Really scary picture
Calculated Risk did a graph of stock indices during the most severe market meltdowns since 1929:
My only complaint with the picture is that the stock market does not equal the economy.
Category: Finance
Senator Harkin To Introduce Bill to Force Derivatives Onto Regulated Exchanges
I think that it’s a good idea, because the markets need transparency:
Senate Agriculture Committee Chairman Tom Harkin plans to introduce a bill Thursday that would force all over-the-counter derivatives, including credit-default swaps, onto regulated futures exchanges.
The problem for some folks, like hedge funds and former Lehman employees is that this will shut their business model down, because it is predicated on secrecy.
It’s not a problem for me, though. Just shut it down, and the stuff that continues, let a Commodity Futures Trading Commission with serious teeth aggressively enforce this.
Any business model that is predicated on information asymmetry and secrecy is dishonest at its foundations, and should be restricted.
Future 3rd World Nations
First, we have the now neutered Celtic Tiger, Ireland, which is one of the biggest economies of Europe, with:
- Farmers unable to sell produce because of collapsing prices.
- Potential public strikes in the public services.
- Bank of Ireland shares cheaper than toilet paper.
- Rumors that their ATM system will be shutting down.
Meanwhile, the Irish government is in the midst working out the finer points of an enormous bank rescue plan, and Irish lenders are now requiring 20% down for mortgages.
You know, if you had done that last one 3-5 years ago, you would not be up the creek now.
In the mean time, Iceland just got a $10.2 billion bailout loan from the IMF, Scandinavian countries, and the UK.
The money goes primarily to the Icelandic deposit guarantee agency, their version of the IMF, so most of the money is going right back to foreigners from the countries who made the loan, but the Iclandic people will be left with the debt, by my calculations about $34 thousand for every man, woman and child on the island.
Welcome to the third world.
And while we’re at it, scroll down on this article, and note that Turkey is going to get screwed again by world financial markets, even though they paid off their debts a few years back, and have been doing everything right.
The lesson here is that if you play by the WTO rules of international trade, you will never be allowed to come out of debt and control your own destiny.
Hank Paulson, Go Cheney Yourself
So now Secretary of the Treasury Hank Paulson is warning that the financial meltdown might create too restrictive a regulatory environment for financial companies:
Treasury Secretary Henry Paulson called the financial crisis now plaguing the world economy a “once or twice” in a 100 years event, even as he warned Thursday against imposing too-strict regulations to prevent a repeat calamity.
The translation for this is, “I made my money because the SEC and the CFTC were muzzled, so I could use deception and extortion to get money out of the average working Joe’s pocket, and this should not change, because I have relatives.”
Paulson is an idiot. While the financial crisis we’re having right now mirrors the stock market crash in 1928, almost 80 years ago, the fact is that these fiscal implosions have gotten more common as we have backed off regulation, and before 19289, they happened every decade or so.
The reason that nothing has happened in the past 80 years is because of the regulations you dispise, and the reason that it is happening now is because of the slow deregulatory movements from about 1975-2001, and the rush to deregulate since then.
Economics Update
Well, the obvious lede is the unemployment numbers, with the weekly new unemployment claims, which are a very noisy metric, and continuing claims, which are not, beinb positively ghastly.
Weekly numbers rose to 542,000, whichn is the highest since mid 1992, and well above the estimate of 502,000 and continuing unemployment claims hit 4,012,000, up 109,000, the highest level since 1982.
Therefore, it is no surprise that the index of leading economic indicators fell in October, as die the Philadelphia Federal Reserve’s business activity index, to an 18 year low, and the Architecture Billings Index, an indicator of future construction activity, fell to an all time low.
Meanwhile in the bond market, so many people are fleeing to US treasuries that rates have been driven to historic, and near historic lows, while the costs of insuring private bonds has returned to the stratosphere.
For what it’s worth, we have some good news for a bond insurer, specifically Ambac, which has managed to negotiate a cancellation of $3.5 billion in insurance contracts, which is obviously a serious reduction in liabilities.
In energy, oil briefly fell under $50/bbl, and retail gasoline prices seem to be heading below $2/gallon.
In currency, the dollar is mixed.
Not Enough Bullets
This time, it’s longtime CEO and founder of South Financial Group, who moved up his retirement date to preserve an $18 million dollar severance:
Meanwhile, corporate governance analyst Hodgson said that Whittle’s deal — nominally a retirement, but treated as a severance — is all too typical of golden parachutes: “If you and I decided to retire, we might get what’s left of our 401(k). But for some reason the rules seem to be different for executives. They get severance even though they’re retiring. There’s no logic to it at all.”
These guys need to be tattooed with verses insulting Mohammad, and parachuted into a Taliban camp.
Too Much Schoolhouse Rock in the 1970s
A very shallow explanation of bonds, done in the style of Schoolhouse Rock.
