Thursday, June 28, 2007

Where are the Guardians of the US's Finances?

Ambrose Evans Pritchard, economics editor on the Daily Telegraph, is one of the few B ritish journalists to have a grasp of scale of the threat posed by the coming first world debt crisis. On the 26th June, he reported on the latest scandal to hit the US finance sector: the failure of Bear Stearns to mark their debts to market. This and other regulatory failures means, according to Lombard Street Research, that 'a severe credit crunch' is imminent...

'The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

'The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

'Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.

"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn." (For more go to his story in the Daily Telegraph of the 26th June, 2007.)

Where were the Guardians of the US's Finances when investment banks cooked the books in this way? Where were Alan Greenspan, Bernard Bernanke and other official regulators - not to mention the US Treasury Secretary - when innocent investors were encouraged/misled into believing that AAA meant AAA? They were asleep at the wheel of a financial system that is now careering out of control. Investors in particular, and the people of the United States in general are about to get badly hurt by this negligence and skulduggery. They must go after the most culpable - not just at Bear Stearns - but at the Federal Reserve and the US Treasury.

Why aren't we all in Monte Carlo driving Ferraris?

Northern Rock, according to the FTs 28 June edition, 'surprised the City yesterday by saying it had been caught out by the effect of higher funding (i.e. interest rate) costs...warning that profits would be below forecasts...

'Adam Applegarth , chief executive said: 'If anyone had forecast a 70 basis point increase in two-year swap rates and a 40 basis point increase in Libor we'd all be in Monte Carlo driving Ferraris .....'

Excuse me: I, together with many other distinguished economists, predicted rising interest rates in my book, 'The coming first world debt crisis' published by Palgrave in October, 2006. But no-one, so far, has rewarded me with a house in Monte Carlo and a Ferrari!

More to the point: how can the chief executive of a mortgage bank have been as unprepared as this for a rise in interest rates? How ignorant can one be, to qualify for the role of overseer/chief executive of a massive lending operation - and to borrow money on international capital markets? And how ignorant can one get away with being, and be registered/ deemed acceptable by the Bank of England and other regulatory bodies?

Recklessly ignorant it seems.

Monday, May 14, 2007

Is there a ten-year cycle?

19th July will mark ten years since the onset of the East Asian Financial Crisis. My most vivid memory of that crisis was attending the IMF's annual meeting in Hong Kong in late September, 1997. I watched incredulously as a proposal by arrogant IMF officials to ignore democratic mandates, and economic common sense, and force open capital markets in countries that were resisting, was ignominously swept aside by the financial storm. A very instructive, if painfully destructive, year.

Then this coming 19th October will mark twenty years since the onset of the biggest stock market crash in history - the 1987 crisis - a day that remains memorable for me because I slept through the alarm clock during one of the worst storms in Britain's history. While I did so, some $500 billion was wiped off the value of the world's stock markets.

As we end another decade, are we due another financial crisis? Henry C K Liu, a New York analyst certainly thinks so.

The Federal Reserve-sponsored credit bubble that has financed consumption as well as stock market, property and other asset bubbles in the US over this last decade, is finally deflating. The sub-prime lending 'carnage' of bankruptcies and home evictions is toughening credit conditions in the US, and hurting those that bought into the sector. But those most damaged by this carnage are the poor and marginalised. The few who have gained most from this huge credit bubble - the mighty rich and arrogant - are still riding high. According to Liu 'labor's share of US GDP growth amounted to negative 2.6%, after adjusting for inflation, while capital's share was positive 2.5%.' This is the real achievement of the administrations of Ronald Reagan and the Bush's Snr and Jnr - and their servants at the Federal Reserve.

Many of today's gamblers, speculators and carry-traders admire Alan Greenspan and his fellow 'guardians of national finances' - the central bank governors and politicians that have unleashed the magic broomstick of de-regulated finance and credit. But on the whole hedge-fund managers and their peers believe that their accumulation of wealth can be put down to innate intelligence, foresight, hard work and brilliant deal-making.

Wait for the turning of the credit bubble tide. Such intelligence, foresight, hard work and brilliant deal-making will be exposed for all its vanity. Scandals will erupt and be greeted by shocked headlines. As credit flows out and dries up, so the flotsam and jetsam of the international financial system will be exposed - and it will not be a pretty sight.

Liu quotes William Rhodes, chairman, president and CEO of Citibank North America and of Citicorp Holdings Inc...who wrote in March:

"The primary worry of many who make or regulate the market is not inflation or growth or interest rates, but instead the coming adjustment and the possible destabilising effect these new players could have on the functioning of international markets as liquidity recedes........"

If he is worried, so should we be.

Wednesday, March 21, 2007

Central bankers, financiers and humble pie

This morning, while drinking my cappuccino, caught a glimpse of a story in the Daily Mail - which claims that Eddie George, until not long ago governor of the Bank of England - admitted yesterday to a House of Commons Select Committee that the Bank had played a key role in fuelling the credit/housing bubble....but that of course it was done in a good cause - to avoid a recession! He seems to have suggested that this credit bubble, sadly was going to be his legacy.....Have not been able to stand up this story as it does not appear in the FT or the Guardian....but if its true, it will be refreshing...if unhelpful.

