, amid the elimination of 76,670 investment jobs in the Americas following the global credit crunch that started a year ago, according to data compiled by Bloomberg.

Bankers are ``buying businesses for themselves, moving west or to Europe, including Russia, or to Dubai,'' said Jeanne Branthover, managing director of Boyden Global Executive Search in New York. ``They're also moving totally outside what they do, buying a retail store or a ranch.''

``The job market is in the worst, most chaotic state I've ever seen it in fixed income,'' said Michael Maloney, who recruits finance professionals for Maloney Inc. in New York. ``I've been doing this for over 30 years and I've never seen anything like this.''

Half the people working in debt sales, trading or research in New York at the beginning of 2007 will have been fired by the end of this year or won't get a bonus, Maloney estimated.

Jeff Salmon said job jitters prompted him to swap investing in asset-backed securities at Bank of New York Mellon Corp. for keeping the books at a hair salon. He and his wife, Olga, opened a Great Clips franchise in Mercerville, New Jersey, that offers $12 haircuts for both men and women.....

Traders and bankers who leave finance can expect to earn a fraction of what they used to make. Compensation for employees on Wall Street averaged $399,360 in 2007, compared with $62,390 for New York City jobs outside the securities industry, according to the state comptroller's office.....

Bond salesmen and traders are trying everything from bartending to real-estate sales to make insurance and tuition payments for their families, Maloney said.

``I know a few guys that started gambling, playing poker to pay the bills,'' he said. ``Especially ex-traders.''

Joshua Perksy took to the streets after being laid off as an investment banker at Los Angeles-based Houlihan Lokey. He strolled New York's Park Avenue in June wearing a sandwich board reading ``Experienced MIT Grad For Hire.''

``It's been slow and frustrating,'' said Persky, 48. ``The only places to turn are hedge funds and boutique banks. I've never been unemployed this long.''

While his gambit generated some job leads, none has panned out so far, Persky said. He's considering a move to Omaha, Nebraska.

[Demeter]

20. Global P/E Ratios and Dividend Yields

http://bespokeinvest.typepad.com/bespoke/2008/08/global-pe-ratio.html

Global P/E Ratios and Dividend Yields

Below we highlight the estimated current year P/E ratios and dividend yields for the major equity indices of 13 countries. As shown, Europe has the lowest estimated P/E ratios, with Italy, the UK and France all below 10. The US ranks 3rd to last behind China and Japan. European equity markets also offer some attractive dividend yields well above 4%.

[Demeter]

21. Surge in repossession orders clogging up the courts (Great Britain)

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article4543323.ece



Alex Spence and Grainne Gilmore

Courts are having to delay adoption hearings and personal injury claims to deal with a surge in mortgage repossessions.

County courts in England and Wales issued 28,658 repossession orders between April and June as banks and building societies clamped down on borrowers who fell behind with mortgage payments. The volume of repossessions, up 24 per cent on the same period last year to the highest level since 1992, at the end of the last recession, has alarmed judges.

On a single day this week, Judge Stephen Gerlis, a district judge at Barnet County Court, in North London, heard 45 repossession cases. His court has appealed for additional part-time judges to help with the caseload.

“The only way that extra cases can be accommodated is by squeezing out less urgent ones,” Judge Gerlis told The Times. “They have been steadily increasing for at least the past two years and are now accelerating at an alarming rate.”

He said that the increase in repossession applications was causing havoc with court schedules, because these applications must legally be dealt with within eight weeks of being filed.

The court previously set aside one day a week for hearing repossession orders, and two days each for family cases and small claims. Most days are now dominated with applications from people whose homes were about to be seized.

People waiting for the court to hear other civil matters, including adoption applications, contract disputes and personal injury claims, have been forced to wait hours or even days while judges deal with the repossession cases.

Judge Stephen Gold, who sits at Kingston-upon-Thames County Court, in South London, had also experienced an increase in repossession cases but so far the court had been able to cope. He said that the courts had managed to deal with other sudden “blitzes” of cases, such as the recent claims over bank charges.

Lenders issued 39,078 claims for repossession in the past three months, according to figures published by the Ministry of Justice, 17 per cent more than a year ago. Not all are granted and in some cases borrowers come to a late arrangement to pay. According to separate figures issued by the Financial Services Authority, the number of people who missed three or more mortgage payments doubled in the first three months of this year to 300,000, which suggests that many more homeowners could be at risk of repossession. So far 18,900 homes have been repossessed this year, 6,100 more than in the first six months of last year.

Housing charities have accused banks and building societies of becoming more aggressive in pursuing homeowners who fail to keep up with their payments. Andy Sampson, chief executive of Shelter, the housing charity, said that mortgage lenders were using repossession as a first, rather than last, resort.

