Too Big to Fail, or to Survive
William Poole on Congress bailing out Fannie and Freddie in The New York Times.
Full Version: Financial Turmoil
Common Ground Common Sense > National & International News > Op-Ed Articles from the Mainstream Media
Pages: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28
Monday, July 28, 2008 Rising energy prices are causing much concern around the world. As it becomes more expensive to fill up car tanks, it also becomes pricier to transport goods. As Edward Gresser discusses, although transporting goods is easier than ever, the cost of manufacturing trade has begun rising again — and may stay high for awhile.
Are We Facing Just Another Market Problem or a System Collapse?
Danny Schechter, AlterNet
Corporate Accountability and WorkPlace: Even as foreclosures double, and the price of gas and food rises sharply, it's been business as usual in newspapers and in Washington.
Danny Schechter, AlterNet
Corporate Accountability and WorkPlace: Even as foreclosures double, and the price of gas and food rises sharply, it's been business as usual in newspapers and in Washington.
THE BEAR'S LAIR
Volcker's best apprentice
The refusal of central banks to follow the lead of former US Federal Reserve chairman Paul Volcker and raise interest rates to appropriate levels means inflation has become a global phenomenon. One unlikely exception is displaying Volker-like monetary maturity. The benefits will follow. - Martin Hutchinson
Volcker's best apprentice
The refusal of central banks to follow the lead of former US Federal Reserve chairman Paul Volcker and raise interest rates to appropriate levels means inflation has become a global phenomenon. One unlikely exception is displaying Volker-like monetary maturity. The benefits will follow. - Martin Hutchinson
THE MOGAMBO GURU 
Nothing but pain
The squeals of pain from the squeeze on the US economy are about to get louder after three months of contracting bank credit, with wages falling off a cliff and jobs heading in the same direction.
Nothing but pain The squeals of pain from the squeeze on the US economy are about to get louder after three months of contracting bank credit, with wages falling off a cliff and jobs heading in the same direction.
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Bernanke Seeks a Great Depression to Test His Thesis - 27th July 08
Oil and the Feeble Greenback by Steve Forbes Exclusive: There are three reasons why oil prices have soared: the weak dollar, Iran and the booming global economy.
The Confidence Gap >When Will Henry Paulson Learn?
Henry Paulson has announced Citigroup and three other banks will begin issuing covered bond in an effort to rejuvenate commercial bank mortgage lending and the housing market.
Concurrently, Merrill Lynch announced it is taking yet another big write down on its subprime securities, selling paper with a face value of $30.6 billion to private equity firm Lone Star for $6.7 billion. It will dilute its common stock 38 percent through the sale of additional shares to make up the losses.
Paulson's covered bonds would be backed by specific mortgages held by the banks. In essence, these would be large certificates of deposit. Though not necessarily insured, the bonds would be back by specific assets on the banks books, and the banks would to take steps to ensure these mortgages were good—not the junk Merrill Lynch, Citigroup and others have been hoisting on investors.
Whether the bond market accepts these securities—essentially whether insurance companies, pension funds and other fixed income investors take the plunge—comes down to trust in the banks. Recent events at Merrill Lynch, Citigroup and others indicate that such trust will require a bold leap of faith.
The basic problem at the big banks is compensation schemes that encourage bank executives to make risky bets that allow them to profit when things go well and to push the losses on bond and stockholders when things go sour. Upon taking over Merrill Lynch, John Thane increased executive bonuses, but established a risk management scheme. That hasn't worked.
At Citigroup, CEO Vikram Pandit is selling off assets to cover losses, but he has not given back the $165 million he took from shareholders in his sale of the Old Lane hedge fund to his employer. The bank subsequently took more than $200 million in losses, yet the Citigroup bonus machine continues to payout to its executives.
USB is under investigation for fraud in the sale of auction rate securities.
It seems hard to find a major bank without some a record of sharp practices.
Mr. Paulson is trying to sell trust in the banks with his new covered bonds. It's tough to sell trust in a Wall Street bank these days, because there is not much to trust.
An insurance company that buys Paulson's covered bonds will likely be all right, but it is taking an imprudent risk. That should tell you something about the competence of its management, and it would be signal to dump its stock.
Paulson's scheme to reopen the bond market to banks for mortgage lending will only work, if the commercial banks clean up the management practices that caused the subprime crisis, and massive losses imposed on shareholders and bond customers.
The federal government is imposing new a regulator on Fannie Mae and Freddie Mac, which will have authority to regulate executive compensation. The Federal Reserve has loaned hundreds of billions to Wall Street banks and securities companies without any real commitments for management reform. The asymmetry is puzzling.
Mr. Paulson will only get the mortgage market, housing crisis and economy turned around when he resolves the confidence gap on Wall Street. That requires systemic reform in the business practices and compensation structures. What's good Fannie and Freddie would be good for Citigroup, Merrill Lynch and the others.
Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
By PETER MORICI
Once again, we have good news and bad from Wall Street.
Once again, we have good news and bad from Wall Street.
Henry Paulson has announced Citigroup and three other banks will begin issuing covered bond in an effort to rejuvenate commercial bank mortgage lending and the housing market.
Concurrently, Merrill Lynch announced it is taking yet another big write down on its subprime securities, selling paper with a face value of $30.6 billion to private equity firm Lone Star for $6.7 billion. It will dilute its common stock 38 percent through the sale of additional shares to make up the losses.
Paulson's covered bonds would be backed by specific mortgages held by the banks. In essence, these would be large certificates of deposit. Though not necessarily insured, the bonds would be back by specific assets on the banks books, and the banks would to take steps to ensure these mortgages were good—not the junk Merrill Lynch, Citigroup and others have been hoisting on investors.
Whether the bond market accepts these securities—essentially whether insurance companies, pension funds and other fixed income investors take the plunge—comes down to trust in the banks. Recent events at Merrill Lynch, Citigroup and others indicate that such trust will require a bold leap of faith.
The basic problem at the big banks is compensation schemes that encourage bank executives to make risky bets that allow them to profit when things go well and to push the losses on bond and stockholders when things go sour. Upon taking over Merrill Lynch, John Thane increased executive bonuses, but established a risk management scheme. That hasn't worked.
At Citigroup, CEO Vikram Pandit is selling off assets to cover losses, but he has not given back the $165 million he took from shareholders in his sale of the Old Lane hedge fund to his employer. The bank subsequently took more than $200 million in losses, yet the Citigroup bonus machine continues to payout to its executives.
USB is under investigation for fraud in the sale of auction rate securities.
It seems hard to find a major bank without some a record of sharp practices.
Mr. Paulson is trying to sell trust in the banks with his new covered bonds. It's tough to sell trust in a Wall Street bank these days, because there is not much to trust.
An insurance company that buys Paulson's covered bonds will likely be all right, but it is taking an imprudent risk. That should tell you something about the competence of its management, and it would be signal to dump its stock.
Paulson's scheme to reopen the bond market to banks for mortgage lending will only work, if the commercial banks clean up the management practices that caused the subprime crisis, and massive losses imposed on shareholders and bond customers.
The federal government is imposing new a regulator on Fannie Mae and Freddie Mac, which will have authority to regulate executive compensation. The Federal Reserve has loaned hundreds of billions to Wall Street banks and securities companies without any real commitments for management reform. The asymmetry is puzzling.
Mr. Paulson will only get the mortgage market, housing crisis and economy turned around when he resolves the confidence gap on Wall Street. That requires systemic reform in the business practices and compensation structures. What's good Fannie and Freddie would be good for Citigroup, Merrill Lynch and the others.
Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
Crisis on the Economic Front
Spreading Layoffs, Sagging GDP
Thursday, the Commerce Department will report advanced estimates for second quarter GDP. The consensus forecast is for a 1.8 percent increase over the first quarter, thanks to surges in consumer spending and exports. Unfortunately, retail spending growth slowed in June and July, and the lift to exports provided by a weaker dollar may be flagging. Businesses remain pessimistic. Many are not replacing workers that leave, layoffs are widespread, and commercial construction has stalled.
The Labor Department July employment report, due out Friday, will likely provide a much better indicator of where the economy is headed in the second half than the GDP report.
Over the last six months, the economy lost 438,000 jobs. Manufacturing and construction shed 235,000 and 261,000 jobs, respectively, and in recent months, layoffs spread to finance and retail sales.
If the economy is to pick up in the second half, the jobs report will have to confound forecasters, who are generally pessimistic, to show strong gains in employment.
