IMF Group

Wall Street - Bail-Out or Buy-In

Well whatever way you cut it - this has to happen - or we will all find out what a depression is all about .. so I am still holding my breath.

A friend of mine from the USA – an extract of her email as follows:–

“yes the $700 Billion has caused a lot of malice, anger, frustration and it doesn't seem rational to have candidates pulling back as congress decides how to pull our economy out. To me I would rather want someone that wants to roll up their sleeves and get the job done....”

I would ask does such a person exist anymore - I mean that can pull up their sleeves and get the job done - certainly in the ranks of politicians who live in a rarefied air of Washington where its all about how it looks and not about how it actually is - sometimes I wonder if politicians will do anything unless their decision is first checked by a polling organisation.. I got to admit that the next blog I am writing won't make anyone too happy  - the congressman who are up for re-election are walking a thin line - of trying to work out what is good for the country and what is good for their own survival - I hope that err on the side of what is good for their country - Yes I know that 700 billion is not petty cash - (the Australian GDP is about 1,000 billion) -  it is almost as much as the Iraq War & Afghanistan see here http://zfacts.com/p/447.html- what I don't understand - is that the British tried to conquer Afghanistan with the valiant 600, the Russians did recently - they all failed - now why don't politicians learn from history? - and what about the fact that we all tried in Vietnam and failed - walk away with honour - and then put that money into Education, children (your future) Hospitals, Veterans Hospitals, roads and every other kind of infrastructure to rebuild America, and to pay of the debts.

I have this belief that all citizens of a country are akin to shareholders in a company - therefore it is essential that the country be run responsibly - that all efforts go to support our children and yourself via Education, Heath (free health - we almost have it in Australia) and to form a society where the benefits are shared to all people truly equally.

The age of greed is over - people just will not put up with it any more - I agree 100%.

I digress – Paul Newman - what a man - a man of honour who in my opinion did more to help the average person world wide than anyone I know of the modern age - he was a man an extraordinary man who never saw himself as anything more than ordinary. There but for the grace of God..

Tags: Bailout+or+buyin, Wall+Street+bailout

USA Financial Rescue Plan - bumps - and with more to come

The Administration in Washington are having difficulty in moving the Wall Street Financial rescue plan forward through the Senate.

Just an observation it seems to me that the ability to influence any decisions should be taken away from lobbyists –  and actually given back to the Government and the legislature.

There are several issues, lets have a look at them here..meanwhile markets are getting skittish and very volatile – will they won’t they – and when!!! 

• The plan is too wide ranging, as well it may take into account some assets that have no value
• There is no control over the salaries of the senior executives of the companies in trouble that have basically contributed to the problem – there should be severe controls over salaries, shares and bonuses whilst under the government bail out or under government ownership.
• It may be a blank cheque for further company structures which may be in trouble !
• Is the package constitutional?
• There are matters of trust here – the US Administration is trusting the people who generated the mess – that they will get it right this time. (with a blank cheque – could they really stuff it up? )
• It has no support for the victims of the Sub Prime disaster – the American people – some senior members of the Senate are pushing for support for the victims themselves – with additions to the bill for a way back for many of the home buyers. A clause actioned by a Judge to force the downward re-negotiation of loans that have defaulted, foreclosed or are likely to default –  this would also take the pressure of the current crisis, and the amount of money that the American people will need to pump into the rescue package.

Indicators of the feedback from the US Senate – are as follows: – Sen. Richard C. Shelby (Alabama), the ranking Republican on the Senate Banking Committee, have expressed concerns about the plan's cost, chance of success and possible unintended consequences. Such opposition could delay passage. "We are being asked to go 'all in' with taxpayer dollars, and once our government and the taxpayer is on the hook, there is no fall back option,"

Corporate, Board and CEO in general:

I believe there should be laws enacted or if they exist already they should be acted upon to control this cowboy-bend the rules until they break-win at all costs-no responsibility here mentality on Wall Street – but as usual such as act– would be windows dressing alone – and the real players would escape – or probably die of natural causes before they had to face up to a penalty.  How about confiscation of assets, not all of them – but say 50% of their assets.

See here the list of CEO Executive Pay Packages, for 2008– rated by efficiency, company name – package etc – Number 1 on the listed, the most efficient CEO is Jeffrey P Bezos of Amazon with a total package of USD$1.28 million (plus considerable share holding) to the highest paid executive which is Lawrence J Ellison at $192 million for 2008 – the efficiency rating here is 101.

For instance the Lehman Brothers Chairman and CEO Richard Fuld Jr. made $34 million in 2007. Lehman filed for Chapter 11 Bankruptcy protection earlier this month, others see here  – OK now lets not forget all of the others in a corporate structure that earn multiple millions – for instance the financial controllers.  The current senior corporate structure is and has been a self serving ride to increase Senior Executive income – at the expense of their employers, this even for those who perform poorly or in some cases incompetently.

New rules should be brought in or if they exist actually acted upon to ensure that bonuses are not paid for immoral and perhaps illegal accounting practises – that artificially increase the bottom line. Bonuses should only be paid for actual increases in income via product sales only (not asset sales though) – and it is just too easy to cut costs.  I had other thoughts that bonuses should be directed into retirement funds instead of being readily available – but I am still working on this thought.