Not all repossession orders result in borrowers losing their homes, as homeowners can still negotiate with lenders after the order is issued. Earlier this year, the Civil Justice Council, the body responsible for advising the Lord Chancellor on civil law, issued a set of draft guidelines that would require lenders to seek a compromise with defaulting borrowers and avoid legal action unless necessary.

The guidelines, which are based on existing rules that govern disputes between landlords and tenants, will be handed to the Ministry of Justice’s rules committee for endorsement in October, with a view to being implemented in March next year.

The number of bankruptcy petitions also rose to nearly 20,000 in the three months to June. More than 15,300 people petitioned for bankruptcy while creditors sought to force a further 5,625 people into becoming insolvent. The total number of petitions was 5 per cent higher than in the same period last year.

[Hugin]

22. Whereas, here in the US we've done away with all of those 'quaint' courts...

and allow our Corporate Masters to unilaterally dispense their version of justice upon the masses at their
whim. Ah, the joys of American Corporatism. :sarcasm:


Edit: Replaced Capitalism because it's gone way beyond that.

[Tansy_Gold]

45. Could we call it shruggery?

:shrug:

[Hugin]

47. Yes, that would be good.... Shruggery at it's finest. n.t

[Demeter]

23. Inflation Versus Deflation: The Debate Continues

http://www.nakedcapitalism.com/2008/08/inflation-versus-deflation-debate.html

Central bankers know in overlevered economies to break glass and print money. Bernanke has written at length as to how damaging even modest deflation is to borrowers and how it impedes investment and growth. He has famously observed that a determined central bank can always reflate, and hews to the conventional wisdom that Japan is in the mess it's in due to not cutting rates fast enough when the bubble economy started imploding.

Yet I have a sneaking suspicion... that we will get a dose of deflation before the Fed turns on the printing press and debases the dollar (that was one of the consequences of the 1934 reflation).

Why? The Fed has been making bad judgment calls for some time that nevertheless get applauded, so they have little reason to question their moves to date. They have tended to wait too long to act, then move in too extreme a fashion. Bermanke & Co. were famously slow to recognize the severity of the subprime crisis. They suffer from what Willem Buiter calls "cognitive regulatory capture" in that they identify too strongly with the viewpoint of banks and Wall Street, that is, they lack sufficient detachment. They also suffer from a lack of expertise in the areas that are the epicenter of the crisis, such as securitized credits and credit default swaps. With all due respect to Timothy Geithner, the head of the New York Fed, no matter how much he talks to and trades with investment banks and broker/dealers, he and his colleagues cannot possibly have the same understanding of their business as they do of banks they supervise. (Worse, even the management of the investment banks may not fully understand what is up at their firms, as Michael Lewis has suggested. He contends that the products have gotten so complicated that only product experts can understand them, and top management doesn't have the in-depth knowledge needed).

So the Fed cut too far, too fast. 75 became the new 25. And as Caroline Baum has noted, if the Fed knew it was going to create its alphabet soup of facilities, it wouldn't have cut as deeply as it has. But it cannot undo the past.

But now the Fed is talking hawkishly (and maybe it hopes the hawkish talk will obviate the need to do anything). But if the Fed was with Waldman's program, it would be thinking about cutting, or at least not raising rates.

Even though the Fed is supposed to be independent, it has been annexed by the Treasury department. Waldman argues that the national interest will be served by devaluation because deflation hurts workers, since the real value of their debt rises. As noted earlier, Bernanke is acutely aware of this issue.

But what he misses in his political calculus is how high commodity prices have put the Fed on tilt. More dollar weakness, even with a faltering global economy, presumably means at least somewhat more costly basic materials. Those are highly visible to consumer/voters. Higher real cost of debt, on the other hand, is far less obvious and plays out over time.

So I suspect the policy bias will continue to be to avoid debasing the dollar (unless we get a real price break and oil goes to $75 or lower, which would give the Fed much more latitude) until we start seeing second-order effects from deflationary trends, such as higher consumer defaults and heightened stress in the financial system.

But no matter how you slice it, the average worker is going to see his standard of living fall.

TALK ABOUT A BIASED ANALYSIS! WORKERS OF THE WORLD, UNITE!

[Demeter]

24. Why inflation?

http://interfluidity.powerblogs.com/posts/1218766479.shtml


In the more eschatological corners of the financial blogosphere, a debate has raged for centuries: Inflation or deflation?...

I'm more certain of monetary and price volatility than I am of inflation or deflation. But on balance, even as commodities crash and the dollar rallies, my best guess is inflation.

Do read today's excellent post by the always excellent Brad Setser, The changing balance of global financial power. Take a look at his graphs, showing the external official claims of "democracies" vs "autocracies". You'll notice that the autocracies are owed a great deal more money than the democracies are. Mostly, money is owed by the democracies to the autocracies in the form of debt denominated in the democracies' currencies.