Not Enough Bullets, Even if It’s Just AIG to Deal With
Yep, an additional $3 million to fired executives at the failed insurance giant.
The they will give the Sirius Cybernetics Corp marketing division a run for their money in the, “first up against the wall when the revolution comes,” sweepstakes.
Economics Update
Well, it looks like the deflationary trap may be here, with the CPI down 1% last month, and core CPI falling 0.1%, the first drop since 1982.
The fact that housing starts and requests for building permits are falling off reinforces the idea that we are heading towards a major downturn.
Of course, it’s not just residential real estate. We are now seeing that mortgage backed securities for commercial properties are seeing increasing insurance costs and delinquencies.
In the larger world of the credit crunch, Calculated Risk’s Credit Crisis Indicators are largely unchanged.
BTW, S&P has downgraded monoliner bond insurer Ambac again.
In energy, oil fell again, on high inventory reports.
In currency, the dollar fell in response to continued news of a recession.
Let’s see…Anything else??? Oh…Yeah, the Dow closed below 8,000 for the first time in 5 years, 7,997.28.
Sometimes, Good Legislation Comes Back Too
In this case, a change to bankruptcy laws that would allow judges to modify mortgages on primary residences.
Right now it can be done on a vacation home, recreational boat, etc., but not on a primary residence, but Senator Dick Durbin (D-IL) is bringing back a change in bankruptcy law to change this.
According to reports, this will be a priority of Obama, but we are hearing that about a lot of things right now.
This is a very good law for a number of reasons:
- Modifying mortgages is cheaper than foreclosure.
- With mortgages sliced and diced 6 ways from Sunday, it is currently impossible to get consent from the holders of the mortgages to renegotiate the loans.
- It punishes the players who created the bubble.
- The cost to people taking out mortgages is minuscule, on the order of 25-75 basis points (¼-¾%), which should not make a significant difference in home affordability.
- It makes the use of arcane financial instruments on home mortgages less certain, and hence less likely.
Isn’t This Like Paying Off One Credit Card with Another?
So, the Treasury is unwinding a roughly $550 billion temporary T-bill program it set up to finance the Federal Reserve’s sh$#pile for cash program, so that people will buy longer term Treasuries to fund the larger bailout.
Iceland: Payback’s a Bitch
Well, in response to being declared a terrorist nation by they UK, and by the IMF attempting to impose draconian conditions on it, Iceland’s President Olafur Ragnar Grimsson has invited Russia to use the old US Air Force base at Keflavik.
The US closed the base in 2006, so certainly the space is available, and the Russians could pay in cash, though the Russian ambassador was as flummoxed as the rest of the people at the diplomatic luncheon.
As to where this will end up, I tend to think that between the gentle ministrations of Gordon Brown and the International Monetary Fund, there is a pretty good chance that the Russians will end up with both Keflavik and a naval basing agreement.
Un-Dirtyword-Believable
It looks like the Dutch insurance company Aegon is looking to buy a small US thrift so that they can score some TARP Money from Hank Paulson and His Evil Minions&trade.
They really don’t need it, but since it is being given away for free, they consider the purchase of a thrift, most likely Suburban Federal Savings Bank headquartered in Maryland.
Companies are doing backflips to get into this program, which is a good indicator that it is too generous.
Paulson is doing the US taxpayer like a 2 dollar whore.
The FDIC is Guaranteeing What???
It looks like the FDIC will be guaranteeing store gift cards, according to their most recent release
- The new General Counsel’s Opinion No. 8 addresses the issue of whether the funds underlying stored value cards and other nontraditional access mechanisms qualify as “deposits” as defined in the Federal Deposit Insurance Act.
- Under the new opinion, the funds will be “deposits” to the extent that the funds have been placed at an insured depository institution. Consequently, the funds will be subject to assessments. Also, the funds will be insured (up to the insurance limit).
- In applying the insurance limit to a pooled custodial account, the FDIC will recognize the holders of the stored value cards (or other access mechanisms) as the owners of the deposits if the FDIC’s standard requirements for “pass-through” insurance coverage have been satisfied. Otherwise, the card distributor or other named accountholder will be recognized as the owner.
- The treatment of the funds underlying stored value products does not differ from the treatment set forth in the FDIC’s proposed rule published in August of 2005 (see FIL-83-2005 at http://www.fdic.gov/news/news/financial/2005/fil8305.html).
Let me be the first to say that this is fracking nuts.
This Will Only Hurt a Bit, Now Bend Over
Well, it looks like public pressure is working, because that’s about the only reason that the seven top executives at Goldman Sachs would send a memo to the board of directors asking for no bonuses this year.
Hopefully, this will spread across the industry.
It’s also happening in Europe, where UBS will not pay bonuses to top staff in 2008.