It should be noted at this point that the U.S. Treasury Secretary, Henry Paulsen, one of the architects of this rescue plan is on a annual salary of $191,300 – I wonder if they have considered paying him a bonus – what would it be for a USD$700 Billion deal?

On the other side of the coin – Senior executives are always saying and doing everything they can to reduce other overhead, such as fixed costs including labour on the premise that if we were in outer Mongolia it would only cost us ‘x’ – but so why are we over paying employees in the USA x++++y – you know some of the Corporate Senior Executives aren’t too bright are they?

From the White house web site – we find this – President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted.  Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.  This has had signs going way back that have just been ignored, glossed over or spun away.

January, 2003 : Freddie Mac announces it has to restate financial results for the previous three years
October, 2003: Fannie Mae discloses $1.2 billion accounting error.

Then we read through the various entries – and it gets really busy from 2007 onwards – check this out at the www.whitehouse.gov web site

Back in February 2008 – President Bush put forward a budget which was slated to balance the budget by 2012 – see here  Some pertinent parts of the contents of this budget are as follows:–  to Promote and preserves the American dream of homeownership,  though education and assistance to combat fore closures and to maintain a stable, healthy housing market.   Enough said !!!

Tags: $700+billion+approval+with+Senate, CEO+executive+Pay, IS+this+constitutional

Sub-Prime - GlassSteagall Act

The GlassSteagall Act, a Depression-era measure was enacted to prevent cross-ownership of banking, securities and insurance companies. The original law was passed in the 1930s to constrain companies Congress deemed responsible for the 1929 stock market crash

Under the GlassSteagall Act (1933) , which separated commercial and investment banking, and also created the Federal Deposit Insurance Corporation, banks were prohibited from the underwriting of corporate debt and equity, one of the most profitable aspects of investment banking.

Prior to the repeal of the GlassSteagall Act (1933) Securities firms and insurance companies had long lobbied for a repeal of this Act, many Congresses have attempted to rescind the regulations. Banking organisations have opposed a rollback, however, arguing it would enable large financial institutions to squeeze smaller banks out of business.

A Vote in congress on May 29th, 1998 during the term of the Clinton Administration rescinded this bill – the vote was so close at 214 to 213 – see more information here and here .

So in a way, ten years later!!   I do know that it is not that simple – but if we were relying on self regulation and the ethics and honesty of organisations to restrain themselves – we really were in LaLa land.

Today on Wall Street:-

Goldman Sachs   (NYSE:GS), has won a respite from investor panic by transforming itself into a bank holding company. The change in status allows it (and Morgan Stanley below) to take advantage of different accounting rules, gives them more access to federal funds and buys it time to stabilise their funding base by acquiring deposits.

Morgan Stanley (NYSE: MS), one of Wall Street's biggest investment banks, received regulatory approval from the Federal Reserve to become a bank holding company — making it a commercial bank and allowing it to receive deposits. Morgan Stanley will also now be regulated by the Fed instead of the Securities and Exchange Commission.

Also Morgan Stanley will sell up to 20 percent of the company to Mitsubishi UFJ Financial Group Inc (Mitsubishi, which has $1.1 trillion in deposits, will be able to add one member to Morgan Stanley's board of directors) – the partnership would allow both banks to expand their global footprint and help Morgan Stanley transition to a commercial bank, John Mack, Morgan Stanley's chairman and chief executive, said in a statement. The deal also provides further financial support to help Morgan Stanley shore up its capital base during the ongoing credit crisis

As these are now banks – they are now under the control of the Federal Reserve and not as previous the United States Securities and Exchange Commission.

Tags: Morgan+Stanley+becomes+a+bank, Goldman+Sachs+becomes+a+bank, Mitsubishi+UFJ+invests+in+Morgan+Stanley

World Economy - Repair progress

I am pleased – no jubilant that there has been a concerted effort of behalf of the stock exchanges in the USA, the UK and Australia to outlaw short selling (in the short term anyway), this is a totally speculative process, there’s that word again – speculative – works that the seller who actually doesn’t own the shares banks on the shares sliding – they buy the shares back at a lower rate – return the shares to their owner and pocket the difference – see a full explanation here.

There was an immediate jump in value of shares such as Babcock & Brown, BHP Billiton and MacQuarie Bank – they all closed higher – it seems that we in Australia have our own brand of opportunist and cowboy, who only cares about themselves – God help us.  Short selling is acceptable in a strong and healthy market – but definitely not now.

Resource stocks were among the top performers with BHP Billiton surging 12.1%, or $4.30, to $39.70, and Rio Tinto jumped 9.3%, or $9.50, to $111.00– Apparently over A$50 billion dollars was re-invested in the stock market – but Guy and gals it ain’t over

Tags: World+economy, world+economy+repair

World Economy - a New beginning ?

Here we are at the cusp of a new beginning, going forward to a new way of doing business – the sunrise of ethical, fair and honest business practices? –  however until the sun does come up, we will have a lot of trials and tribulations to experience in the next 1–2 years possibly longer – subject of course to how competently this is handled.