Inflation helps debtors at the expense of creditors. In democracies where those who can vote are, on balance, debtors, one would expect collective indebtedness to favor inflation. Not all citizens are debtors, there would be domestic winners and losers. But on balance, voters gain by printing currency. If that's a good argument for free trade, why should it not be an argument for weak money?

There are, of course, institutional constraints, "independent" central banks and all. It is one thing for a nation's central bank to stand above the fray with respect to competing domestic interests, but quite another for the bank to put foreign interests or economic ideals above a collective national interest. That's especially true if the alternative to devaluation is deflation. Under a deflation, American workers (those who remain employed!) would have to work more to pay off their fixed dollar debts. Individuals can declare bankruptcy and default, but collectively we cannot default on official debt (pace Felix Salmon, whose heretical idea I adore). One way or another, as reckless debtors or noble taxpayers, Americans would have to work harder under a deflation than they had signed on for when they took on the debt. Americans are having a hard time coming to grips with their nominal debt burden, public and private. I think it implausible that they would accept a large increase in the real interest rate they must pay. Officially it is the policy of the American central bank to maintain price stability and full employment regardless of the external value of the dollar. If the Fed faces a choice between deflation and high unemployment, or tolerating a significant inflation (with or without high unemployment), I'm pretty certain it would choose the latter as the less-bad option.

Japan's experience in the 1990s and the US' in the 1930s are often cited to suggest the inevitability of deflation, despite monetary policy heroics. But in both cases, the deflating country had a large, positive international asset position. To the degree money was owed by foreigners in domestic or pegged currency, the "national interest", looking past winners and losers, was to tolerate deflation.

All of this ignores the secondary consequences of a partial default through inflation and devaluation. A wise polity would weigh the immediate collective benefit of reduced debt load against costs including higher future interest rates (foreign creditors get spooked), more expensive tradables, and a nationalistic backlash by creditor states. Of course, it would also have to consider the secondary effects of tolerating deflation, such as a spike in bankruptcies combined with a large tax spike to avoid a sovereign default. It seems to me that the adverse consequences of deflation would be sharp and domestic, while high prices and interest rates can be billed as "facts of nature" in a market economy, and other people's hostile nationalism often helps domestic politicians, who can provoke some hostile nationalism of their own.

It is not impossible that the Fed will square the circle, maintaining something close to price stability while the US gears up its tradables economy and foreign creditors silently ease our debt burden via real appreciation. Obviously, that's the best outcome (at least for the United States). But if deflationary winds do blow, if the Fed is faced with the choice of tolerating a spiraling credit contraction, falling prices, and bankruptcies or overshooting with "quantitive easing" into inflation, well, as Ben Bernanke famously put it...

he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.


--------------------------------------------------------------------------------

FD: My investment portfolio includes inflation hedges such as precious metals and short positions on long bonds. My portfolio return over the past several weeks has been large and negative, and if you take anything here as investment advice please expect a similar outcome.

[Demeter]

25. Implications of the Slowing Global Economy (DEFLATION ANGLE)

http://globaleconomicanalysis.blogspot.com/2008/08/implications-of-slowing-global-economy.html


The global economy is slowing rapidly. Let's take a look at some striking examples.

Germany, France, Spain, Italy

Bloomberg is reporting German, French Economies Shrink as Spending, Investment Falter.


Germany and France, the euro area's two largest economies, contracted in the second quarter as faltering sales undermined investment by companies and soaring costs eroded consumer spending power.
German gross domestic product fell a seasonally adjusted 0.5 percent from the first quarter.
French GDP declined 0.3 percent, reversing a 0.4 percent gain in the previous three-month period.
Spain's economy grew at the slowest pace since a 1993 recession in the second quarter as the country's once-booming construction industry slumped.
Italy's economy, the third-biggest in the euro region, unexpectedly shrank in the April-June period, edging closer to a fourth recession in a decade.
An index measuring the economic climate in the euro region dropped to the lowest since 1993, the Munich-based Ifo institute said yesterday. Measures of both current conditions and expectations declined, according to institute's quarterly World Economic Survey.

Japan Economy Shrinks 2.4%

A recession looms in Japan as the Japanese Economy Shrinks 2.4%.

Japan's economy contracted last quarter, bringing the country to the brink of its first recession in six years, as exports fell and consumers spent less.
Gross domestic product shrank an annualized 2.4 percent in the three months ended June 30 after expanding 3.2 percent in the first quarter, the Cabinet Office said today in Tokyo. The Nikkei 225 Stock Average fell the most in a month.
Exports fell the most since the 2001-2002 recession, robbing Japan of the engine that drove its longest postwar expansion, while record fuel and food prices deterred spending at home.


