Weekday NEWS to Comfort the Disturbed and Disturb the Comfortable.
Tues 02.24.2009
Taleb Says Crisis Is Harder to End Than Depression The financial crisis will be harder to end than the Great Depression and may force banks to be nationalized, “Black Swan” author Nassim Nicholas Taleb said. A more complex financial system makes the current problems, which cut global stock market value by 55 percent to $28 trillion since October 2007, worse than the contraction in the 1930s, Taleb said in a Bloomberg Television interview today. Bonuses paid on Wall Street encouraged risk taking with no regard for losses, he added. Rare and unforeseen events are known as “black swans,” after Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable.” The financial crisis isn’t one, he said. Watch his Bloomberg video (or click on VIDEO tab)
Commodities Outlook - Gold's Melting Value - Bloomberg
AIG in talks with Fed over another bail-out AIG is in talks with the US government over a new bail-out aimed at giving the stricken insurer, which is already 80 per cent-owned by the authorities, fresh capital to absorb an expected fourth-quarter loss and more time to sell assets. People close to the situation said AIG could announce the new rescue plan as early as next week, together with fourth-quarter results that are likely to show a loss bigger than the $24.5bn reported in the previous three months. A new bail-out of AIG would be the third time in five months that the US taxpayers have come to the rescue of a company that was once a global insurance powerhouse and is now fighting for its survival.
Beware doomsayers, gold may hit $6,000/oz! YES, gold futures closed in New York on Friday at $1002.20 an ounce. So, talk about the gold bubble bursting can’t be far away. The world has started speculating heavily on the gold bubble, which, according to some analysts, will burst very soon. But reality is far from that. Do you know the present gold prices are far from what it was in 1980. And definitely gold will have to reach its inflation adjusted 1980 high of $2,400/oz before it can come down. In fact, it is currently less than half the value that it was in 1980. There cannot be a bubble in an asset class unless it rises to all time inflation adjusted highs and often times asset bubbles result in prices of multiples of their previous record highs.
Silver: Potential safe haven like Gold It is time investors look closely at the white metal and give it its rightful place as a safe haven. Some very significant aspects of Silver have come forth in these trying times. As we mentioned in our earlier reports about Silver’s ability to race ahead Gold in a rally but drop faster than a brick when the market turns, losing more than it had gained and eventually losing much more than Gold. Its higher lows and lower highs have proven this time and again.
**Fixing the Banking System - Bloomberg 2.23.2009 Time to Nationalize Banks? A "Bad Bank" for Toxic Assets? What is the FDIC's Role? - Roundtable Discussion with Josh Rosner of Graham Fisher & Co., Catherine Mann of Brandeis International Business School, and Mark Sunshine of First Capital
Timothy Geithner, the man who will run Obama's economic team, is a basketball playing 'pressure junkie' Barack Obama will this weekend hand the levers of the US economy to a pressure junkie who shares his love of basketball. He has revealed details of his economic team - who will be in charge of America's response to the greatest financial crisis for 80 years - in an attempt to boost confidence in his ability to tackle his gravest problem on taking office next month. Democratic sources have told The Sunday Telegraph that the President-Elect is disgruntled with the failure of Congress or the Bush administration to act quickly to tackle the continuing turmoil in the markets. Mr Obama's transition team on Friday night leaked that Timothy Geithner, the chairman of the New York branch of the Federal Reserve is a sure bet to become Treasury Secretary.
Auto team drives imports Fed task force has few new U.S. cars . . . . The co-chairs of the task force -- Treasury Secretary Timothy F. Geithner and White House National Economic Council Director Lawrence Summers -- both own foreign automobiles. Geithner owns a 2008 Acura TSX, registered in New York. He once owned a 1999 Honda Accord and a 2002 Acura MDX, according to public records. Geithner is the president's designee for purposes of enforcing loan agreements with GM and Chrysler and must approve or reject any proposed transactions by either company that would cost $100 million or more. His maternal grandfather, Charles Moore, was a vice president at Ford Motor Co. from 1952-63, according to Peter Geithner, the secretary's father. But Geithner wasn't very interested in cars growing up -- in part because he graduated from high school in Asia, his father said.