By now if you have been reading my blog entries you would have discovered that I have a problem with how a word is used in the corporate word – “expedience” – to me this is the biggest bail out for ethical business practices – it demeans the goal and the organisations and the people within those organisations –  I say this as it leads to a win at all costs mind set – leading to business being carried out with no ethics, little honesty and a what we can get away with mentality – far from a win-win mentality.

Business has been living on hype, hot air and make believe in the corporate world for at least ten years probably longer, with no thought of where these practices were going, they were just riding the roller coaster and hanging on like hell, the ride is over guys and girls and life and reality, an oncoming MAC Truck has hit us all fairly in the face.

This gung ho, aggressive, winner take all approach to business that has been so defined by the players in the business world – are soon to discover, if they haven’t already, what it is like to be involved in irrevocable change, they have no control over – a change that doesn’t care about them as individuals – this huge correction is going to affect their dreams, deflate or completely obliterate their homes (perhaps too highly geared), their current investments as well as those for retirement / Superannuation, their bank accounts and their prospects for the future.

Do you think anyone will really trust the Financial / Banking sector again ?

Last Friday – the market was up, did you feel relieved, that things are going to get better – my suggestion would be to use this temporary hiatus in the market to reduce your exposure and cash out or go into blue chip stocks – personally I would just cash out – nothing is safe – (actually some are, relatively) safety is very much a relative term at the moment, the whole system is badly infected and will need to be reborn with a new structure and concept and then rebuilt, however this new structure may have little in common with the past.

My only suggestion so far as my perception of stable companies in the investment area is Charles Swabb – they have always seemed to have a conservative outlook on investments – so they may be a good port in this storm to seek some advice – (incidentally I have no interest in this company, and it is just my opinion). Mind you I would think that there are hopefully a number of realists in the market that could offer you specific advice for your personal or business position, but please find someone competent in light of the current and future financial climate.

The next roller coaster ride will probably be more personal, with the fallout in personal debt, credit cars and car finance, in the past you could perhaps reorganise your debt, into a lower interest loan by consolidating with your mortgage or other personal loan – this is going to be near impossible, as the banking system is incredibly sick and is not in a position to loan money. This is going to have a very detrimental effect on those companies that rely on cheap and easy credit, cheap energy and of course cheap oil –transport for instance. Further, these changes are going to reflect in the general economy with a marked changes in the availability of credit, lower job security and reduction in activity with a marked downturn in retail sales (this is happening now), travel, and in high end or capital goods such as cars as well of course in luxury goods.

Then we have on the horizon a test – Carbon Emissions Trading System, do we do the right thing and enact worldwide changes to the way we use energy and deal with emissions or do we take the easy way out and continue as before? – the reasons I say this as it will be an extra charge, a cost on not only countries but every business and person worldwide, unless you are on the proposed trip to Mars. It is going to exacerbate the hurt. Bite the bullet - lets start afresh.

In this race to reduce corporate leverage (I wish we could somehow slow this de-leverage process) – assets are going to be sold at fire sale prices just to cash out, assets  are going to deflate, there will be fewer buyers, and they will be looking for the best price – corporate capitalisation will be lowered as well as cash reserves, this will be exacerbated by their reduced stock exchange value due to low confidence, this will further reduce the effectiveness of corporations to respond to opportunities.

Dealing initially with the USA, their Government will activate the printing money press – this is going to devalue the US dollar, which you may not consider to have an effect, but it will – due to the long term effect of the flawed strategy to import food and energy.

Importing value added and manufactured products from overseas (in particular China and Asia) will become more expensive, for instance consumer goods, raw materials, but mainly energy and food (lets change the use of oil based plastics especially in packing).  There will come a tipping point (in the short-medium term) where citizens of countries will choose the local product to save costs, as it should be the cheaper product, as costs associated with importing products will have increased due to energy, transport costs, exchange rates – this will lead to a dramatic reduction in the number of imported goods over time.  The flow on effects to manufacturing economies worldwide in the medium term is going to be profound.  World Governments may do the absolutely wrong thing, by introducing import duties and excise – sprouting exceptional times – wake up guys – this is really false– you need to encourage trade – for your own industries – talk to your citizens, ask them what they think, what they need, you might be surprised.

The historical strategy of closing down essential and non-competitive manufacturing industries internal to a country that produced the essentials of life and living to me has always been a flawed strategy, I have previously touched on it before, the essentials of life and the support of your citizens should be the absolute priority of any countries administration, and at the forefront of their priorities.

But what are the essentials of life, I hear you say, clean water, good food, shelter, what we breathe – for now what about energy I hear you say – Yes I think so, as transport to and within countries which are geographically diverse, what else are the other essentials of life today – what do you think? Communications?

Defence – you have got me here – I would prefer none – but let's be real, we could reduce it – any reduction would seriously help our deficits that we have to finance – any specific incursions or invasion could be handled by a body such as the UN (with teeth) rapid response group – I would like all the world to be peaceful and altruistic – it would certainly be cheaper, but at the same time – its a dream – but I believe no armed forces are in the long term the only way forward. Again what we need here is an UN (with teeth) – no full time security council members for a start – fuly supported, not just put up with, that way we have a chance (only a chance though) of a fair decision with again some honesty, integrity and ethics in the process to negotiate any disagreement before it ends in conflict.