Other key data this week will be consumer confidence, auto sales and construction spending. All have been heading down in recent months. Forecasters expect:
Thursday, the Commerce Department will release second quarter GDP, and the consensus forecast is for a 1.8 percent annual increase, up from 1.0 percent in the first quarter and 0.6 percent in the final quarter of 2007. However, the surge in consumer spending is already abating, and export growth may have run its course.
Economic stimulus tax rebate checks motivated stronger consumer spending in May, but this tapered off in June. A significant amount of the additional spending was concentrated in gasoline, food and other nondurable goods, as surging gasoline and food prices force consumers to focus on necessities. Absent was spending on furniture and automobiles, which would reflect stronger consumer confidence about the future.
Retailers are reporting a profits squeeze, as they face difficulties passing on to consumers higher wholesale prices for goods. Manufacturers will either have to find ways to absorb higher energy and material prices, by boosting productivity, or face shrinking sales.
Last week's new and existing home sales reports indicated further weakness in the housing market and with so many unsold homes on the market, a recovery in residential construction appears many months away.
The weaker dollar against the euro and non-Asian currencies has given exports a boost; however, most of the recent growth has been in commodities and industrial materials, and an important element of that growth has been from higher prices, as opposed to increased shipments that generate more employment. Exports of capital goods have not grown since December 2007, reflecting the tough time U.S. exporters have penetrating still rapidly growing Asian markets.
The Jobs Data
The credit crisis, falling home and stock prices, the high cost of imported oil, and the growing trade deficit with China are hammering down demand for U.S.-made goods and services and forcing layoffs in many industries.
Broader job losses indicate problems in the financial and housing sectors are damaging the non-financial and non-energy sectors of the economy in ways that may take many months, even years, to repair. The economy is entering a period of much slower growth during the second half of 2008.
In Friday's jobs report the key variables to watch are:
Jobs Creation. July 3, the Labor Department reported the economy lost 62,000 payroll jobs in June and shed an average of 73,000 jobs each month since December. The consensus forecast is that the economy lost 68,000 jobs in July. My published forecast is for a 60,000 decrease in employment.
Business vs. Government Payrolls. In June, government employment expanded by 29,000, even as overall payroll jobs contracted 62,000. This indicates the private business economy shed 91,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.
Construction. In June, construction lost 43,000 jobs, and manufacturing lost 33,000 jobs.
Residential construction shed nearly 7000 jobs, while 36,000 jobs were lost in nonresidential buildings, roads and other infrastructure projects. This has been a persistent pattern for many months. Notably, since residential construction employment peaked in September 2006, that sector has lost 164,100 jobs, while the balance of the construction industry lost 364,000 jobs. Commercial building construction has lost 31,600 jobs.
Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2008 and beyond.
Retailing. Despite the May and June bursts in retail sales, retailing and nonautomotive retailing lost 30,100 jobs in May and June together. Even removing the automobile and parts dealers, employment was down 21,800. Retailers are anticipating a slow second half of 2008 and are trimming store staff to limit their losses.
Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. In May and June finance and insurance shed 14,200 jobs.
It's not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup. Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.
Manufacturing. Over the last 99 months manufacturing has lost 3.8 million jobs. The dollar remains undervalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.
Many U.S. manufacturers find it easier to locate production in China and other Asia locations than add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.
U.S. manufacturers have received little encouragement from the Bush Administration, and in particular Treasury Secretary Henry Paulson, that it will do much to level the playing field in Asia.
Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, and U.S. growth would exceed 3.5 percent a year. Growth is likely to be subpar, and average about 2 percent through the end of 2010.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.
Spreading Layoffs, Sagging GDP
By PETER MORICI
Second quarter GDP and the July employment report highlight this week's economic data. The hiring data, reflecting business sentiment about future sales, are key indicators of where the economy is headed in the second half.
Second quarter GDP and the July employment report highlight this week's economic data. The hiring data, reflecting business sentiment about future sales, are key indicators of where the economy is headed in the second half.
Thursday, the Commerce Department will report advanced estimates for second quarter GDP. The consensus forecast is for a 1.8 percent increase over the first quarter, thanks to surges in consumer spending and exports. Unfortunately, retail spending growth slowed in June and July, and the lift to exports provided by a weaker dollar may be flagging. Businesses remain pessimistic. Many are not replacing workers that leave, layoffs are widespread, and commercial construction has stalled.
The Labor Department July employment report, due out Friday, will likely provide a much better indicator of where the economy is headed in the second half than the GDP report.
Over the last six months, the economy lost 438,000 jobs. Manufacturing and construction shed 235,000 and 261,000 jobs, respectively, and in recent months, layoffs spread to finance and retail sales.
If the economy is to pick up in the second half, the jobs report will have to confound forecasters, who are generally pessimistic, to show strong gains in employment.
Other key data this week will be consumer confidence, auto sales and construction spending. All have been heading down in recent months. Forecasters expect:
Tuesday—the Conference Board Index of Consumer Confidence to be unchanged from JuneGDP
Friday—auto sales to be little changed from depressed June levels, and June construction spending to decrease 0.3 percent from May.
Thursday, the Commerce Department will release second quarter GDP, and the consensus forecast is for a 1.8 percent annual increase, up from 1.0 percent in the first quarter and 0.6 percent in the final quarter of 2007. However, the surge in consumer spending is already abating, and export growth may have run its course.
Economic stimulus tax rebate checks motivated stronger consumer spending in May, but this tapered off in June. A significant amount of the additional spending was concentrated in gasoline, food and other nondurable goods, as surging gasoline and food prices force consumers to focus on necessities. Absent was spending on furniture and automobiles, which would reflect stronger consumer confidence about the future.
Retailers are reporting a profits squeeze, as they face difficulties passing on to consumers higher wholesale prices for goods. Manufacturers will either have to find ways to absorb higher energy and material prices, by boosting productivity, or face shrinking sales.
Last week's new and existing home sales reports indicated further weakness in the housing market and with so many unsold homes on the market, a recovery in residential construction appears many months away.
The weaker dollar against the euro and non-Asian currencies has given exports a boost; however, most of the recent growth has been in commodities and industrial materials, and an important element of that growth has been from higher prices, as opposed to increased shipments that generate more employment. Exports of capital goods have not grown since December 2007, reflecting the tough time U.S. exporters have penetrating still rapidly growing Asian markets.
The Jobs Data
The credit crisis, falling home and stock prices, the high cost of imported oil, and the growing trade deficit with China are hammering down demand for U.S.-made goods and services and forcing layoffs in many industries.
Broader job losses indicate problems in the financial and housing sectors are damaging the non-financial and non-energy sectors of the economy in ways that may take many months, even years, to repair. The economy is entering a period of much slower growth during the second half of 2008.
In Friday's jobs report the key variables to watch are:
Jobs Creation. July 3, the Labor Department reported the economy lost 62,000 payroll jobs in June and shed an average of 73,000 jobs each month since December. The consensus forecast is that the economy lost 68,000 jobs in July. My published forecast is for a 60,000 decrease in employment.
Business vs. Government Payrolls. In June, government employment expanded by 29,000, even as overall payroll jobs contracted 62,000. This indicates the private business economy shed 91,000 jobs. Failing tax revenues are crimping state and local budgets, and some state and municipal governments are now beginning to trim payrolls.
Construction. In June, construction lost 43,000 jobs, and manufacturing lost 33,000 jobs.
Residential construction shed nearly 7000 jobs, while 36,000 jobs were lost in nonresidential buildings, roads and other infrastructure projects. This has been a persistent pattern for many months. Notably, since residential construction employment peaked in September 2006, that sector has lost 164,100 jobs, while the balance of the construction industry lost 364,000 jobs. Commercial building construction has lost 31,600 jobs.
Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2008 and beyond.
Retailing. Despite the May and June bursts in retail sales, retailing and nonautomotive retailing lost 30,100 jobs in May and June together. Even removing the automobile and parts dealers, employment was down 21,800. Retailers are anticipating a slow second half of 2008 and are trimming store staff to limit their losses.
Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. In May and June finance and insurance shed 14,200 jobs.
It's not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup. Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.
Manufacturing. Over the last 99 months manufacturing has lost 3.8 million jobs. The dollar remains undervalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.
Many U.S. manufacturers find it easier to locate production in China and other Asia locations than add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.