SP 500 Still Overvalued by 46% as Dividends Plummet at Record Pace We have not reached a sustainable bottom yet in US equity prices despite the infomercials and chief strategist's exhortations to buy them while they are cheap on the financial news channels. Stocks are valued based on their returns, and those returns are based on real cash flow and profits paid out to shareholders as dividends or stock buybacks to boost share prices. For too many years US companies have essentially robbed Peter to pay Paul, servicing short term profits by offshoring US jobs, manipulating their balance sheets, and appropriating the savings of the world through the US reserve currency mechanism.
China’s record demand for Treasuries (and all US assets) in 2008 . . . . China has now released data on the PBoC’s other foreign assets (what I have called China’s hidden reserves) for December. The US TIC data for December is now out at as well. The two together permit us to paint a reasonably comprehensive picture of Chinese demand for US financial assets in 2008. This post updates the estimates of China’s true demand for US assets laid out in my paper with Arpana Pandey.* It consequently touches on the central subject of Geoff Dyer’s FT analysis piece, namely the scale of China’s holdings of US assets and China’s willingness to continue to add to its US portfolio.
Bear Market's Bite Could Go Deeper Dow at 6-Year Low, but Analysts Say More Pain Lies Ahead With the Dow Jones industrial average plunging past its lowest point since the financial crisis began, panicked investors are asking: How much uglier can it get? Many market analysts and technicians armed with reams of historical data say that even though the Dow has given back all its gains -- and more -- from the five-year bull market that ended in 2007, it is unlikely the market has hit bottom. Mark Arbeter, chief technical strategist at Standard & Poor's Equity Research, said the current market environment is showing few of the signs that have characterized previous lows -- high price volatility, high volumes of trading and even higher levels of fear.
Dow, S&P Slip To 1997 Levels Investors Still Wary of Recovery Plans Stock markets tumbled to 12-year lows yesterday as new details of the government's plan to shore up ailing banks failed to quell investors' fears of a long and difficult recovery. The Dow Jones industrial average closed down 250.89, or 3.4 percent, to 7114.78 -- a level not seen since the bull market of 1997. The Standard & Poor's 500-stock index dropped 26.72, or 3.5 percent, to 743.33, another 1997 level. And the tech-heavy Nasdaq composite index fell 53.51, or 3.7 percent, to 1387.72. "Basically, it's a disaster," said David Dietze, chief investment strategist at Point View Financial Services. "There's much more pain ahead."
Treasury, Citigroup discuss partial takeover Nationalization fears hit stocks The federal government is negotiating a deal with Citigroup that may expand its ownership share to the point that it effectively nationalizes the nation's third-largest bank. The Treasury and bank regulators sought to reassure investors Monday by pledging to stand behind Citi and other major banks, outlining a new strategy of allowing banks to convert Treasury's preferred stock in the banks to common shares. The move boosts bank capital without having to invest more taxpayer money, but also gives the government substantial ownership of the firms - raising the specter of nationalization.
Controlling the Banks - Bloomberg Bank Nationalization - Interview with Former New York State Bank Superintendent Elizabeth McCaul, Now of Promontory Financial Group (Bloomberg News) 2.23.2009
A Third Rescue Would Give Washington a 40% Stake in Citigroup Inside Citigroup headquarters, everyone is buzzing about the N-word. Nationalization, at least a partial one, seems inevitable for the troubled financial giant. As Washington prepares to tighten its grip on the struggling company, the implications - for Citigroup and the rest of the financial industry - are starting to sink in. Under a plan federal regulators were discussing on Monday, the government may end up owning as much as 40 percent of Citigroup, which has already grabbed two multibillion-dollar lifelines from Washington.
Nation faces enormous fiscal obstacles Agency reports warn nation must tackle challenges "A billion here, a billion there - pretty soon it adds up to real money," Sen. Everett Dirksen famously observed. Mr. Dirksen, the late Republican fiscal conservative, held the Illinois Senate seat Barack Obama later occupied. To meet the standards of Monday's "fiscal responsibility summit" Mr. Obama hosted at the White House, Mr. Dirksen's quip would have to be adjusted by several orders of magnitude. Even "a trillion here, a trillion there" would not suffice.