Sharp Slowdown In Australia

In Australia, the Reserve Bank is "shocked" by the severity of the slowdown.

The RBA predicts that Australia's annual rate of jobs growth, at present 2.3%, will slow to three-quarters of 1% almost straight away. The forecast implies a jump in unemployment from 4.3% to 6% by the end of next year.
Westpac chief economist Bill Evans said the Reserve Bank seemed to be "shocked" by the severity of the slowdown that it had helped engineer.
Associate Professor Steve Keen from the University of Western Sydney says Brace yourselves for recession in this interview with Phillip Lasker.


New Zealand Recession Fears

In an unexpected move New Zealand cuts rates on fears of drawn-out recession.

Alan Bollard, governor of the Reserve Bank of New Zealand, cut the rate from 8.25 per cent to 8 per cent - still the highest in the industrialised world after Iceland - despite rising inflation, forecast to peak at 5 per cent by September.
Economists said the New Zealand authorities were acting aggressively and taking a gamble in looking through the worsening inflation picture and cutting rates to prevent the economy weakening further.
The move surprised many as it contradicts the Reserve Bank's mandate, which states that achieving and maintaining price stability are the sole objectives of monetary policy. The central bank's stated inflation target band is 1 to 3 per cent.

Economic Chill In The U.K.

Bloomberg is reporting Pound Near 22-Month Low on Growing Case for Interest-Rate Cut.


The U.K. pound traded near its lowest level in 22 months against the dollar after the Bank of England cut its economic-growth forecast yesterday, signaling it may reduce interest rates.
Bank of England Governor Mervyn King said yesterday he saw a "chill in the economic air" after unemployment climbed in July by the most in almost 16 years. The pound has lost 5.8 percent against the dollar in the past 10 days, more than any other major currency except the South African rand and Australian dollar. The pound fell yesterday by the most in nine months.
"The central bank has effectively opened the door for an interest-rate cut, possibly as soon as next month," Lee Ferridge, a foreign-exchange strategist in London at State Street Global Markets, a unit of the world's largest money manager for institutions, wrote in an e-mailed note to clients today. "Sterling has obviously reacted significantly to this."

Perfectly Obvious

Lee Ferridge, a foreign-exchange strategist in London at State Street Global Markets wrote in an e-mailed note to clients today: "Sterling has obviously reacted significantly to this."

Indeed it is perfectly obvious why the Sterling has reacted to the news. It is equally perfectly obvious why the Euro has reacted. And it is perfectly obvious why the Australian dollar is reacting as well.

Currency Intervention vs. Fundamentals

On Monday, a post of mine, Currency Intervention And Other Conspiracies, stirred up a ruckus from those who see manipulation as the reason for the rise in the dollar. One person accused me of "yellow journalism" for not seeing manipulation as the "cause" of this rally.

I have exchanged friendly emails with others, most notably James Turk, a person I highly regard, about the Forex markets.

From James Turk:

I use the term "ignited" the rally. I agree the dollar was oversold, and a rally can occur at any time. But usually a market doesn't rally unless there is some news event or some fundamental change that causes the market to reverse course.

The Fundamental Change

That is a reasonable statement from James Turk, even more so if one changes "But usually a market doesn't rally ..." to something like "But usually a market doesn't have a sustainable rally unless there is some news event or some fundamental change that causes the market to reverse course."

I believe James would accept that and would also add there can be short term technical rallies at any time without any news, based on market players entering and exiting position at or near support/resistance points.

The key point in this is that often times a "fundamental change" is only obvious in hindsight, with the market reacting in advance. In my opinion, that is what James Turk missed in Mystery Solved when he proposed on August 7th "There has not been any news exceptionally favorable to the dollar. .... So what happened to cause the dollar to rally over the past three weeks? In a word, intervention."

The fundamental change is now, in my opinion, perfectly obvious: The economies in Germany, France, Spain, Italy, Australia, New Zealand, Japan, and the U.K. are all crumbling much faster than anyone expected.

Furthermore, New Zealand, Australia, and most importantly the EU are all going to violate price stability mandates to make the implied rate cuts that are coming! That is an enormous fundamental change given that interest rate differentials, and the expected rate of change of interest rate differentials are two of the biggest factors behinds trends, and reversals thereof, in the Forex markets.

Read that last sentence again, carefully: Rate differentials, and the expected rate of change of interest rate differentials are two of the biggest factors behinds trends, and reversals thereof, in the Forex markets.

Falling oil prices are yet another reason for the dollar to rally given that falling oil prices will help balance of trade.