U.S. manufacturers have received little encouragement from the Bush Administration, and in particular Treasury Secretary Henry Paulson, that it will do much to level the playing field in Asia.
Were the trade deficit cut in half, manufacturing would recoup at least 2 million of those jobs, and U.S. growth would exceed 3.5 percent a year. Growth is likely to be subpar, and average about 2 percent through the end of 2010.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.
Merrill Lynch
Hope amid the gloom
Jul 29th 2008
From Economist.com
Is Merrill Lynch on the road to recovery?
AFP
IF THE definition of insanity is doing the same thing over and over again and expecting a different outcome, bank shareholders are certifiably mad. Time and again since the start of the credit crunch, shares in one bank or another have rallied after the announcement of another slug of write-downs on mortgage-related assets and other nasties. With each round of bad news, investors dare to hope that a bottom has been reached and that the bank in question can start to think about a return to health. Invariably their hopes have been dashed.
The pattern has repeated itself this month with Merrill Lynch. In mid-July, the investment bank announced a $4.6 billion loss for the second quarter, after a write-down of $9.4 billion. To help plug the hole in its finances, John Thain, Merrill’s newish chief executive, offloaded a long-prized 20% stake in Bloomberg, a financial-information provider. “We believe that we are in a very comfortable spot in terms of our capital,'” he told analysts. Could the worst finally be over, wondered investors?
On Monday July 28th, Mr Thain had a swift answer: no. Merrill announced more write-downs, this time to the tune of $5.7 billion, and further steps to bolster its capital through an $8.5-billion share offering (a figure that may rise to $9.8 billion). Temasek, a Singaporean fund that became Merrill’s largest shareholder when it raised capital in December, will buy $3.4 billion of the new stock, but will also be reimbursed for the losses it has suffered on its initial investment.
The speed of the about-turn does little for Mr Thain’s credibility, but this time it is not lunacy to wonder whether a turning-point has been reached. The new write-downs reflect a deal to sell collateralised-debt obligations (CDOs) with a nominal value of $30.6 billion at an eye-watering discount to a distressed-debt investor called Lone Star Funds. The CDOs are being sold for just $6.7 billion, valuing them at a mere 22 cents on the dollar. To make the deal even sweeter for Lone Star, Merrill is lending it money to complete the deal, using the very same toxic assets it is trying to get rid of as collateral. Merrill is also slashing the value of hedges it had bought from various bond insurers.
The pain is not over for Merrill but the risk of further big write-downs has been considerably reduced. The deal with Lone Star brings Merrill’s exposure to CDOs down to around $10 billion, much of that in the form of mortgage-backed securities from 2005 and earlier, when lending standards in America’s housing market were not as slipshod as they were in 2006 and 2007. The raising of new capital leaves some headroom for further markdowns. Whether Mr Thain can restore Merrill’s fortunes over the longer term is a bigger question. Some argue that a purged balance sheet, coupled with a battered share price, makes it a much more attractive takeover target. But the bank may finally be able to raise its head to the horizon.
The news for other banks is less good. Merrill was an outlier in terms of the size of its exposure to mortgage-backed assets, because of its leading role as a distributor of CDOs. But the Lone Star deal sets a new, and very low, benchmark for the price of these instruments. There is enough wiggle room in the accounting rules for banks not to be bound by this price level but the news from Merrill signals the likelihood of more fair-value losses to come. Shares in European banks tumbled on Tuesday morning as a result, with Barclays, a British bank with fewer write-downs and a lower capital cushion than many of its peers, taking the worst punishment. For most bank shareholders, the madness continues.
http://www.economist.com/finance/displaySt...e=features_box1
Hope amid the gloom
Jul 29th 2008
From Economist.com
Is Merrill Lynch on the road to recovery?
AFP
IF THE definition of insanity is doing the same thing over and over again and expecting a different outcome, bank shareholders are certifiably mad. Time and again since the start of the credit crunch, shares in one bank or another have rallied after the announcement of another slug of write-downs on mortgage-related assets and other nasties. With each round of bad news, investors dare to hope that a bottom has been reached and that the bank in question can start to think about a return to health. Invariably their hopes have been dashed.
The pattern has repeated itself this month with Merrill Lynch. In mid-July, the investment bank announced a $4.6 billion loss for the second quarter, after a write-down of $9.4 billion. To help plug the hole in its finances, John Thain, Merrill’s newish chief executive, offloaded a long-prized 20% stake in Bloomberg, a financial-information provider. “We believe that we are in a very comfortable spot in terms of our capital,'” he told analysts. Could the worst finally be over, wondered investors?
On Monday July 28th, Mr Thain had a swift answer: no. Merrill announced more write-downs, this time to the tune of $5.7 billion, and further steps to bolster its capital through an $8.5-billion share offering (a figure that may rise to $9.8 billion). Temasek, a Singaporean fund that became Merrill’s largest shareholder when it raised capital in December, will buy $3.4 billion of the new stock, but will also be reimbursed for the losses it has suffered on its initial investment.
The speed of the about-turn does little for Mr Thain’s credibility, but this time it is not lunacy to wonder whether a turning-point has been reached. The new write-downs reflect a deal to sell collateralised-debt obligations (CDOs) with a nominal value of $30.6 billion at an eye-watering discount to a distressed-debt investor called Lone Star Funds. The CDOs are being sold for just $6.7 billion, valuing them at a mere 22 cents on the dollar. To make the deal even sweeter for Lone Star, Merrill is lending it money to complete the deal, using the very same toxic assets it is trying to get rid of as collateral. Merrill is also slashing the value of hedges it had bought from various bond insurers.
The pain is not over for Merrill but the risk of further big write-downs has been considerably reduced. The deal with Lone Star brings Merrill’s exposure to CDOs down to around $10 billion, much of that in the form of mortgage-backed securities from 2005 and earlier, when lending standards in America’s housing market were not as slipshod as they were in 2006 and 2007. The raising of new capital leaves some headroom for further markdowns. Whether Mr Thain can restore Merrill’s fortunes over the longer term is a bigger question. Some argue that a purged balance sheet, coupled with a battered share price, makes it a much more attractive takeover target. But the bank may finally be able to raise its head to the horizon.
The news for other banks is less good. Merrill was an outlier in terms of the size of its exposure to mortgage-backed assets, because of its leading role as a distributor of CDOs. But the Lone Star deal sets a new, and very low, benchmark for the price of these instruments. There is enough wiggle room in the accounting rules for banks not to be bound by this price level but the news from Merrill signals the likelihood of more fair-value losses to come. Shares in European banks tumbled on Tuesday morning as a result, with Barclays, a British bank with fewer write-downs and a lower capital cushion than many of its peers, taking the worst punishment. For most bank shareholders, the madness continues.