Citi Seeking More Federal Aid Another Round of Help May Not Require Taxpayer Money Citigroup executives have approached federal regulators to discuss steps the government could take to strengthen the troubled company, according to two people familiar with the matter. The giant New York bank is under mounting pressure to convince investors that it can survive its financial problems. The government already has invested $45 billion in Citigroup and promised to limit its losses on a portfolio of more than $300 billion of loans and other troubled assets. But investors remain nonplussed, and the company's stock price has dropped 71 percent this year.
In Latest Plan for Banks, U.S. Could Demand Voting Stake The Obama administration put the nation's biggest banks on notice Monday that the government could become their biggest shareholder if regulators decide they are not strong enough to weather a deeper-than-expected downturn in the economy. In an unexpectedly assertive joint statement, the Treasury Department, Federal Reserve and federal bank regulatory agencies announced that the government might end up demanding a direct ownership stake in major banks after they undergo a tough evaluation of their strength, which is to begin shortly.
Bank stress tests to start Wednesday Federal regulators said Monday they plan to start evaluating the needs of major banks on Wednesday and served notice that the U.S. government "stands firmly behind the banking system" during the current financial crisis. They said they will ensure that the banks have the money and liquidity necessary to restore economic growth as part of a Capital Assistance Program that is to begin with an evaluation of the banks.
Stimulus Package Earmarks & Pork - The Today Show/NBC News Investigation Exposes pet projects such as . . . a high speed magnetic levitation rail line from Las Vegas to Disneyland
U.S. Pledges Capital for Banks as Stress Tests Begin U.S. financial regulators pledged to inject additional funds into the nation's major banks to prevent their collapse and will this week begin examinations to determine whether they have enough capital. Banks that cannot privately raise the additional capital they need after the so-called stress tests will get taxpayer money, regulators said in a statement in Washington. Government funds would be in the form of "mandatory convertible preferred shares" that would be exchanged into common equity "only as needed over time." Stakes the Treasury has already bought will be eligible to be changed to convertible preferred shares.
JPMorgan Cuts Dividend 87 Percent to 5 Cents a Share JPMorgan Chase & Co., the second- largest U.S. bank, slashed its dividend by 87 percent to 5 cents and said it plans to maintain that level "for the time being." The bank and its predecessors haven't cut the dividend since 1990. The move aims to protect the bank even if the economy deteriorates "significantly," Chief Executive Officer Jamie Dimon said in a statement today. It isn't "directly related" to the $25 billion that JPMorgan received under the government's Troubled Asset Relief Program, or TARP, Dimon said.
U.S. to provide 'capital buffer' as needed for banks Government reiterates position that banks must 'remain in private hands' As part of the latest efforts by regulators to thwart concerns that some banks need to be nationalized, U.S. regulators vowed Monday to provide a "temporary capital buffer" to financial institutions that fail a planned stress test and are unable to secure help from private sources. "The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," regulators from various agencies said in a joint statement. Shares of major banking institutions surged after the statement, in which the Treasury, Federal Reserve and other bank regulators asserted that no "systemically important" financial institution will be allowed to fail.
On Transparency of the Fed by Ron Paul This week the Federal Reserve responded to the American people's increased concerns over our monetary policy by presenting new initiatives aimed at enhancing the Fed's transparency and accountability. As someone who has called for more openness from the Fed for over 30 years, I was pleased to see the Fed acknowledge the legitimacy of this need. The Federal Reserve controls the flow of money and credit in our economy because Congress has abdicated its responsibility over the nation's currency. This process therefore occurs centrally, and almost completely outside the system of checks and balances. Because of legal tender laws, people are left with no real choice, except to build their lives and futures around this monopoly currency, vulnerable to powerful central bankers. The Founding Fathers intended only gold and silver to be used as currency, however, inch by inch over the decades, this country has backed away from this important restraint. Our money today has no link whatsoever to gold or silver. For many reasons, this is extremely dangerous, and has a lot to do with the boom and bust cycles that have resulted in the crisis in which we find ourselves today.