I have never liked the idea of importing basic essentials, such as food, and or energy – however those countries that were looking for the best price and not the best strategic alliance will pay for this as countries take advantage, for instance – this speaks to me of the former Soviet Union, however they might remember they are only in this position whilst they have someone to sell the energy to, if would be a opportune time for them to consider this point.

We are a world market – financially almost one, this already is a World problem, it is likely to become a worldwide disaster unless a single systematic approach for action is formed, considered and acted upon – I know that what I am asking for is not normally something I would expect from people let alone different countries all with their own agendas – but how about it Ladies and gentlemen – would you like to work together to form the basis of a new beginning, as Roosevelt said so long ago – a New deal, or a worldwide depression with tens of millions more disenfranchised, marginalised and penniless people, truly we cannot comprehend the full consequences that may result – perhaps even you may be one of the new poor – such a mass obliteration of wealth may result in perhaps a real blood and guts revolution.

This may in the long term mean the formation of a new economic unit – similar –  but certainly not such a behemoth and bureaucratic monster as the EU – but a common worldwide currency may be a good place to start. It may be time to start living in this world as a one financial community – with STRICT laws and unforgiving penalties for those cowboys of the future, as there will be those who will always try it on. I wouldn’t be surprised it there are organisations even now who are trying to carry on illegal or at least immoral practices – their time will come.

Finally if you are in business, change is here big time, your suppliers and customers are in or soon will be in a frantic, desperate attempt to stay liquid and of of course solvent – you must respond to the current business climate, as it deteriorates and changes so rapidly, trust and confidence are falling, margins will be eroded. How about thinking about a future where you run your company along ethical and honest lines with a win-win mentality – you will survive - all other things being equal.

Don't even get me started on these programs that are using agricultural fields to grow corn and other cereal crops for Bio-Fuels. This has two direct results, firstly increasing the price of food essentials and secondly perpetuating a technology that we know is old and will soon be dead, why not invest in new technologies and speed up their development and roll out.

Technorati Tags: after subprime the future after sub prime

Sub Prime - where we are we now and how do we move forward..

I had a similar entry yesterday – but it didn’t do it for me – so lets have another look at it.

The Sub-Prime is not the cause of this world wide financial disaster – the originators of the CDO’s are responsible. We are in a mess – we feel out of our depth, big time, in a deep dark place. Some are feeling anxious, panic and hopefully, some are feeling regret (though I doubt it) for past actions which has amounted to gambling by playing roulette with the whole World’s economy and loosing. We think there is no way out..but there is – well I think there is.

Here is what I am going to suggest:-

1. All of these problems keep on coming back to what is called the Sub Prime paper – but is really a collateralized debt obligations (CDOs) which are an unregulated type of asset-backed security and structured credit product.  See here for a full and complete definition of these types of “investments” We will come back to this.
   
   To stop the rot – what we need to do is somehow isolate these CDO’s which is particular are related to the Sub-Prime Mortgage markets, but also can apply to other risky paper.
   
   Perhaps the Central Banks in each country can transfer these CDO’s and other of the same ilk into a trust perhaps – in isolation from the mainstream financial market – the “owners” of these CDO’s would then be compensated with a cash equivalent – of their value at the time of entry into the trust – we are of course assuming here that these CDO’s do have a cash vale – some of course may been to be written off in total.
   
   In the future, how these CDO’s are transferred back to the original owners has it issues – after all who would want them back, nevertheless there has to be a process to value or even combining several into one to give the current market value at the time of their return – if of course they have a value.
2. Large sums of cash in the area of trillions of dollars over time will need to be injected into the markets by their various Central Banks to imporve liquidty.
3. To ensure various companies long term viability – they will need to be re–capitalised, this may need to be a medium term goal, because essentially we know that these funds will need to come from the market – and their may be considerable reticence to do this in the short term – perhaps companies that are viable and need funds could be injected by the Central Banks with the necessary equity. When market confidence has returned which maybe a long term goal, these funds that were provided by the Central Banks could then be repaid, by the stock market. The good thing is that at this time – the company (assuming it is still in business) would have a track record of profitability – which would add credibility and hence for the limited market recapitalisation of these companies into the wider stock market. I am here assuming we will have one –  I think we will – this has been a huge wakeup call – and at least for the next ten to twenty years of so, in may engender some amount of care and responsibility about the deals that are done.
4. China – has to be involved in the “repair and rebuilding” process – they have as much, actually ,considerably more to lose than anyone country – the result of the huge trade surplus is a lot of cash, Treasury bonds, companies and other hard and soft assets to protect – they also are relatively uninjured so far in the world wide process. They maybe able to help in other ways.  The only other county that could help, a former major driving force in the Pacific is currently having its own problems and I don’t believe that they will be able to help – I am obviously speaking of Japan here.
5. We need a systematic program to fight this disease in the financial system, we have identified the cause – so as in (1) above lets nullify the effects by withdrawing this “virus, cancer – whatever” from the body of the worlds financial system, The current actions – appear like we are all running around “putting out bush fires” – a bit here a bit there. Hence my suggestion is that we – sorry not me – the powers across World finance system – broker the best way for a World wide expedited and “prompt” response to this situation. Put aside your agendas, your egos and other negative feelings and work together to come up with a systematic response to this situation – please.
   