http://www.economist.com/finance/displaySt...e=features_box1
Quotable
“There’s a greater than 50% probability that the financial system ‘will come to a grinding halt’ because of losses from mortgages, said Gregory Peters, head of credit strategy at Morgan Stanley, Bloomberg, November 13, 2007
“There’s a greater than 50% probability that the financial system ‘will come to a grinding halt’ because of losses from mortgages, said Gregory Peters, head of credit strategy at Morgan Stanley, Bloomberg, November 13, 2007
U.S. Treasury Notes Decline on Speculation Debt Sales to Rise - Bloomberg (07/29/2008 08:01 AM)
Oil futures fall as U.S. dollar rises vs. rivals - Market Watch from Dow Jones (07/29/2008 08:02 AM)
Wall Street opens higher as oil declines - Reuters (07/29/2008 08:51 AM)
Oil futures fall as U.S. dollar rises vs. rivals - Market Watch from Dow Jones (07/29/2008 08:02 AM)
Wall Street opens higher as oil declines - Reuters (07/29/2008 08:51 AM)
IMF sees no end in sight to credit crisis - FT ($) (07/28/2008 10:01 PM)
White House cuts GDP growth forecast - LA Times (07/29/2008 05:32 AM)
S&P/Case-Shiller 20-City Home-Price Index Fell 15.8% in May - Bloomberg (07/29/2008 08:05 AM)
Producers gloomy as slowdown spreads: survey - Reuters (07/29/2008 08:03 AM)
US credit crisis is hitting the wealthy - FT ($) (07/28/2008 09:48 PM)
New York City mayor warns of looming $2.3 billion budget gap - Chicago Tribune (07/29/2008 05:39 AM)
US deficit zooming to half-trillion as Bush leaves - AP (07/29/2008 05:10 AM)
No funds to lend to 40,000 students - Boston Globe (07/29/2008 06:04 AM)
White House cuts GDP growth forecast - LA Times (07/29/2008 05:32 AM)
S&P/Case-Shiller 20-City Home-Price Index Fell 15.8% in May - Bloomberg (07/29/2008 08:05 AM)
Producers gloomy as slowdown spreads: survey - Reuters (07/29/2008 08:03 AM)
US credit crisis is hitting the wealthy - FT ($) (07/28/2008 09:48 PM)
New York City mayor warns of looming $2.3 billion budget gap - Chicago Tribune (07/29/2008 05:39 AM)
US deficit zooming to half-trillion as Bush leaves - AP (07/29/2008 05:10 AM)
No funds to lend to 40,000 students - Boston Globe (07/29/2008 06:04 AM)
Back down to earth for hedge funds of funds - FT (07/28/2008 09:43 PM)
Banks' Woes Made Worse By Big Bets On Banks - WSJ ($) (07/29/2008 06:13 AM)
Treasury, Banks Promote 'Covered Bonds' - Washington Post (07/29/2008 05:22 AM)
States Follow Federal Probe of Muni Derivatives, XL Filing Says - Bloomberg (07/29/2008 05:00 AM)
Credit crisis spreading in 'negative feedback loop': IMF - AFP (07/29/2008 05:25 AM)
Bloated U.S. budget deficits may mean higher rates - San Diego UT (07/29/2008 05:44 AM)
XL Capital to Raise Cash to Bolster Bond Insurer - NY Times (07/29/2008 05:53 AM)
US credit crisis is hitting the wealthy - FT ($) (07/29/2008 06:10 AM)
NYSE responds to rise of algorithmic trades - FT ($) (07/28/2008 09:57 PM)
No funds to lend to 40,000 students - Boston Globe (07/29/2008 05:43 AM)
Vacant-Property Fees Add to Mortgage Firms' Woes - WSJ ($) (07/29/2008 05:55 AM) Foreclosure-plagued cities gain sales - Boston Globe (07/29/2008 06:06 AM)
Banks' Woes Made Worse By Big Bets On Banks - WSJ ($) (07/29/2008 06:13 AM)
Treasury, Banks Promote 'Covered Bonds' - Washington Post (07/29/2008 05:22 AM)
States Follow Federal Probe of Muni Derivatives, XL Filing Says - Bloomberg (07/29/2008 05:00 AM)
Credit crisis spreading in 'negative feedback loop': IMF - AFP (07/29/2008 05:25 AM)
Bloated U.S. budget deficits may mean higher rates - San Diego UT (07/29/2008 05:44 AM)
XL Capital to Raise Cash to Bolster Bond Insurer - NY Times (07/29/2008 05:53 AM)
US credit crisis is hitting the wealthy - FT ($) (07/29/2008 06:10 AM)
NYSE responds to rise of algorithmic trades - FT ($) (07/28/2008 09:57 PM)
No funds to lend to 40,000 students - Boston Globe (07/29/2008 05:43 AM)
Vacant-Property Fees Add to Mortgage Firms' Woes - WSJ ($) (07/29/2008 05:55 AM) Foreclosure-plagued cities gain sales - Boston Globe (07/29/2008 06:06 AM)
USD System At Risk - 19 July 2008
Subprime/Credit Crunch Crisis and Stock Market Volatility Led to Higher Securities Class Action Filings in the First Half of 2008, Finds Report by Cornerstone Research and Stanford Law School
Second Consecutive Half-Year with High Filings after a Two-Year Lull
Last update: 8:08 a.m. EDT July 29, 2008 BOSTON & STANFORD, Calif., Jul 29, 2008 (BUSINESS WIRE) -- During the first half of 2008 securities class action filings continued the rebound that started in the second half of 2007, following two years of lower activity. According to a report released today by Cornerstone Research in cooperation with Stanford Law School's Securities Class Action Clearinghouse, there were 110 filings between January 1 and June 30, 2008, suggesting as many as 220 filings by the end of the year. The recent high level of filings coincided with a marked increase in stock market volatility. Filings jumped from 119 in the twelve months ending June 2007 to 217 over the next twelve months, and stock market volatility doubled over the same period. This level of litigation activity exceeded the annual average for the eleven years between January 1997 and December 2007. About half of the filings in the first half of 2008 were driven by the subprime mortgage/credit crunch, with 58 filings containing related allegations. Of these, 17 involved auction rate securities. Professor Joseph Grundfest, co-Director of the Rock Center on Corporate Governance and former Commissioner of the Securities and Exchange Commission, noted that, "We continue to witness the dramatic effects of the subprime market meltdown, with half of the filings so far this year linked to the subprime/credit crunch disaster." John Gould, Vice President at Cornerstone Research and contributor to the report, said, "We have also seen a sharp increase in defendant firms' average market capitalization losses associated with filings. The median loss in the first half of 2008 was $243 million, more than twice the historical average. Not since the period of heightened filing activity in 2000-02 have we seen market capitalization losses of this size among defendant firms." Additional findings include: -- Financial Sector Had the Most Filings. The Financial sector had the most securities class action filings for the third straight six-month period, with 63 filings in the first half of 2008--up from 30 in the second half of 2007 and 19 in the first half of 2007. This sector also registered more filings than all other sectors combined. The subprime/credit crunch fallout drove this spike, with almost all the Financial sector filings involving related allegations. In 2007 and the first half of 2008, 87 of the 97 subprime/credit crunch-related filings were in the Financial sector. -- Market Capitalization Losses Increased. Maximum Dollar Losses (MDL)+ rose from $504 billion in the second half 2007 to $587 billion in the first half of 2008--the highest level since the second half of 2002. Annualized, this figure would represent a 74 percent increase over 2007 and a 69 percent rise over the average for the eleven years ending December 2007. Disclosure Dollar Losses (DDL)* also remained high in the first half of 2008, at $106 billion. Annualized, that would be 40 percent more than in 2007 and 65 percent more than the average for the eleven years ending December 2007. Incidences of "mega" MDL filings (cases associated with MDL of $10 billion or more) also continued at high levels, with 17 in the first half of 2008 compared with 16 in all of 2007. In addition, there were 7 mega DDL filings (cases associated with DDL of $5 billion or more) in the first half of 2008, compared with 9 in 2007 and just 1 in 2006. Dr. Gould and Professor Grundfest are available to speak to the media about the report, titled Securities Class Action Filings: 2008 Mid-Year Assessment. The full text of the report is available at http://securities.cornerstone.com and http://securities.stanford.edu. About Cornerstone Research Cornerstone Research provides financial and economic analysis in litigation and regulatory proceedings, with a focus on litigation related to securities, antitrust, intellectual property, financial institutions, energy, and accounting. Cornerstone Research also cosponsors the Stanford Law School Securities Class Action Clearinghouse. For additional information, please visit www.cornerstone.com. About the Stanford Law School Securities Class Action Clearinghouse The Securities Class Action Clearinghouse is an authoritative source of data and analysis on the financial and economic characteristics of securities class action litigation. + MDL is the dollar value decrease in the defendant firm's market capitalization from the trading day on which the defendant firm's market capitalization reached its maximum during the class period to the trading day immediately following the end of the class period. * DDL is the decrease in the market capitalization of the defendant firm from the trading day immediately preceding the end of the class period to the trading day immediately following the end of the class period. SOURCE: Cornerstone Research
Second Consecutive Half-Year with High Filings after a Two-Year Lull