U.S. Pressed to Add Billions to Bailouts The government faced mounting pressure on Monday to put billions more in some of the nation's biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them. The government's boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Nouriel Roubini - Outlook for Government on Facing Global Economic Crisis - Bloomberg 2.20.2009 Analysis and Discussion with Roubini Global Economics Chairman and Economic Professor at NYU Stern School of Business Nouriel Roubini (Starting Bell)
Obama Vows to Cut Federal Deficit in Half by End of First Term [commnet: yesterday he vowed to cut deficit by two-thirds in first term!] States to Start Getting Funds to Cover Medicaid Costs Wednesday; Biden to Oversee Stimulus's Implementation President Obama launched a bipartisan effort today to restore fiscal discipline to the nation, pledging to cut the budget deficit in half in four years and reinstate pay-as-you-go rules to prevent the government from spending money it does not have. At the end of an extraordinary "fiscal responsibility summit," he called on a broad cross-section of Democratic and Republican lawmakers, independent experts, business leaders and advocates to help the administration move toward tough decisions on reforming Social Security, health care, the tax code, the budget process and federal procurement. And he announced that the White House will hold a "health care summit" next week in an effort to capitalize on momentum for change.
Paul Krugman: The econoclast The New York Times columnist and Princeton professor is in his policy-influencing prime, and has become one of the highest-profile advocates of bank nationalization. Paul Krugman couldn't help but do a victory dance last week when none other than Alan Greenspan, a most-ardent defender of laissez-faire capitalism, acknowledged that several big U.S. banks would probably have to be nationalized. "Comrade Greenspan: Seize the economy's commanding heights!" Mr. Krugman crowed on his blog ( http://krugman.blogs.nytimes.com ).
Entitlements on the back of an envelope Today’s “fiscal responsibility” summit, which was originally much feared as a Trojan Horse for Social Security cuts, has apparently been downgraded into relative obscurity. But I thought it might nonetheless be worth talking briefly about the math of the entitlements issue. Usually this is done with fairly elaborate projections, but I think the essence can be explained with a back-of-the-envelope calculation. So here goes. Right now, the federal government spends about 9 percent of GDP on the three biggies, Social Security, Medicare and Medicaid, with the total roughly evenly divided between retirement and medical care.
Dick Armey discusses Senate economic plan
Obama Picks Nation's First Chinese-American Governor for Commerce Secretary Official: Obama Likely to Name Locke to Commerce A senior administration official says that President Barack Obama's likely third pick for Commerce secretary is former Washington Gov. Gary Locke. The official spoke on condition of anonymity because the announcement has not yet been made. Locke was the nation's first Chinese-American governor when he served two terms in the Washington statehouse from 1997 to 2005. Obama's expected choice of Locke arose less than two weeks after his most recent pick, Republican Sen. Judd Gregg of New Hampshire, backed out.
Microsoft to Ask Laid-Off Workers to Return Portion of Severance Pay A few weeks after launching the first wide-scale layoffs in its history, Microsoft Corp. admits it screwed up a key part of the plan. The company is asking some laid-off employees for a portion of their severance back, saying an administrative glitch caused the software maker to pay them too much. Lou Gellos, a Microsoft spokesman, would not say how many of the 1,400 workers let go in January were overpaid, or by how much. Microsoft has said severance would be calculated by length of service and position in the company. The Redmond, Wash.-based software maker is asking former employees for reimbursement, by check or money order, within two weeks, according to a redacted letter posted by the technology blog TechCrunch. Gellos confirmed the letter's authenticity.
Forecasters see higher unemployment in 2009 Brace yourself: The recession is projected to worsen this year. The country stands to lose a sizable chunk of economic activity in 2009 as consumers at home and abroad retrench in the face of persistent economic troubles. And the U.S. unemployment rate - now at 7.6 percent, the highest in more than 16 years - is expected hit a peak of 9 percent this year. That gloomy outlook came from leading forecasters in the latest survey by the National Association for Business Economics to be released Monday. The new estimates are roughly in line with other recent projections, including those released last week by the Federal Reserve. "The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic on the economic outlook for the next several quarters," said NABE president Chris Varvares, head of Macroeconomic Advisers.
World Of Trouble How the mortgage industry destroyed itself. Three years before the housing market crash, Paul Bishop says he warned his superiors at World Savings that many of the mortgages they were granting were misleading and predatory.
Mortgage Whistleblower World Savings whistleblower Paul Bishop spoke with Harry Smith about when he first noticed the company was taking on unstable loans.