In a market that trades $1 trillion a day, a onetime intervention of 10 billion Euros is simply not enough to cause a rally, at least beyond a day or two. Japan intervened to the tune of $300 billion over the course of about seven months and all it saw was a sustained move opposite to what Japan was hoping to produce.

British Pound vs. US Dollar



click on chart for sharper image

Euro vs. US Dollar



click on chart for sharper image

Fundamentals Now Perfectly Clear In Hindsight

Look at the fundamentals again.

The US dollar rallied because it was damn good and ready to rally. Those with their eyes open spotted fundamental reasons in advance. Those who did not, blamed intervention.

The Implications Looking Ahead

It is quite possible that oil prices have peaked, and if so, CPI comparisons year over year are going to be easy looking forward, even if energy prices merely stabilize here. And if energy prices continue to drop, the CPI is going to be falling or even negative, soon enough.

Oil at 150 is yesterday’s news. Everyone knows about peak oil and China. But China is slowing and the entire world is headed for recession.

Those focused on the CPI and prices have it wrong for two reasons. The first is the lagging effect as described above, but the far more important reason is the credit markets themselves.

It is credit markets and the global economy that are going to determine where interest rates go. Japan, the UK, EU, Australia, and New Zealand are all on the verge of recession, and slowing at a huge pace. So from my perspective lower yields on treasuries are coming, not just in the US but also in the UK, EU, Australia, Canada, and new Zealand, all on account of that slowing global economy.

This is very dollar supportive on the margin given that many market participants expected the Eurozone and the commodity exporting countries would decouple from the US. That decoupling theory has been blown out of the water and Trichet’s change in stance (as opposed to currency intervention), using Turk's word, may have ignited a dollar rally.

However, unbeknown to most, the fundamentals had already changed. That is after all, what caused Trichet to be open towards rate cuts.

With a weakening global economy, default risk is rising everywhere. Unsurprisingly, the cost of raising capital is also rising. One implication is that junk bond yields and yields on preferred stock of even the highest grades are going to soar. And soaring corporate bond spreads are never good for the equity markets in general, at least over the long haul. A second implication is that treasury yields are poised to fall, not only in a flight to safety scenario, but also because the savings rate in the US can be expected to rise, and with that, internal demand for treasuries in the US will rise.

This is of course exactly what one should expect in deflation, with deflation being properly defined as a net contraction in credit and money. Credit, especially credit marked to market (and the latter has a long, long way to go), is contracting rapidly.

Those focused on prices and the rear view mirror of the CPI are simply focused on the wrong things when it comes to treasury yields. The important things to focus on are the deflationary forces of sinking asset prices, the effect that bank writeoffs will have on future bank lending, and the lagging effects of the CPI itself.

The overall implication is that treasury yields are likely to go lower. And when they do, expect to see still more shouts of intervention and manipulation, especially from market participants who do not understand what inflation and deflation really are.

Mike "Mish" Shedlock

[Demeter]

26. The changing balance of global financial power

http://blogs.cfr.org/setser/2008/08/14/the-changing-balance-of-global-financial-power/

Not only do we live in a new “age of authoritarianism,” but we live in a world where autocratic governments increasingly finance democratic governments.

Consider a chart that shows the increase in the foreign assets of the world’s more authoritarian governments v the increase in the foreign assets of the world’s democratic government.



Right now, autocratic governments generally don’t finance other autocracies. China’s capital account is closed to Gulf sovereign funds (nearly) as tightly as it is closed to private hedge funds. China’s government is no more able to buy a stake in the Gulf’s national oil companies than private investors. China, Russia and the Gulf are all building up large financial claims on the United States and Europe far faster than they are building up financial claims on each other.

In the first chart, I included Russia and Venezuela alongside the world’s authoritarian governments. That can be debated. Both Putin and Chavez have authoritarian sides, but both have also put their governments up for a vote. But separating Russia and Venezuela out doesn’t change the story much. The rise in the foreign assets of the world’s less-than-perfectly-democratic government is driven overwhelmingly by the rise in the foreign assets of the People’s Republic of China and the Gulf monarchies.



Both graphs, incidentally, are drawn from a paper that I have been working on over the summer, so stay tuned. The graphs include estimates for new inflows into sovereign funds (and the increase in the foreign assets of Chinese state banks) as well as the growth in central bank reserves. And yes, they indicate that the increase in the foreign assets of the world’s governments - particularly governments in the emerging world — over the last four quarters has been truly extraordinary.

Earlier this week Gerald Seib noted — quite correctly — that high oil prices have increased the financial power of the world’s less-than-democratic oil exporters. Throw in the fact that high oil prices have yet to put a dent in China’s current account surplus or the accumulation of China’s foreign assets, and the shift in financial power away from from democratic governments is even more pronounced.