Last update: 8:08 a.m. EDT July 29, 2008 BOSTON & STANFORD, Calif., Jul 29, 2008 (BUSINESS WIRE) -- During the first half of 2008 securities class action filings continued the rebound that started in the second half of 2007, following two years of lower activity. According to a report released today by Cornerstone Research in cooperation with Stanford Law School's Securities Class Action Clearinghouse, there were 110 filings between January 1 and June 30, 2008, suggesting as many as 220 filings by the end of the year. The recent high level of filings coincided with a marked increase in stock market volatility. Filings jumped from 119 in the twelve months ending June 2007 to 217 over the next twelve months, and stock market volatility doubled over the same period. This level of litigation activity exceeded the annual average for the eleven years between January 1997 and December 2007. About half of the filings in the first half of 2008 were driven by the subprime mortgage/credit crunch, with 58 filings containing related allegations. Of these, 17 involved auction rate securities. Professor Joseph Grundfest, co-Director of the Rock Center on Corporate Governance and former Commissioner of the Securities and Exchange Commission, noted that, "We continue to witness the dramatic effects of the subprime market meltdown, with half of the filings so far this year linked to the subprime/credit crunch disaster." John Gould, Vice President at Cornerstone Research and contributor to the report, said, "We have also seen a sharp increase in defendant firms' average market capitalization losses associated with filings. The median loss in the first half of 2008 was $243 million, more than twice the historical average. Not since the period of heightened filing activity in 2000-02 have we seen market capitalization losses of this size among defendant firms." Additional findings include: -- Financial Sector Had the Most Filings. The Financial sector had the most securities class action filings for the third straight six-month period, with 63 filings in the first half of 2008--up from 30 in the second half of 2007 and 19 in the first half of 2007. This sector also registered more filings than all other sectors combined. The subprime/credit crunch fallout drove this spike, with almost all the Financial sector filings involving related allegations. In 2007 and the first half of 2008, 87 of the 97 subprime/credit crunch-related filings were in the Financial sector. -- Market Capitalization Losses Increased. Maximum Dollar Losses (MDL)+ rose from $504 billion in the second half 2007 to $587 billion in the first half of 2008--the highest level since the second half of 2002. Annualized, this figure would represent a 74 percent increase over 2007 and a 69 percent rise over the average for the eleven years ending December 2007. Disclosure Dollar Losses (DDL)* also remained high in the first half of 2008, at $106 billion. Annualized, that would be 40 percent more than in 2007 and 65 percent more than the average for the eleven years ending December 2007. Incidences of "mega" MDL filings (cases associated with MDL of $10 billion or more) also continued at high levels, with 17 in the first half of 2008 compared with 16 in all of 2007. In addition, there were 7 mega DDL filings (cases associated with DDL of $5 billion or more) in the first half of 2008, compared with 9 in 2007 and just 1 in 2006. Dr. Gould and Professor Grundfest are available to speak to the media about the report, titled Securities Class Action Filings: 2008 Mid-Year Assessment. The full text of the report is available at http://securities.cornerstone.com and http://securities.stanford.edu. About Cornerstone Research Cornerstone Research provides financial and economic analysis in litigation and regulatory proceedings, with a focus on litigation related to securities, antitrust, intellectual property, financial institutions, energy, and accounting. Cornerstone Research also cosponsors the Stanford Law School Securities Class Action Clearinghouse. For additional information, please visit www.cornerstone.com. About the Stanford Law School Securities Class Action Clearinghouse The Securities Class Action Clearinghouse is an authoritative source of data and analysis on the financial and economic characteristics of securities class action litigation. + MDL is the dollar value decrease in the defendant firm's market capitalization from the trading day on which the defendant firm's market capitalization reached its maximum during the class period to the trading day immediately following the end of the class period. * DDL is the decrease in the market capitalization of the defendant firm from the trading day immediately preceding the end of the class period to the trading day immediately following the end of the class period. SOURCE: Cornerstone Research
Dan Solin: Smart Advice for the HuffPost Investor: Two Studies Wall Street Wants to Bury
Another study demonstrates the consequences of following the advice of brokers and advisors who push actively managed funds on their trusting clients.
You Can Take That To the Bank...not!
Thomas Stern | Posted July 29, 2008 | Business
Read More: Banking Crisis, Economy, Fannie Mae, Specialization Are we nuts? Why do we continue to put such effort into our careers when Fannie Mae and Freddie Mac are tanking faster than Ron Paul at a charisma contest? And the very names of these institutions don't exactly inspire confidence in their economic acumen. Smith-Barney, now that sounds like...
Read Post
How Should We Respond to the Imploding Economy?
Danny Schechter | Posted July 29, 2008 | Business
Read More: Banks, Congress, Economy, Foreclosures, Housing Bill, Mccain, Naca, Obama, Recession Boston, July 26, 2008: The questions we face in late July, as regulators seize two more failing banks, is this: will we be engulfed by a further collapse in our economy or can the damage be contained, or, even turned around?
We know what goes up must come down...
Read Post
t's the Economy, Stupid -- Part Deux
Zachary Karabell | Posted July 29, 2008 | Politics
Read More: 2008 Presidential Election, Economy, Election, McCain Campaign, Obama, Robert Rubin, Warren Buffett More than 75% of Americans now say that the economy is their number one concern heading into the general election in the fall. Those poll numbers are more than confirmed by consumer sentiment surveys which, despite a recent bounce care of the slight retreat of gas prices, have been at...
Read Post
How Should We Respond to the Imploding Economy?
Danny Schechter | Posted July 29, 2008 | Business
Read More: Banks, Congress, Economy, Foreclosures, Housing Bill, Mccain, Naca, Obama, Recession Boston, July 26, 2008: The questions we face in late July, as regulators seize two more failing banks, is this: will we be engulfed by a further collapse in our economy or can the damage be contained, or, even turned around?
We know what goes up must come down...
Read Post
A Deal at Merrill Puts Spotlight on Others
By LOUISE STORY Published: July 30, 2008 Somehow, $4.4 billion just evaporated at Merrill Lynch.
Skip to next paragraph Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot.
The fire sale raises a troubling question for the nation's battered financial industry: Have other banks with similar investments overestimated their values?
That question reverberated across Wall Street on Tuesday as analysts began assessing the implications of Merrill's move to cleanse its tainted balance sheet.
Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.'s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill.
Still, financial stocks rallied on Tuesday, as investors hoped the deal at Merrill signaled the troubles plaguing banks' balance sheets might be coming to an end.
"This is setting some sort of precedent for these prices," said Stuart Plesser, an analyst with Standard & Poor's Equity Research.
Merrill's deal also shone a light on the desperate measures banks are taking to clean up their balance sheets. As Wall Street firms negotiate deals to sell troubled assets to private equity funds and hedge funds, they are offering generous loans to potential buyers.
For Merrill, this meant lending $5 billion to Lone Star Funds toward the $6.7 billion purchase price. If the assets deteriorate below their current marks, Lone Star loses the first $1.7 billion, then the losses move to Merrill. Merrill could lose up to $5 billion, though the bank may have protections on the deal that it has yet to disclose.
Analysts were skeptical.
"It's not truly unloading the risk," said David Trone, an analyst with Fox-Pitt Kelton. "I mean from an accounting standpoint, it's gone, but from a real risk standpoint, it's still there."
Merrill is not the only company that has made loans to seal a deal. Citigroup and Deutsche Bank made similar loans in the spring when they sold billions of dollars in loans used to finance corporate buyouts.
And, in May, when UBS sold mortgage bonds to a BlackRock investment fund, the Swiss bank lent $11.25 billion of the $15 billion purchase price. That deal left UBS on the hook for any losses more than $3.75 billion.
"Essentially what you've done is you've taken a write-down, and you've put it back on your balance sheet as a loan," said Brad Hintz, an analyst with Sanford C. Bernstein. "What they're trying to do is to clear the balance sheet."
The round-about pattern of these sales raises more confusion over the actual value of mortgage assets. In Merrill's case, the C.D.O.'s were originally valued at $30.6 billion before the credit crisis. By the end of the second-quarter, Merrill had written them down to $11.1 billion. And then it sold them for $6.7 billion, sugar-coated with a loan package.
Still, Merrill's price of 22 cents on the dollar was held up as the new measuring stick on Tuesday, as analysts whipped out predictions for Merrill's peers. Several focused on Citigroup, a bank with large exposure to C.D.O.'s.
An analyst from Deutsche Bank said the new marks might cost Citigroup up to $8 billion. An analyst from Merrill Lynch said the write-down at Citigroup would probably be closer to $6 billion. And at Ladenburg Thalmann, an analyst said the marks would be much smaller. Citigroup declined to comment.
Citigroup's chief financial officer said on the company's second-quarter earnings call that many of the bank's C.D.O.'s were created before 2006. Those assets are valued at 61 cents on the dollar, for now. Other mortgage assets at Citigroup known as mezzanine C.D.O.'s and high-grade C.D.O.'s are already marked closer to Merrill's 22-cent level.
This is not the first time banks have watched large mortgage sales in the market translate into losses on their own books. A sale by Peleton Partners in February forced several firms to write down mortgage assets.
Bob Stickler, a spokesman for Bank of America, said the bank is taking Merrill's sale into consideration. Bank of America currently values its comparable C.D.O.'s at 44 cents on the dollar.