   Whatever is the outcome – the effect will be that billions of dollars will be lost and written off the assets not only of countries, companies, but the most important what this does to the perception around the world of the mystery of the Worlds Financial Markets – this will affect the finances of ten of millions of families around the world impinging on the hopes and dreams, their children’s education, their homes and retirement nest eggs.  I am sure that time will help us move on – however I can never see the hysteria and hype that we have seen in the last few years occur again – as I hope that there will be some kind of improved regulatory framework in place including legislations to make companies, employees or individuals accountable for any actions of any dubious nature in the future. I am sure that there will be changes in laws from the SCC, Treasury, Stock Markets and the Central Banks about how business will be done in the future, particularly in the areas for banking especially regarding increases in the reserves that will be necessary to be kept with the Central Banks, the Rating services, and accountability for these cowboys.  So these news laws should be laid down under the legislations name of the WILD WEST IS DEAD .. Gambling is illegal with our money
   
   Whatever the short to mid term outcome is – one thing is for sure that this financial disaster that has been created by corporate greed and therefore originally by someone – perhaps someone who’s payment package was all about a small retainer and large amount of bonus or performance income – we need to re-look at this and frankly I will be thinking about it over the weekend.
   
   When this is over and so long as no one panics – with some level of political honesty and collaboration across party lines, but most of all political competency in the rebuilding process – we have a chance.  However the USA will loose probably trillions of dollars – and with this crippling ongoing war the recovery will be further delayed – however at least with Iraq, the USA is looking as though it might be soon placed for a honourable withdrawal, retreat (call it what you like) – the healing process can then begin in earnest.
   
   I believe America can come back from this – it has the energy in its people and so long as it has the political will, support and most of all competency it will recover , to again return leaner, stronger, wiser and a more accountable player in the financial world.

  

Tags: Sub+Prime+Fix, Fix+Sub+Prime, SUb+Prime+move+forward

Sub-Prime - Solution an Observation

The thought has occurred to me, that perhaps this is the end of free enterprise as we know it.

The reason is if you think about it, all the money that has been poured into the free enterprise companies by the US Treasury and the US federal Reserve, taking them in effect into public ownership, when the Enterprise of Capitalism has always resisted this.  One obvious point here is the dramatic increase in Public debt that our great grandchildren will be paying for.

At sometime in the future these companies now owned by the US Government will be re-listed for transfer back to Private ownership – however I think that we may be past this – the private enterprise as we know it is dead – the wild west in now officially dead – companies need to have much stricter report rules both to the Government, the SCC and the Federal Reserve  – Banks (and all financial companies – that deal with public or private monies ) need to have much tighter financial controls – and higher funds that have to be lodged with the Federal Reserve.

With the absolute destruction (where stocks have fallen sometimes over 50–60%) of the stock exchanges set up by the newly emerging capitalist economies such as China and the former Soviet Union. These countries are in the transition from full public ownership to private enterprise.

America, the epitome of Capitalism – is going the other way.  In these cases it is all they can do – they cannot afford to have the companies of this importance go belly up.

I only hope that the US Administration and the two Presidential hopefuls – read history books and take the lessons on board – I hope that there is no temptation to follow the bad lessons of the depression, when America became isolationist and increased taxes – you cannot do this – America has to trade her way out of this – and to give the citizens a chance to have a life – a tax reduction with added tax benefits to save and reduce personal and private company debt is the way to go.

Now Detroit is standing in line for another loan – perhaps – but how long will it be before we see a dramatic correction here, with the failure of one of them, or perhaps the consolidation of the US car companies into one major company that can grow and remain strong.

Good news about Merryl Lynch, much better than the recent reporting by Goldman Sacs.

I think however we are still going into the storm, rather than coming out.

Tags: Capitalism+to+Socialism, End+of+enterprise, the+end+of+the+Epitomy+of+capitalism

AIG, Lehman Bros and Mogan Stanley ...

It seems that the bigger you are the better – with AIG – you are dealing with a critical part of the world financial infrastructure.

AIG has over 70 million customers in over 100 countries with 116,000 employees (2007) with assets in excess of a trillion dollars – that is impressive – but that is not the key to the reason why they must survive – the company insures bank loans worldwide, as well as risks on all sorts of hard and soft assets,  it insures deals and investments across the globe - would have a far greater impact on financial markets than Lehman's collapse.

If the company were to fail, many banks and investment funds in the US and worldwide world would lose their insurance cover at a time when defaults on payments are likely to rise.

The bail out of some USD$85 billion dollars – which will take control of 80% of the share holding into the Public ownership, is not a small purchase, however the Federal Reserve has initiated the buy out and will take control of 80% of the company, will also most likely remove its management, in a similar fashion to the way it took control of mortgage giants Fannie Mae and Freddie Mac which were crippled by the US housing crisis.

Due to the market slump, AIG was badly affected by the collapse of the US housing market, owing to the underwriting payments it was forced to make when customers defaulted on their loans.

Lehman Brothers

It has been released that Barclays Bank (UK) has said that it had reached a deal to buy Lehman's US investment banking and capital markets businesses.  This well timed purchase will cost Barclays some USD$250 million – but still has to be approved by the US Bankruptcy court. If approved this will make Barclays the third biggest investment bank in the US. 