To me, one of the world’s greatest ironies is that US dependence on authoritarian governments for financing has soared over the last four year. US rhetoric hasn’t matched financial reality.

Though I guess it is equally ironic that Russian purchases of Treasuries over the past few months have helped to finance the current US aid mission to Georgia.

One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies. A gathering of the countries that matter for global economic coordination will no longer be a gathering of the leaders of the world’s big democracies. Coordination among the large democracies was never easy — and likely will only get harder as additional countries have to be brought in.

And that I suspect this is among the least significant — though among the most visible — ways the world will change as financial power moves away from the world’s big democracies.

Update: Both Paul Krugman and Steve Waldman touched on similar themes today. Both are worth reading.

NOTE: I ADJUSTED THE FIRST GRAPH IN LIGHT OF THE COMMENTS AFTER THE INITIAL POST

This entry was posted on Thursday, August 14th, 2008 at 6:09 pm and is filed under Systemic Risk, US politics, central bank reserves. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

[Demeter]

30. The Great Illusion By PAUL KRUGMAN

http://www.nytimes.com/2008/08/15/opinion/15krugman.html?hp


So far, the international economic consequences of the war in the Caucasus have been fairly minor, despite Georgia’s role as a major corridor for oil shipments. But as I was reading the latest bad news, I found myself wondering whether this war is an omen — a sign that the second great age of globalization may share the fate of the first.

If you’re wondering what I’m talking about, here’s what you need to know: our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment, a world destroyed by nationalism.

Writing in 1919, the great British economist John Maynard Keynes described the world economy as it was on the eve of World War I. “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.”

And Keynes’s Londoner “regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement ... The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion ... appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”

But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together...

[Hugin]

31. Some good reads here Demeter.

It'll keep me busy for awhile. :)

[Demeter]

35. As Long As Prag Is Off The Streets, The World Is Safe

[Hugin]

49. Hey, Sunshine, A Day Without Prag is Like a Day Without...

Bunion Pads or even Mustard Plasters. Keep it real!

:7

[Karenina]

36. Can we get 2 more recs???

[DU GrovelBot]

33. ## PLEASE DONATE TO DEMOCRATIC UNDERGROUND! ##

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This week is our third quarter 2008 fund drive. Democratic Underground is
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[DemReadingDU]

34. James Quinn: The Great Consumer Crash of 2009

8/14/08 James Quinn: The Great Consumer Crash of 2009

some snippets

It is easy to ignore the storm if you look at the opposite horizon. When the storm reaches your location there can be no more ignorance.”

I hate to tell you, but the storm has reached your location and it is a Category 5 hurricane. The levees are leaking. Ignore it at your own peril. The 6,000 sq ft McMansion buying, BMW leasing, $5 Starbucks latte drinking, granite countertop upgrading, home equity borrowing days are coming to an end. The American consumer will not go without a fight.

For the last seven years the American consumer has carried the weight of the world on its shoulders. This has been a heavy burden, but when you take steroids it doesn’t seem so heavy. The steroid of choice for the American consumer has been debt. We have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live above our means. It has been a fun ride, but the ride is over. We can’t get steroids from our dealer (banks) anymore.

Only in the bizzaro world of America in the last 7 years, while in the midst of 2 foreign wars, would a President urge his citizens to show their patriotism by buying cars and TVs. When did our priorities become so warped?

The last thing that anyone thought would result while watching the Twin Towers collapse on September 11, 2001 was the greatest housing boom in the history of the world. When a country goes to war, it usually asks its citizens to sacrifice.


Retail store closings and retail bankruptcies have begun to accelerate. This will lead to hundreds of thousands in job losses. Barry Ritholtz recently documented the fate of many retailers so far:

Ann Taylor closing 117 stores nationwide

Bombay Company: to close all 384 U.S.-based Bombay Company stores.

Cache, a women’s retailer is closing 20 to 23 stores this year

CompUSA (CLOSED).

Disney Store owner has the right to close 98 stores.

Dillard's Inc. will close another six stores this year.

Eddie Bauer to close more stores after closing 27 stores in the first quarter

Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.

Foot Locker to close 140 stores

Gap Inc. closing 85 stores

Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world's largest home improvement store chain has ever closed a flagship store.

J. C. Penney, Lowe's and Office Depot are all scaling back

Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide

Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.
Macy's - 9 stores closed

Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery and Hollywood Video stores in addition to the 520 locations the video rental chain closed last fall as part of bankruptcy.

Pacific Sunwear - 153 Demo stores closing

Pep Boys - 33 stores of auto parts supplier closing

Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year

Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill

Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.

Wilsons the Leather Experts – closing 158 stores

Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.