But Mr. Stickler cautioned that the quality of C.D.O.'s varies, especially based on when the C.D.O. was created.
"You can't compare anything of high quality to the toxic waste they sold," Mr. Stickler said, referring to Merrill's sale. "That's not even comparing apples to oranges."
By LOUISE STORY Published: July 30, 2008 Somehow, $4.4 billion just evaporated at Merrill Lynch.
Skip to next paragraph Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot.
The fire sale raises a troubling question for the nation's battered financial industry: Have other banks with similar investments overestimated their values?
That question reverberated across Wall Street on Tuesday as analysts began assessing the implications of Merrill's move to cleanse its tainted balance sheet.
Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.'s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill.
Still, financial stocks rallied on Tuesday, as investors hoped the deal at Merrill signaled the troubles plaguing banks' balance sheets might be coming to an end.
"This is setting some sort of precedent for these prices," said Stuart Plesser, an analyst with Standard & Poor's Equity Research.
Merrill's deal also shone a light on the desperate measures banks are taking to clean up their balance sheets. As Wall Street firms negotiate deals to sell troubled assets to private equity funds and hedge funds, they are offering generous loans to potential buyers.
For Merrill, this meant lending $5 billion to Lone Star Funds toward the $6.7 billion purchase price. If the assets deteriorate below their current marks, Lone Star loses the first $1.7 billion, then the losses move to Merrill. Merrill could lose up to $5 billion, though the bank may have protections on the deal that it has yet to disclose.
Analysts were skeptical.
"It's not truly unloading the risk," said David Trone, an analyst with Fox-Pitt Kelton. "I mean from an accounting standpoint, it's gone, but from a real risk standpoint, it's still there."
Merrill is not the only company that has made loans to seal a deal. Citigroup and Deutsche Bank made similar loans in the spring when they sold billions of dollars in loans used to finance corporate buyouts.
And, in May, when UBS sold mortgage bonds to a BlackRock investment fund, the Swiss bank lent $11.25 billion of the $15 billion purchase price. That deal left UBS on the hook for any losses more than $3.75 billion.
"Essentially what you've done is you've taken a write-down, and you've put it back on your balance sheet as a loan," said Brad Hintz, an analyst with Sanford C. Bernstein. "What they're trying to do is to clear the balance sheet."
The round-about pattern of these sales raises more confusion over the actual value of mortgage assets. In Merrill's case, the C.D.O.'s were originally valued at $30.6 billion before the credit crisis. By the end of the second-quarter, Merrill had written them down to $11.1 billion. And then it sold them for $6.7 billion, sugar-coated with a loan package.
Still, Merrill's price of 22 cents on the dollar was held up as the new measuring stick on Tuesday, as analysts whipped out predictions for Merrill's peers. Several focused on Citigroup, a bank with large exposure to C.D.O.'s.
An analyst from Deutsche Bank said the new marks might cost Citigroup up to $8 billion. An analyst from Merrill Lynch said the write-down at Citigroup would probably be closer to $6 billion. And at Ladenburg Thalmann, an analyst said the marks would be much smaller. Citigroup declined to comment.
Citigroup's chief financial officer said on the company's second-quarter earnings call that many of the bank's C.D.O.'s were created before 2006. Those assets are valued at 61 cents on the dollar, for now. Other mortgage assets at Citigroup known as mezzanine C.D.O.'s and high-grade C.D.O.'s are already marked closer to Merrill's 22-cent level.
This is not the first time banks have watched large mortgage sales in the market translate into losses on their own books. A sale by Peleton Partners in February forced several firms to write down mortgage assets.
Bob Stickler, a spokesman for Bank of America, said the bank is taking Merrill's sale into consideration. Bank of America currently values its comparable C.D.O.'s at 44 cents on the dollar.
But Mr. Stickler cautioned that the quality of C.D.O.'s varies, especially based on when the C.D.O. was created.
"You can't compare anything of high quality to the toxic waste they sold," Mr. Stickler said, referring to Merrill's sale. "That's not even comparing apples to oranges."
Bear's death and the
US way of banking
As US regulators seek out culprits on whom they can pin culpability for the collapse earlier this year of Bear Stearns, the more important policy question is why did the bank have to die? Was that not a feature of the business it had chosen? - Julian Delasantellis
COMMENT
Paulson still doesn't get it
US Treasury Secretary Henry Paulson's latest effort to build trust in banks will be a tough sell because there is not much to trust in a Wall Street bank these days. What is required is systemic reform in business practices and compensation structures. - Peter Morici
US way of banking
As US regulators seek out culprits on whom they can pin culpability for the collapse earlier this year of Bear Stearns, the more important policy question is why did the bank have to die? Was that not a feature of the business it had chosen? - Julian Delasantellis
COMMENT
Paulson still doesn't get it
US Treasury Secretary Henry Paulson's latest effort to build trust in banks will be a tough sell because there is not much to trust in a Wall Street bank these days. What is required is systemic reform in business practices and compensation structures. - Peter Morici
THE MOGAMBO GURU
Rewards for the incompetent
It is a crazy desperation of a new kind when investors drive up share prices even as earnings slide. But it gives a great lever for us useless workers when we next put in for a pay rise.
CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD
MARKET RAP
Much ado about nothing
Asian stocks showed plenty of volatility over the past few trading days, but after all that activity the markets failed to break through significant medium-term strategic resistances. (Jul 25, '08)
R M Cutler runs his eye over the ups and downs in the week's markets.
Rewards for the incompetent It is a crazy desperation of a new kind when investors drive up share prices even as earnings slide. But it gives a great lever for us useless workers when we next put in for a pay rise.
CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Doug Noland looks at the previous week's events each Monday.
THE WEEK AHEAD MARKET RAP
Much ado about nothing
Asian stocks showed plenty of volatility over the past few trading days, but after all that activity the markets failed to break through significant medium-term strategic resistances. (Jul 25, '08)
R M Cutler runs his eye over the ups and downs in the week's markets.
Mercenaries at work
The ongoing process in the United States of the transfer of military and intelligence functions (and much of a US$66 billion budget) to private, often anonymous operatives, has made it easier for enemies to penetrate American intelligence. This has greased the slippery slope to the loss of professionalism within the community of intelligence analysts, in turn heightening the risks of war by accident, or by presidential whim. - Chalmers Johnson (Jul 29, '08)
CHINA'S DOLLAR MILLSTONE
Breaking dollar's hegemony
China, by seeking growth through exports for US dollars, has trapped itself in a crisis-prone mismatch between domestic policies to assure sustainable growth and monetary policy dictated by dollar hegemony. Only sovereign credit can redress the resulting problems, including a shortage of capital needed to develop its economy. - Henry C K Liu (Jul 29, '08)
This is the first part of a two-part analysis.
THE BEAR'S LAIR
Volcker's best apprentice
The refusal of central banks to follow the lead of former US Federal Reserve chairman Paul Volcker and raise interest rates to appropriate levels means inflation has become a global phenomenon. One unlikely exception is displaying Volker-like monetary maturity. The benefits will follow. - Martin Hutchinson (Jul 29, '08)
THE MOGAMBO GURU
Nothing but pain
The squeals of pain from the squeeze on the US economy are about to get louder after three months of contracting bank credit, with wages falling off a cliff and jobs heading in the same direction. (Jul 29, '08)
The ongoing process in the United States of the transfer of military and intelligence functions (and much of a US$66 billion budget) to private, often anonymous operatives, has made it easier for enemies to penetrate American intelligence. This has greased the slippery slope to the loss of professionalism within the community of intelligence analysts, in turn heightening the risks of war by accident, or by presidential whim. - Chalmers Johnson (Jul 29, '08)
CHINA'S DOLLAR MILLSTONE
Breaking dollar's hegemony
China, by seeking growth through exports for US dollars, has trapped itself in a crisis-prone mismatch between domestic policies to assure sustainable growth and monetary policy dictated by dollar hegemony. Only sovereign credit can redress the resulting problems, including a shortage of capital needed to develop its economy. - Henry C K Liu (Jul 29, '08)
This is the first part of a two-part analysis.