Elderly Emerge as a New Class of Workers -- and the Jobless Mary Appleby, 76 years old, lost her job in January as a cashier at a courthouse cafeteria here. She is now looking for minimum-wage work. Mary Bennett, 80, began filling out applications for fast-food restaurants and convenience stores after she was laid off last March as a machinist. Fred Dase, 81, a bartender until last summer, also needs another job. During past recessions, older workers simply would have retired rather than searching want ads and applying for jobs. But these days, with outstanding mortgages, bank loans and high medical bills, many of them can't afford to be out of work. With jobs so scarce, people in their seventh and eighth decades are up against those half their age in a desperate scramble for work.
China's dollar dilemma The flotation of Blackstone in June 2007 has already gone down as one of the symbolic events in America's financial bubble - the end-of-an-era deal when some of Wall Street's savviest insiders decided to cash out. Yet the listing of the private equity group could also be the turning point in another chapter of financial history; one that will shape the world that emerges from the current crisis: the moment when China really began to question its deep financial entanglement with the US.
Will Germany deliver on the Faustian bargain that created monetary union? If Der Spiegel is correct, the German finance ministry is drafting rescue plans to prevent default on the edges of the eurozone leading to a full-blown collapse of Europe's monetary system. This is an entirely appropriate policy in economic terms. One dreads to think what would happen if the world's twin reserve currency were to disintegrate at this stage. But what about the solemn pledge to voters by Germany's political elites – promiscuously given over the years – that monetary union would never leave them on the hook for the debts of half Europe? The vast imbalances that have been allowed to build up under the seductive protection of EMU leave German taxpayers facing bail-out liabilities that exceed the cost of reparations after the First World War, in proportional terms. The political ground has not been prepared for this. EMU was foisted on the German people without a referendum, in the face of deep public scepticism and scathing criticisms by the professoriat. This failure to secure a mandate for such a revolutionary undertaking is coming back to haunt them.
Beer sales: Economic indicator 101 So the Dow hit a low unseen since 1997 today, but the real economic indicator of the recession at hand may lie in another measure: "There has generally not been much of a relationship between alcohol purchases and changes in GDP -- the correlation is essentially zero,'' the good analytical folks at fivethirtyeight.com -- "politics done right'' -- note. "But something was very, very different in the fourth quarter of 2008,'' they report. "Sales of alcohol for off-premises consumption were down by 9.3 percent from the previous quarter, according to the Commerce Department. "This is absolutely unprecedented: the largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991. "Beer accounts for almost all of the decrease, with revenues off by almost 14 percent,'' they add.
Stimulus Watch - Projects by state StimulusWatch.org was built to help the new administration keep its pledge to invest stimulus money smartly, and to hold public officials to account for the taxpayer money they spend. We do this by allowing you, citizens around the country with local knowledge about the proposed "shovel-ready" projects in your city, to find, discuss and rate those projects. These projects are not part of the stimulus bill. They are candidates for funding by federal grant programs once the bill passes.
As It Falters, Eastern Europe Raises Risks Since the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise. Now the bill is coming due. The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States. Last week, Wall Street plunged after Moody’s Investors Service warned that Western banks that had recently beat a path to Eastern Europe’s doorstep now faced “hard landings,” spooking investors with new fears that the exposure could spread beyond Europe’s shores.
A Crisis Is Separating Eastern Europe’s Strong From Its Weak PRAGUE — The owner of some of the Czech capital’s chic restaurants unveiled a novel approach this week to lure business clients to one of his upscale dining rooms: let diners pay what they like. The owner, Sanjiv Suri, hopes executives will not want to appear cheap to their guests when presented with a blank check after dining at the lunch buffet, laden with grilled vegetables instead of foie gras. Even if they pay nothing, he added, they will almost certainly return as paying customers. “During an economic crisis you need to be creative,” said Mr. Suri, sipping pinot noir in a half-empty dining room.
Don't miss this one - it will come back to "bite US" . . . Obama Issues Questionable Executive Order to Close Guantanamo Bay Newly minted president Barack Obama issues an executive order to close the terrorist detention center at Guantanamo Bay, Cuba. This video questions the wisdom of such a move. True, there were cases where innocent people were being held there unjustly, but what about those who are known sympathizers of terrorist groups? What SHOULD be in place is a system where solid verification of these individuals' affiliations (if any) is confirmed.
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