I know Linens & Things just went belly up, and Steve & Barrys recently filed for bankruptcy protection and sale.



full text, and interesting graphs & charts...
http://seekingalpha.com/article/90892-the-great-consumer-crash-of-2009?source=side_bar_editors_picks

[Demeter]

37. QBE to buy units of US mortgage insurer PMI

http://www.ft.com/cms/s/0/39ee6ea0-69ee-11dd-83e8-0000779fd18c.html

By Peter Smith in Sydney


QBE, the acquisitive Australian insurance group, has agreed to buy the Australian, New Zealand and Asian operations of a struggling US mortgage insurance group in a deal worth up to A$1.03bn.

The assets are being sold by PMI Group, the large US mortgage insurance group struck down as rising borrower defaults in the US have led to higher insurance claims. The deal will give QBE close to 40 per cent of the Australian mortgage insurance market. QBE has a definitive agreemtent for the Australia and New Zealand assets, and an “in principle” agreement for the Asia business.

QBE, which earlier this year had its A$8.5bn offer for Insurance Australia Group rejected, has undertaken dozens of deals over many years under Frank O’Halloran, the insurer’s chief executive. He has earned a reputation for not overpaying for assets. QBE has agreed only to pay troubled PMI’s parent book value for the assets it is buying...

PMI Australia is a mortgage insurer for lenders and writes about 40 per cent of the residential mortgage insurance market in the country. Gross written premium in 2008 is expected to be about A$200m, including about A$5m through its New Zealand branch. PMI Asia has gross written premium of about A$12m.

PMI’s shares were hit earlier this year when Standard & Poor’s cut the ratings of the US’s three largest mortgage insurers.

The shares closed down 1.7 per cent at A$23.50 on Thursday.

[Demeter]

38. Market for new homes levelling, says Toll

http://www.ft.com/cms/s/344c7966-6952-11dd-91bd-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F344c7966-6952-11dd-91bd-0000779fd18c.html&_i_referer=


By Daniel PImlott in New York

Published: August 13 2008 17:21 | Last updated: August 13 2008 17:21

Toll Brothers, the largest US builder of luxury homes, is ready to make acquisitions, according to its chief executive, who said the market for new housing had “stabilised”.

“We won’t hesitate to buy assets if they are a steal,” said Robert Toll, as the company reported preliminary third-quarter sales on Wednesday that were stronger than expected and revealed that fewer customers were cancelling orders for new homes.

[Demeter]

39. Seoul pardons business leaders

http://www.ft.com/cms/s/89fdaef6-688b-11dd-a4e5-0000779fd18c.html



By Song Jung-a in Seoul

Published: August 12 2008 17:45 | Last updated: August 12 2008 17:45

South Korea on Tuesday pardoned several of its most powerful businessmen, who had been convicted of crimes ranging from fraud to assault.

The move by Lee Myung-bak, the president, was billed as an economic ­revitalisation measure but drew criticism from the opposition for giving the impression of impunity for business leaders.

[Demeter]

40. Beijing bucks the price trend By Geoff Dyer in Beijing

http://www.ft.com/cms/s/0/486dfcc6-6830-11dd-a4e5-0000779fd18c.html


Consumer price inflation in China fell in July for the third month in a row, sinking to 6.3 per cent as sharp drops in food prices allowed Beijing to buck the global trend of rising inflation.

The drop in consumer inflation from 7.1 per cent in June, sharper than had been expected, will prompt renewed debate about slowing the pace of appreciation of the Chinese currency. The figures further complicate the situation facing policy­makers as they try to weave a path between containing inflation and preventing a sharp economic slowdown. Statistics released on Monday told a different picture of a sharp rise in factory-gate inflation and strong increases in exports and imports, which suggested economic activity remains robust.

The surge in inflation in China from last spring began earlier than in most countries largely due to rising pork prices caused by shortages and disease. A marked increase in pig stocks this year has helped push food prices back down in recent months.

The further sharp reduction in consumer prices in July will lend support to those government officials who are lobbying for policies to support higher growth and who have called for slower currency appreciation to help exporters.

However, the contradictory signals from recent inflation data have prompted a discussion about whether the authorities are really over the worst of the inflation problem. Although the increase in July producer price inflation to 10 per cent, its highest level in 12 years, suggested inflationary pressures remain, a leading government economist argued that higher factory gate prices would not be passed to consumer prices because of fierce competition in the manufacturing sector.

Zhao Qingming, economist at China Construction Bank, said consumer price inflation would continue to ease, especially as commodity and energy prices had started to drop in recent weeks...

The government has so far only taken modest measures to boost growth, including increasing tax rebates for textiles exports and slightly increasing lending quotas for commercial banks.

Policy options that could be introduced later in the year include a far greater relaxation in lending quotas and significant increases in public spending.