In fact, it’s going further, to change the incentives for a quick buck:
Starting from 2009, top managers’ bonuses will be blocked for at least three years instead of being paid immediately and executives will receive variable pay if UBS results warrant.
Which means that the quest for a quick buck for a quick bonus has just become more difficult.
Paulson Won’t Ask For the Second $350B
There is only 10 weeks left in the (mis)rule of Bush and Paulson and their Evil Minions™, and now they are saying that they do not want the 2nd half of the bailout package.
So Obama, and whoever is his SecTreas will get to make the decision on that chunk of change.
I can’t figure this one out. They are passing up an opportunity to reward friends, and to fiscally constrain the incoming administration.
My guess is that given the incompetence, opacity, and general corruption of Paulson, he realizes that the Congress will attach strings to the second half that will get his ass thrown in jail over what he did with the first $350 billion.
Economics Update
Well, in a case of stating the blatantly obvious, the Philadelphia Fed;s Survey of Professional Forecasters says that we are in a recession, and have been since Spring, though the Conference Board has not yet chimed in on this, so it’s not yet “official”.
In any case, Japan is officially in recession. I guess that they have better record keeping than we do.
In the mean time Calculated Risk’s Credit Crisis Indicator interest rate metrics are basically unchanged.
We also have some mixed numbers in industry, with post hurricane industrial production, but the New York Fed’s Empire State index of hitting its lowest level ever.
In the UK, they are seeing an explosion in jingle mail, where mortgage holders mail their keys back to the bank, either figuratively or literally.
In the US, pending sales are down from September to October, but up against last October, which Barry Ritholtz catches, it’s really a net up, who wants to buy a house in October, but the National Association of Realtors does not get.
In currency, then dollar is down on recession worries, though my guess is also that the G20 meeting being hosted by a drooling idiot did not help.
In energy, oil is at a 21-month low, and retail gasoline prices fell for 61st straight day, which does not surprise me, as I filled up for $1.979/gallon yesterday.
Not Enough Bullets: AIG, the Gift That Keeps on Giving Edition
AIG is paying $503 million in deferred compensation to its top employees, because it needs to, “keep valuable workers from exiting the troubled insurance giant.”
Let’s see, the company in bankrupt. It’s sucked up hundreds of billions of dollars from the federal government, and it still needs more.
Could someone please explain to me how getting a company this deep in a hole makes senior management “valuable”?
Economics Update
Retail sales are imploding Down 2.8% from September, and down 4.1% year over year,
Here is a historical data, courtesy of Calculated Risk, just so you know how bad these numbers look.
Of course, the financial press always has to find a silver lining, so they make note of the fact that consumer confidence rose from to 57.9 from 57.6, the article attributes this to falling gas prices, but I ascribe it to three words, “Buh Bye Bush.” With the election, they realize that Bush will soon be gone, and so the number goes, though the number still reflects major suckage.
In the overseas economy, yesterday, it was Germany, well today, it’s been confirmed that it’s actually the whole Euro Zone that is in recession.
Also, we have automotive news from that side of the pond, with the three major credit insurers in Europe pulling insurance coverage to suppliers of Ford and GM. Basically this means that if either of the auto makers default, the suppliers are on their own.
They have basically decided that the risk of a default is too much for them to cover.
And in domestic bad news cast as good news, we make note of the fact that banks and bank like institutions borrowed less from the Fed this week. Only an average daily borrowing rate of 95.4 billion, down from $110 billion.
Down to an average of 95.4 average daily borrowing list week. Let’s run the numbers 95.4 billion/business days * 250 days a year = 28.85 trillion…$23,850,000,000,000.00…By comparison, the US GDP in 2006 was 13.6 trillion.
We also have Freddie Mac tapping a $100 billion bailout fund that was not counted in the above.
As Calculated Risk notes, “Remember Fannie and Freddie have much lower default rates than the loans packaged by Wall Street. If conditions worsened dramatically for Freddie and Fannie, imagine how bad it is for Wall Street MBS and loans held by lenders like Wachovia (Wells Fargo) and WaMu (JPMorgan Chase).”
As to energy, oil is down on demand concerns, and and retail gasoline is down almost $2/gallon from peak.
There is a part of me that wonders if the swing in oil/gas was some sort of electioneering, but it clearly did not work.
In currency, the dollar rose, because when people are frightened, they still flee to the dollar for safety…for a while at least.
The End of Wall Street’s Boom
Go read the whole thing, it’s an inventory of how corruption, self dealing, stupidity, and lack of moral created the Wall Street debacle.
Upton Sinclair put it best when he said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it, though in the case of Wall Street, it is more the year end bonuses than the straight salary.
Here is a typical quote:
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with sh$#ty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
People should be going to jail.
Lots and lots of people should be gong to jail.