THE BEAR'S LAIR
Volcker's best apprentice
The refusal of central banks to follow the lead of former US Federal Reserve chairman Paul Volcker and raise interest rates to appropriate levels means inflation has become a global phenomenon. One unlikely exception is displaying Volker-like monetary maturity. The benefits will follow. - Martin Hutchinson (Jul 29, '08)
THE MOGAMBO GURU
Nothing but pain
The squeals of pain from the squeeze on the US economy are about to get louder after three months of contracting bank credit, with wages falling off a cliff and jobs heading in the same direction. (Jul 29, '08)
Arbitration Tilting More Against Investors
Bloomberg - USA
July 30 (Bloomberg) -- Let's say you had $50000 in auction- rate securities that your broker said were as safe as money- market funds. ...
Bloomberg - USA
July 30 (Bloomberg) -- Let's say you had $50000 in auction- rate securities that your broker said were as safe as money- market funds. ...
4 Subprime, Auction-Rate Securities Cases Driving Shareholder Class Action Filings toward Highest Level since 2002, while Settlement Values Remain Steady
NERA Study Reveals Additional Factors Affecting Filings
NEW YORK--(BUSINESS WIRE)--Driven in large part by the current subprime and credit crisis, shareholder class action filings continued to increase in the first half of 2008, according to a new study from NERA Economic Consulting. Filings are on pace to reach almost 280 by year's end, which would represent a 42% increase over 2007 and the largest annual total since 2002; at that rate filings will have more than doubled in just two years, from their recent low of 131 in 2006.
According to NERA's study, 2008 Trends: Subprime, Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High, the credit crisis is a significant factor contributing to the increase. In fact, 51% of 2008 filings through 30 June 2008 have allegations related to the subprime collapse (including auction-rate securities cases).
Market Volatility, Returns also Factor in Filings Increase
Market volatility and returns are also significant factors associated with filings. Specifically, the NERA study found that if market volatility is higher during a quarter, filings are likely to be higher as well. The authors also found:
Although filings increased through the first half of the year, average settlement values remained roughly constant at around $30 million. However:
For more details, and to read the full report, visit www.nera.com/recenttrends.
Shareholder Trends Report Series
NERA has been analyzing trends in shareholder class actions for more than 15 years. Two reports are published a year: one at mid-year and a second, annual review published at year's-end. This year's mid-year report was authored by NERA Senior Consultant Dr. Stephanie Plancich, Consultant Svetlana Starykh, and former NERA Consultant Brian Saxton, and includes data on filings and settlements through 30 June 2008.
About NERA
NERA Economic Consulting is an international firm of economists who understand how markets work. We provide economic analysis and advice to corporations, governments, law firms, regulatory agencies, trade associations, and international agencies. Our global team of more than 600 professionals operates in over 20 offices across North America, Europe, and Asia Pacific.
NERA provides practical economic advice related to highly complex business and legal issues arising from competition, regulation, public policy, strategy, finance, and litigation. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Because of our commitment to deliver unbiased findings, we are widely recognized for our independence. Our clients come to us expecting integrity and the unvarnished truth.
NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.
NERA Study Reveals Additional Factors Affecting Filings
NEW YORK--(BUSINESS WIRE)--Driven in large part by the current subprime and credit crisis, shareholder class action filings continued to increase in the first half of 2008, according to a new study from NERA Economic Consulting. Filings are on pace to reach almost 280 by year's end, which would represent a 42% increase over 2007 and the largest annual total since 2002; at that rate filings will have more than doubled in just two years, from their recent low of 131 in 2006.
According to NERA's study, 2008 Trends: Subprime, Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High, the credit crisis is a significant factor contributing to the increase. In fact, 51% of 2008 filings through 30 June 2008 have allegations related to the subprime collapse (including auction-rate securities cases).
Market Volatility, Returns also Factor in Filings Increase
Market volatility and returns are also significant factors associated with filings. Specifically, the NERA study found that if market volatility is higher during a quarter, filings are likely to be higher as well. The authors also found:
- The probability of a company facing a class action filing over the three months following a large one-day drop in its stock price increases with the size of the drop.
- Nearly one-third of companies whose stock fell by 40% or more in a single day, net-of-market, were confronted with a federal filing within three months. Large price drops may trigger shareholder class action litigation because they often follow disclosures of adverse company-specific news that fuel allegations of fraud.
Although filings increased through the first half of the year, average settlement values remained roughly constant at around $30 million. However:
- Excluding settlements of over $1 billion, the average settlement dropped to $10 million, representing a decline compared to recent years.
- In part this is due to the lower incidence of so-called "mega-settlements" of at least $100 million. Only 2% of settlements in 2008 cross this $100 million mark, as compared to almost 7% in 2007 and nearly 10% in 2006.
For more details, and to read the full report, visit www.nera.com/recenttrends.
Shareholder Trends Report Series
NERA has been analyzing trends in shareholder class actions for more than 15 years. Two reports are published a year: one at mid-year and a second, annual review published at year's-end. This year's mid-year report was authored by NERA Senior Consultant Dr. Stephanie Plancich, Consultant Svetlana Starykh, and former NERA Consultant Brian Saxton, and includes data on filings and settlements through 30 June 2008.
About NERA
NERA Economic Consulting is an international firm of economists who understand how markets work. We provide economic analysis and advice to corporations, governments, law firms, regulatory agencies, trade associations, and international agencies. Our global team of more than 600 professionals operates in over 20 offices across North America, Europe, and Asia Pacific.
NERA provides practical economic advice related to highly complex business and legal issues arising from competition, regulation, public policy, strategy, finance, and litigation. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Because of our commitment to deliver unbiased findings, we are widely recognized for our independence. Our clients come to us expecting integrity and the unvarnished truth.
NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.
Class-Action Filings Grow
Wall Street Journal - 10 hours ago
By DAISY MAXEY Shareholder class-action filings are up, thanks largely to the subprime-mortgage and credit crisis, according to a new study. ...2008 Trends: Subprime And Auction-Rate Cases Continue To Drive ...
Mondaq News Alerts (subscription), UK - 1 hour ago
Article by Stephanie Plancich, Ph.D. and Svetlana Starykh with former NERA Consultant Brian Saxton 1 If activity continues at this pace, there will be ...Subprime, Auction-Rate Securities Cases Driving Shareholder Class ...
Business Wire (press release), CA - 17 hours ago
NEW YORK--(BUSINESS WIRE)--Driven in large part by the current subprime and credit crisis, shareholder class action filings continued to increase in the ...
Wall Street Journal - 10 hours ago
By DAISY MAXEY Shareholder class-action filings are up, thanks largely to the subprime-mortgage and credit crisis, according to a new study. ...2008 Trends: Subprime And Auction-Rate Cases Continue To Drive ...
Mondaq News Alerts (subscription), UK - 1 hour ago
Article by Stephanie Plancich, Ph.D. and Svetlana Starykh with former NERA Consultant Brian Saxton 1 If activity continues at this pace, there will be ...Subprime, Auction-Rate Securities Cases Driving Shareholder Class ...
Business Wire (press release), CA - 17 hours ago
NEW YORK--(BUSINESS WIRE)--Driven in large part by the current subprime and credit crisis, shareholder class action filings continued to increase in the ...
The following missive is written by the only popular international media personality that has consistently told the truth. Truth and understanding of these complex matters is essential to financial survival. Our community’s only popular media friend is Greg Hunter. Please consider the points in this missive seriously as fools of today will always be fooled with only the truly informed escaping the present systemic breakage of the Western Nation's financial system.
Remember, Asia is not broken.
The Beginning of a New Era Or The End of the Beginning
Greg Hunter
Everybody knows the date of the start of the Great Depression, October 29th 1929. It was the day of the worst stock market crash in history. Some people confuse the stock market crash on that fateful day as the Great Depression. The Depression was not a single day but rather an era that dragged on through the thirties and into the forties. The picture of what was about to happen to the lives of most Americans in the beginning was opaque at best. At the time, the general public did not realize a major change was taking place. After all, they were being told things like the economy is “fundamentally sound” by then President Hoover. A few other quotes from the beginning of that dark era include:
December 5, 1929
“The Government’s business is in sound condition.”
– Andrew W. Mellon, Secretary of the Treasury
December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”
– Associated Press dispatch.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”
– News item.
May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”
– President Hoover
June 29, 1930
“The worst is over without a doubt.”
– James J. Davis, Secretary of Labor.
June 9, 1931
“The depression has ended.”
– Dr. Julius Klein, Assistant Secretary of Commerce.