Share prices on the Shanghai stock market fell 0.5 per cent on Tuesday, bringing the decline over the past three days to 10 per cent as investors worried that higher factory prices would lead to lower profit margins.

[Pale Blue Dot]

41. Breaking up big banks questioned as losses mount

NEW YORK (AP) -- America's biggest banks have suffered unprecedented losses from the ongoing credit crisis, and that's made some investors question whether the big financial conglomerates should be broken up in order to survive.

Break-up advocates, who for months have been clamoring for Citigroup Inc. to be dismantled, got some validation of their viewpoint this past week. Europe's UBS AG -- created through the combination of Swiss Bank Corp. and Union Bank of Switzerland in 1997 -- on Wednesday laid the groundwork to tear up its business model after another quarter of steep losses.

Though the UBS announcement was expected, it was nonetheless a departure from what executives promised during a wave of big bank deals that began in the late 1990s. The creators of global banks like Citigroup, JPMorgan Chase & Co., and HSBC Holdings PLC had promised customers and shareholders that a diverse set of businesses would shield them from economic volatility.

But, those models haven't sheltered the banks from the subprime mortgage crisis that turned into a dislocation of the credit markets. Major global banks have taken more than $300 billion in asset write-downs, and organizations like the International Monetary Fund believe that amount could reach $1 trillion.

"The whole idea was, 'let's be so unbelievably diversified that we won't be affected,' but when the credit markets seize up, no matter what kind of financial company you are, everything seizes up," said William Smith, president of New York-based Smith Asset Management. "The UBS statement basically shows the model is a failure."

http://biz.yahoo.com/ap/080816/wall_main.html

[Demeter]

42. Not Sure That Egg Could Be Unscrambled Now

If the banks had been disconglomerated before the crash, perhaps a piece or two could have survived.

But now, with the entire global financial system seized up in a credit crunch, I'm not sure it would make any difference. Nothing is working now except the manic markets for stocks and commodities. And those aren't doing much good for investors either. Too many jokers in the deck.

[Dr.Phool]

43. And the Jokers are trying to shed all of their liabilities now.

That's what this is all about now.

Hold on to the profitable divisions, separate them from the losers to protect their assets, and stick everyone else with the problems.

[Dr.Phool]

50. Kick

[Demeter]

53. BP's troubles in Russia show Big Oil's clout fading By LOREN STEFFY

http://www.chron.com/disp/story.mpl/business/steffy/5947272.html

Last year, soon after Tony Hayward became chief executive of BP, a colleague and I met with him and asked, among other things, about the company's venture in Russia. He described it as "stunningly successful" and pledged that "we are going to continue to expand and grow our business in Russia." A year later, TNK-BP is in tatters. Russia essentially kicked the venture's chief executive out of the country. BP remains in an ugly battle for control, while almost a quarter of its annual production hangs in the balance. Russia's invasion of Georgia last week, by the way, forced the shutdown of a BP pipeline originally built to circumvent Russia's control of energy in the region. TNK-BP was a hallmark of Hayward's predecessor, John Browne. Browne transformed BP into a global player and pushed it into Russia in a bold move that many rivals wouldn't dare attempt. Daring turned to disaster, though, as BP found itself unable to control the outcome.

Gone are the days when BP manhandled reserves out of foreign countries, as it did in Iran the early years of the last century. Once the lion of British enterprise, Russia has brushed it aside like a kitten. It's not alone. The rise in oil prices has emboldened foreign governments with petro-fed economies, from Russia to Venezuela. Western oil companies have been shut out of major new oil finds around the globe for years. Now, they're finding it increasingly difficult to hold onto assets they already have. Even when drilling rights are sold at auction, the majors often lose, outbid by state-owned oil companies that can afford to sacrifice profitability for supply.

In other words, Big Oil doesn't seem so big these days....

No wonder, then, that Big Oil is talking green and pouring money into natural gas — both in unconventional domestic plays and new technology such as liquefied natural gas. As its Russian venture crumbled, BP announced plans to invest $90 million in a cellulosic ethanol program in Louisiana... Perhaps the majors will lead in developing a new energy technology, or major reserves will be found in a region that welcomes their involvement. But that seems unlikely. New discoveries are made behind the veil of state control, and new technology can't grow fast enough to generate returns on par with record oil prices.

The reign of Big Oil is in its twilight, the promise of stunning successes dimming as rising oil prices — the bane of Big Oil's public image at home — bolster its opponents abroad. Nowhere is that more obvious than in Russia, where BP's hopes unraveled into a glaring example of Big Oil's lost stature.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at [e-mail]. His blog is at http://blogs.chron.com/lorensteffy/.

[antigop]

56. U.S. likely to recapitalize Fannie, Freddie

http://rawstory.com/news/2008/U.S._likely_Text