Barclays have also confirmed that subject to approval they will also purchase Lehman's New York headquarters, as well as its two data centres in New Jersey for $1.5bn.

Morgan Stanley

Morgan Stanley confounded critics last night by releasing a forecast-beating third-quarter results designed to fiercely combat suggestions that its independence may be in jeopardy, the investment bank, which had been due to unveil its results later today, reported a profit of USD$1.43bn for the three months to August - 2.8pc down on the same period last year, but beating analysts' expectations by 69pc.

Chairman and chief executive John Mack stressed that the results had been achieved "despite unprecedented market conditions" and said that the bank had continued to reduce its legacy positions and carefully manage its risk, capital and liquidity.  Shares in Morgan Stanley, rose almost 9pc in extended trading after Wall Street had closed for the day.

Worldwide Fallout

The Bank of England and the Bank of Japan have also injected almost USD$40 billion and almost USD$25 billion respectively into the money markets.  The Australian Reserve bank has injected over AUD$4 billion into the local market – the reason for this response in these and other markets is to alleviate and hopefully lessen the inter bank rate – that rate at which Banks lend money to each other – this money release is something that they has been happening worldwide on a on-going basis since the start of this total loss of confidence – called the credit crunch.

Some observations – if you think about the money side – much of the money that has been printed in the last 10 years has ended up in the pockets of the top 5% and it is now that money that is being destroyed – but what about those investors who aren’t the top 5% – what about the normal Mr & Mrs America who were relying on these investments perhaps for their retirement?

Australia - Babcock & Brown & Macquarie

The downgrading of Babcock and Brown by S&P as there is talk of the possibility that B&B may default.

This whole business model relying on cheap debt is no longer viable – difficulties surround the Macquarie Business model as well.  The era of these types of business models is no longer sustainable.

Conclusion:

This whole mess has dealt an irrevocable blow to the old boys club – all of the banks and institutions KNOW that their own books are in a mess so they rightly assume everyone else's is as well – which means that nobody can or will deal.  Confidence and trust is what we are dealing with here – and only time can see this grow back.

 

Technorati Tags: Morgan Stanley,Lehman Bros,Barclays,AIG Bail Out

Sub-Prime - the Dominos are falling and ...

So now more large corporations are going to the wall – the effects of this worthless Sub Prime paper is now in full swing in the USA, as well as other banks and financial institutions around the world.

Lehman Brothers investment bank are seeking Bankruptcy protection, and as a result some 23,000 employees are out of work, and most of them will lose their homes, and their other assets as well, but there may be hope for Lehman brothers or at least parts of it as Treasury and Federal Reserve officials are working on a sale of Lehman Brothers Holdings Inc., the 158-year-old investment bank that reported a third-quarter loss of $3.9 billion. U.S. Treasury Secretary Henry Paulson, who lead a government takeover of the mortgage giants Fannie Mae and Freddie Mac last weekend, has said he's reluctant to use Federal funds to rescue Lehman.

Greenspan said – “``What they are trying to do with Lehman is find a way in which there is no government money involved in this particular set of negotiations,' –  ``If they can't, they have to make a very key decision as to whether they allow it to liquidate or support it,' he said, adding that he doesn't know enough details to recommend the right move.

Another huge shakedown in the form of Merrill Lynch –  here from the press release on the Merryl Lynch website – here is the part thereof.. However in the new form as part of Bank of America, at the very least – it will remain viable part even after the sale at at a knock down – fire sale price – this really may look like the end, but its not – its only what is immediately visible.  Then of course will come the inevitable rationalisations of branches, staff, computer & IT and …..

Bank of America expects to achieve $7 billion in pre-tax expense savings, fully realized by 2012. The acquisition is expected to be adding to growth & earnings by 2010.

The transaction is expected to close in the first quarter of 2009. It has been approved by directors of both companies and is subject to shareholder votes at both companies and standard regulatory approvals.  The combined company would have leadership positions in retail brokerage and wealth management. By adding Merrill Lynch’s more than 16,000 financial advisers, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and $2.5 trillion in client assets.

However did you note the part about they want to achieve $7 Billion in pre-tax expense saving .. more rationalisation, and more jobs lost .. another victim of mainly Sub-Prime.

What caused the fall of Merrill Lynch – perhaps this list of the 101 dumbest moments:–    In the first quarter of 2007, thanks to its $1.3 billion purchase of First Franklin Financial, Merrill Lynch becomes the world's top underwriter of sub-prime-mortgage-backed securities. Nonetheless, with the market in meltdown just a few months later, Merrill CFO Jeffrey Edwards (pictured) tells analysts that the firm's sub-prime exposure is "limited, contained, and appropriately marked." In October, Merrill announces a quarterly loss of $2.24 billion after $7.9 billion in sub-prime-related write-downs.