(quotes came from Illuminati News Sept. 2005)
Fast forward to today’s credit crisis. I can remember vividly in February of 2007 how all the financial experts and administration officials being brought on to CNN (where I worked as an investigative correspondent) all said that the sub prime crisis (securitized debt or OTC derivatives) would be “contained.” “Contained”? America is now bailing out GSE’s Fannie and Freddie along with every major bank and brokerage house through the Feds “Lending and Auction” facilities. There is no telling what the ultimate tab for all the bailouts will add up to, but trillions of dollars is far from a fantasy figure. After all, this so called credit crisis is not a one day event like the takeover of Bear Sterns or the stock market crash of 1929, but the beginning of a new era. Many financial events and upheavals will serve as mile markers along the road that will undoubtedly shape this new era. What the country will look like in the end will take years to develop. I think where we are now is certainly not the end and not the beginning… but the end of the beginning of a new and dark era in world financial history.
Remember, Asia is not broken.
The Beginning of a New Era Or The End of the Beginning
Greg Hunter
Everybody knows the date of the start of the Great Depression, October 29th 1929. It was the day of the worst stock market crash in history. Some people confuse the stock market crash on that fateful day as the Great Depression. The Depression was not a single day but rather an era that dragged on through the thirties and into the forties. The picture of what was about to happen to the lives of most Americans in the beginning was opaque at best. At the time, the general public did not realize a major change was taking place. After all, they were being told things like the economy is “fundamentally sound” by then President Hoover. A few other quotes from the beginning of that dark era include:
December 5, 1929
“The Government’s business is in sound condition.”
– Andrew W. Mellon, Secretary of the Treasury
December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”
– Associated Press dispatch.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”
– News item.
May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”
– President Hoover
June 29, 1930
“The worst is over without a doubt.”
– James J. Davis, Secretary of Labor.
June 9, 1931
“The depression has ended.”
– Dr. Julius Klein, Assistant Secretary of Commerce.
(quotes came from Illuminati News Sept. 2005)
Fast forward to today’s credit crisis. I can remember vividly in February of 2007 how all the financial experts and administration officials being brought on to CNN (where I worked as an investigative correspondent) all said that the sub prime crisis (securitized debt or OTC derivatives) would be “contained.” “Contained”? America is now bailing out GSE’s Fannie and Freddie along with every major bank and brokerage house through the Feds “Lending and Auction” facilities. There is no telling what the ultimate tab for all the bailouts will add up to, but trillions of dollars is far from a fantasy figure. After all, this so called credit crisis is not a one day event like the takeover of Bear Sterns or the stock market crash of 1929, but the beginning of a new era. Many financial events and upheavals will serve as mile markers along the road that will undoubtedly shape this new era. What the country will look like in the end will take years to develop. I think where we are now is certainly not the end and not the beginning… but the end of the beginning of a new and dark era in world financial history.
Creating OPEC On the Information Superhighway - Tim Wu, NY Times
Let's Privatize Our Roadways - Steven Malanga, RealClearMarkets
Americans Vastly Prefer Foreign Cars - Kambanis, Mayur & Holland, IBD
A Case for Lower Taxes - Richard Ebeling, Washington Times
Merrill Lynch: No Longer In Denial - Colin Barr, Fortune
Let's Privatize Our Roadways - Steven Malanga, RealClearMarkets
Americans Vastly Prefer Foreign Cars - Kambanis, Mayur & Holland, IBD
A Case for Lower Taxes - Richard Ebeling, Washington Times
Merrill Lynch: No Longer In Denial - Colin Barr, Fortune
After 7 Years, Talks on Trade Collapse - NY Times (07/30/2008 06:17 AM)
The world cannot grow its way out of this slowdown - FT (07/29/2008 07:51 PM)
Paterson Warns of Economic Crisis - NY Times (07/29/2008 08:09 PM)
New York's Paterson Calls Lawmakers Back Amid Crisis - Bloomberg (07/29/2008 08:14 PM)
ADP Says U.S. Companies Increased Payrolls by 9,000 - Bloomberg (07/30/2008 08:11 AM)
Mortgage applications slowest since 2000: MBA - Reuters (07/30/2008 05:56 AM)
Term Auction Facility is oversubscribed - CFO.com (07/30/2008 08:49 AM)
Building Costs Soaring - N.Y. Post (07/30/2008 05:32 AM)
The world cannot grow its way out of this slowdown - FT (07/29/2008 07:51 PM)
Paterson Warns of Economic Crisis - NY Times (07/29/2008 08:09 PM)
New York's Paterson Calls Lawmakers Back Amid Crisis - Bloomberg (07/29/2008 08:14 PM)
ADP Says U.S. Companies Increased Payrolls by 9,000 - Bloomberg (07/30/2008 08:11 AM)
Mortgage applications slowest since 2000: MBA - Reuters (07/30/2008 05:56 AM)
Term Auction Facility is oversubscribed - CFO.com (07/30/2008 08:49 AM)
Building Costs Soaring - N.Y. Post (07/30/2008 05:32 AM)
Quotable
“The next phase of de-leveraging will focus on the real economy. The availability of debt has contracted sharply. The cost of funding has increased. This will force de-leveraging of corporate and personal balance sheets.”
Satyajit Das, May 2008
“The next phase of de-leveraging will focus on the real economy. The availability of debt has contracted sharply. The cost of funding has increased. This will force de-leveraging of corporate and personal balance sheets.”
Satyajit Das, May 2008
The cost of socialism
The United States is seeking to resolve its present financial crisis by socializing losses. International precedents indicate that this path leads to curbs on individual freedom and enterprise, and economic decline. - John Brow
The United States is seeking to resolve its present financial crisis by socializing losses. International precedents indicate that this path leads to curbs on individual freedom and enterprise, and economic decline. - John Brow
THE MOGAMBO GURU
Too little, too late It should be a cause for some sort of celebration when the US Federal Reserve stops increasing money and credit and so is not increasing inflation in consumer prices. But it is not, because so much debt has already been created that it is impossible to pay it back. We are doomed!!
CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Too little, too late It should be a cause for some sort of celebration when the US Federal Reserve stops increasing money and credit and so is not increasing inflation in consumer prices. But it is not, because so much debt has already been created that it is impossible to pay it back. We are doomed!! CREDIT BUBBLE BULLETIN
Just the facts
A week of hyper-volatility ended with mostly slight declines in the major averages, as the markets absorbed the implications of the Fannie Mae and Freddie Mac rescue package. Smaller companies, however, as captured by the Russell 2000, strengthened, even as reports said loans were increasingly difficult to come by.
Covered Bonds: The Latest Scam or Real Rescue? - Angry Bear
Too High, Too Fast for Financials? - Rich Karlgaard, Digital Rules
The End of Free Trade? - Editorial, Wall Street Journal
We'll Pay a Price for Free Trade Failure - Peter Mandelson, Telegraph
We'll Pay a Price for Free Trade Failure - Peter Mandelson, Telegraph
If it walks, quacks and ducks like a recession duck it is a RECESSION now: the current W-shaped double-dip recession may have started in Q4 of 2007 rather than Q1 of 2008</h1> PrintShare Delicious Digg Facebook reddit Technorati Nouriel Roubini | Jul 31, 2008 This forum has argued for a while that the US recession started in Q1 of 2008 and that this long and protracted U-shaped recession (lasting 12 to 18 months as opposed to the consensus for a short and shallow 6 months V-shaped recession) could turn into a double-dip recession because $100 billion of tax rebates would be a temporary drug that would boost consumption in Q2. Indeed, the figures published today – a 1.9% GDP growth in Q2 – confirm this W-shaped path.
More importantly the revisions of 2005-2008 GDP figures now show that the economic recession may have started in Q4 of 2007 – rather than Q1 of 2008 – as GDP contracted at the annualized rate of 0.2% in that quarter. While Q1 of 2008 was positive (+0.9%) it is clear that the economy was already into a recession in Q1. The reason why the recession started in Q4 of 2007 or – at the latest in Q1 of 2008 – are clear. Let me elaborate them…
More importantly the revisions of 2005-2008 GDP figures now show that the economic recession may have started in Q4 of 2007 – rather than Q1 of 2008 – as GDP contracted at the annualized rate of 0.2% in that quarter. While Q1 of 2008 was positive (+0.9%) it is clear that the economy was already into a recession in Q1. The reason why the recession started in Q4 of 2007 or – at the latest in Q1 of 2008 – are clear. Let me elaborate them…
This is a "lo-fi" version of our main content. To view the full version with more information, formatting and images, please click here.