The next big problem area maybe in Insurance industry – and any other company that is directly involved with the finance markets, the stock markets, rating agencies, and more banks and of course their customers.  Others likely to be at risk in the very short term in the USA will be AIG (American Insurance) the worlds largest insurer and Internationally CBD – the German CommerzBank – which seems to be a well managed institution, which however did become involved with the Sub Prime – as well due to its recent purchase of the Dresdner Bank, an investment it made recently, will correct over time – with the proposed slashing of 9,000 jobs from the Investment Banking group Dresdner Kleinwort.

The flow on effect of this ever world wide tightening of confidence – and hence credit not only between banks  and other financial institutions – but between banks and their clients – do remember than clients come in all shapes and sizes – from citizens to corporations to Governments themselves.  I suppose Governments can always print more money – which of course isn’t too good for the value of the money itself and can be very detrimental when it comes to using our currency to buy other currencies – thereby affecting the balance of trade.

Throughout history, governments have tried to solve financial problems by simply printing more money, akin to what the USA is doing now in a small way (any thoughts as to why the US Dollar is at such a low level – still) . This can drive the value of money drastically downward, especially in modern markets where money is not backed by gold. Twice as many dollars in an economy makes those dollars worth half as much. So I would ask the Federal Reserve to perhaps call Greenspan – if you need any education as to the effect on money supply on inflation.  Greenspan does have some comments – here in a Bloomberg report – saying that he believed it to be a once in a 100 year event.

There are other flow on effects from the death or severe contraction of large corporations (1) What happens when all of those big tenants vanish from the building they occupy – obviously lenders will then get another round of failures on top of the failures of the financial institutions themselves as well as all of those former highly paid people from those expired organisations dumping their own real estate , cars, shares, securities on the market in bulk – what do you think this will do to the prices of these former assets – the golden rule – Scarcity has a direct relationship to value – if all of these assets become available at once – the prices they realise will be fire sale and hence we then lead onto the next chain – the financiers for these former employees.

Tomorrow is 'D Day" for one of the two Monsters of the Merchant Banks that are left in New York - with the release of Morgan Stanley's 3rd Quarter figures - it will give an indicator of whether the financial services sector will survive as we know it, in any shape to go forward.

Of course there are real hardship issues here – not everyone has been laying a golden egg – many were just getting by, month to month – as a result of this highly leveraged consumerist society – they will experience real hardship in the short term until they can be obtain employment.

I can only wish them all good luck for the future..

 

The World, the Economy and Deflation

Recently I was involved in the purchase of a house. Due to the inordinate time involved in the completion of the house the value of the house dropped over $140,000 – due basically to our good friend the sub-prime which has led as well to the tightening of monetary policy in the banks.  Whilst for me this might be to my advantage – I had the further thought that this may not be the end of it, what's to say that it’s not going to deteriorate further.

For some years I have considered that we are walking on the edge of an abyss – although generally the population at a whole cannot conceive of a negative outcome – I consider that we are in line for a correction, a somewhat dramatic one.  I believe we are in the early stages of it as I write.

In Australia this current result of the sub-prime – the credit crunch has had effects on Merchant Banks, Developers and even large scale industrial organisations such as Gunns – as well as the tightening of monetary policy in the Big 4 and other lesser banking and mortgage lenders.

In the USA it is not uncommon that due to the total lack of capital gain on properties – as well as rampant deflation on the achievable sell prices of these houses – many owners are in the position where they in fact have no equity in these properties – whilst so long as they have a income or a job this is may not be a critical issue – it becomes an issue as soon as they do not have the means to pay for the mortgage, if in fact they do not have equity – then if they are fortunate enough to sell the property – they may end up owing the mortgage provider funds when their house settles.

Hence when you think about this – it is as if the Sub Prime fiasco has become some kind of contagious virus now infecting the status quo – normal Prime mortgages as well – then progressing world wide. The fault and the wonder is that everything is connected which is good, because everything is anyway, but in this instance it is too connected.

This of course has on going effects to financial institutions where this now non existent equity cannot be called upon for those people who are silly enough to put their house as security for their investments, the companies and the optimistic but totally unrealistic position that this current position is just an aberration – sorry guys its not.

One expected outcome of the liquidity crunch is the availability of and the cost of normal operating funds for business in general.

Unfortunately in the USA the Federal Reserve in the USA is not helping – not leading – not doing much at all except making the situation worse – All they seem to be able to do – is either reduce the interest rate or print money – whilst I know that this is one of their primary function, its not going to fix America.

Lets look at history shall we. What did the America do last time when they were in a similar situation – in the 1930’s they built infrastructure – roads, bridges, dams  etc. – Currently though there is no strategy here, again no economic or long term strategy that isn’t tied up with the war in Iraq – the politicians who are supposed to lead the country aren’t talking to the Treasury, the market, and the Federal reserve concerning what would be the strategy for the future. Its all about the war. What if they placed that money into education, energy or medical research or one of the premier problems in the USA – health cover.

Whilst the optimism in the foreign exchange markets (and the perception of vulnerabilities in the mineral exporters) to the USA the strengthening of the US Dollar is nice (at last its worth something)  – unless there is a positive outcome in the US Presidential elections – with a party that has a plan to stimulate the economy and not just the will to print more money. This is a critical time for the USA and the connected financial world – I am afraid that the future of America is doomed for at least another four years, depending on their response – perhaps considerably more. 

It seems that too much of the fan fare on both sides of the political divide is all about how it looks rather than how it is.  Much of the problems are about political games and debts in Washington and not about the future of the country.  For instance – special interest groups, whilst I understand that the religious right in America has every right to be concerned about what is important to them – in their focused and narrow view of America’s place in the world – they need to wake up to the fact that America is not owed anything – God is not on their side, and they are not right much of the time, and like many empires that have gone before –  there may come a time that its influence with fade into insignificance unless they start managing the economy and not being so concerned about how it looks rather, and thereby absolutely ignoring reality. For a supposedly secular state – the prospect of religion and the far right is a bad influence on the politics of the American Union – America talks about religious states such as Iran, etc – but they are appearing to be the same – except to the far right in some areas of the Union – which astounds me. Too many decisions are being made from the point of expedience rather than what is right for America – expedience is never the course to take – as expedience lessens and depreciates the honour and integrity of the goal. Too much testosterone, hate, acrimony and the lack of communication is involved here.

Whilst for instance this ridiculous idea of creationist dogma is something that only the Americans could think up – they are looking very much like children – you know if I don’t get my way – I shall leave and go and play with my toys elsewhere.  Grow up!

Speaking of children – this whole never ending subject of abortion whilst it is extremely important – it should be the ultimate decision of the mother – not some court – not some legislator and definitely not the religious right – America is supposed to be the ‘Land of the free’ – not the Land of the free – if you agree with me.  The idea that they have killed Doctors and other medical staff – Gosh I just cannot understand – talk about home grown terrorism. Isn’t murder against the Law, Ten Commandments and the common good.  This act of abortion is as I said a decision for the mother alone – the far right talks about the child is viable and has rights – yes this is true but the mother has rights as well – if the mother does not want the child that may have come about via assault or rape, or cannot provide for it – how can she be made to go full term? Who looks after the baby – does the state - do the far right ? No they talk the talk but unfortunately that's all it is.

The former Soviet Union with their invasion and occupation of Georgia is playing politics verging on brinkmanship, it is a test which the US and Europe have failed.  The US will get little support from the European Union on this as the European Union has placed itself, strategically in a extremely vulnerable position due to the energy supply from the former Soviet union – who’s dumb idea was this ????  We are in for a rough ride – whilst Moscow sows its oats and flees its new found muscles.

I believe that this Sub-Prime situation will have serious rebounding around the world for years to come – as the assets and access to cash are closed or at the very least minimised – this as you know will have roll on effects in the general business community – the general economies and of course in the banks whose willingness to lend money has been severely curtailed – now I know all about this Fractional Lending criteria – but if a bank won’t lend the money to anyone and it still has to pay its depositors – what is its future? We have seen the impact of the current liquidity crisis in the Macquarie Group (more to come), Centro, B&B, Gunns etc ..I don’t think that it will decay all the way into anarchy however I seriously believe that we are in for a huge correction – and unfortunately the Australian Government – as with all governments are all about how it looks and not how it is – mind you the ability of a single government’s ability to handle what is coming may be beyond any single government’s ability or resources.

This idea of the World economy is basically flawed when dealing is strategic areas – for example in areas such as food, energy – (although essential for developing economies with the dictum “lets teach them fish”) whilst trading with countries for the produce whether it be primary, commodities or manufactured and of course in many cases financial – which mostly do not create any true wealth as the money bounces around the world. Anyway getting back to my point – the idea of off loading ones responsibilities to feed, clothe and heat one citizens to some outside source or country – is a very altruistic dream – it is La-La land..the one thing you are banking on (literally) is that your partner in all of these transactions is a honourable entity or country. Not a bright idea – especially for one case in point the former Soviet Union and its sabre rattling and brinkmanship – and with its ambitions to be a world player again (who cares)– so we may soon have another cold war literally as Russia uses energy as it's weapon of war, in a flawed policy to redefine its identity in the world, a sad reflection of the delusions of the people in Moscow – mainly of course Putin to play on the world stage, the Soviets, again rising perhaps as the harbinger of doom.

I think we are in for a revolution of sorts – where the purpose of life and living it will markedly change – in the short / medium term, yes this will have serious effects on the current structure of business and society – but I don’t think it will decay all of the way into anarchy. In a way – the focus of the individual is about survival – much like it was in the beginning of time – except the tools have changed – instead of going out hunting for animals and the gathering of berries etc – we use money as our terms of trade – the value of which has been so degraded that we are now in the beginnings of serious cost inflation, along with a downside of a serious asset deflation.

In a way the asset deflation will be a good thing perhaps for the next generation. It will take all of the heat out of the property market and should (assuming a similar structure – which I know we can’t) allow a lot more people to buy a property – however – with what I don’t know.

However looking back on history – the only thing that I really know is that history keeps repeating itself – we seem condemned by politicians and expedience of people in power to keep repeating our mistakes again and again.

What we need is a true World Government – a friend of mine is talking to me about sociocracy – where all members have a equal say – perhaps once I have had a chance to look at this in detail it might be the way to go..well after all democracy, Totalitarianism, monarchy, dictatorships and communism don’t seem to be for the good of all men and woman on the planet.

We need to find a alternative that works, how about as money is the root of all evil, we get rid of money all together – but what next – ideas anyone..

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