Conrad Black is not eating humble pie. But, like millions of others, I am enjoying the spectacle of his court case. Recall giving a talk to the City of London School for Girls in 2004, if memory serves me correctly, in the presence of a Conservative MP, John Gummer and the deputy editor of the Economist...the talk was of course about low income countries...and very quickly turned to how corrupt they all are. I retorted that corruption was not confined to the poor, and to black people...indeed in our very own House of Lords there was a gentleman, Conrad Black who was alleged to have been guilty of thieving on a grand scale from shareholders, and the difference between him and corrupt Nigerian businessmen, say, was only a matter of scale........Shock and horror registered on the face of the Conservative MP and on the deputy editor of the Economist, who interrupted my speech with calls of 'Libel! Libel! Watch out for libel!'......As I expected him to know a great deal more about libel law than I did, was just a trifle unnerved.....but only a trifle...

Are his friends which, according to Peter Newman of Maclean's magazine include members of Hollinger's board like Margaret Thatcher, Henry Kissinger, his eminence Emmett Cardinal Carter, Chaim Herzog, a former president of Israel, James Thompson, a former governor of Illinois, Lord Carrington, the former secretary general of NATO, Richard Perle, one of the architects of George W. Bush's Iraq policy, as well as half a dozen other British lords, plus the Italian industrialist, Giovanni Agnelli - are these and the editors of the Economist all standing by Lord Conrad Black now?

Well the Economist is trying its best. Today's editorial (21st March 2007) tries hard:

"Lord Black’s defenders argue that the cure has been worse for Hollinger’s shareholders than the disease—though prosecutors would no doubt retort that breaking the law deserves punishment regardless. Sorting things out after his departure cost a fortune: the $200m cost of investigations far exceeds the sum taken in the alleged “corporate kleptocracy”. .......

'Prosecutors retort' but does the Economist? No, its still hedging its bets on whether this generous fellow could really have been that if he had been Nigerian.....?

Tuesday, March 13, 2007

Bloomberg on declining assets

Hold on to your assets, says Bob Ivry of Bloomberg (12 March 2007). The deepest housing decline in 16 years is about to get worse.

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.

The spring buying season, when more than half of all U.S. home sales are made, has been so disappointing that the National Association of Home Builders in Washington now expects purchases to fall for the sixth consecutive quarter after it predicted a gain just last month.

``The correction will last another year,'' said Mark Zandi, chief economist for Moody's in West Chester, Penn

Monday, March 12, 2007

Of asteroids and credit

In August 2006, when most financial commentators, banks and lenders were asleep at the wheel, I posted a piece on the Guardian's Comment is Free site predicting that the fall in house sales in Florida and California were canaries in the deep vast coal mine of US credit - and that the impact of a credit/debt crisisand the associated housing crash in the US would have a much greater impact than the then crisis in Lebanon....

I got some pretty rude comments from, amongst others 'MisterD' (USA) 'Bobdoney'(UK) and others too offensive to credit. 'Bobdoney' was particularly rude...."Next week Ann writes about a six mile wide asteroid which has just collided with a butterfly in the Van Allen belt and which even now, as I eat my cucumber sandwich and drink my third cup of tea today, is heading inexorably towards its final destination just off the coast at Grimsby at 2.30pm on 29th August 2016.


It was a fine piece of sardonic commentary. But Bobdoney, while pitching for the Guardian prize of best 'commenter' was, like so many other clever ostriches working in the City, a little too focused on honing his writing skills .....Since that piece appeared new home sales in the US are down 32% from their peak, and fell by 16% in January alone...Today the Wall Street Journal and Nouriel Roubini of RGE
report on the 'Splosh!' created by the sub-prime lending asteroid as it hits US credit markets. The impact of bankruptcies and collapses amongst 30 sub-prime lenders is not a pretty sight......Credit conditions are tightening, and borrowers are having mortgage applications turned down...the impact is spreading from sub-prime to a range of other credit markets........

What might transform the waves from the impact of this asteroid into a tsunami of defaults, losses, foreclosures and rising insurance costs? .......Roubini quotes Bloomberg as warning that 'subprime mortgage bonds are falling in part because Wall Street dealers are lending less money to managers of collateralized debt obligations (CDOs) that buy 'residential mortgage backed securities' (RMBSs) .....Roubini quotes the trade magazine 'Inside MBS and ABS' which warns that 'rising defaults and foreclosures in the US mortgage market could cause CDOs to pull out of the MBS market 'potentially toppling the mortgage industry'.......

The asteroid's impact still has to be felt here in the UK.....Sadly, we're likely to feel it well before the 29th August, 2016.

Wednesday, March 07, 2007

Borderless money and the matter of passports

The nation state is dead, we are told. Boundaries no longer matter. Globalisation is triumphant, and we should all rejoice in a borderless world. Money, trade and information can flow, uninterrupted, from Japan's capital markets via the 'carry trade' to South Africa's capital markets, where quick and big bucks can be made on the interest rate differential. Toothpicks can flow from New Zealand to Norway, with no barriers to trade. Information can flow, uninterrupted by journalistic tinkering, across the globe in the twinkling of an eye. Rejoice in such freedom!

But what of the freedom of statelessness? Imagine freedom from of the burden of citizenship, from taxation, from the obligation to live in community with fellow-citizens. Why do the rich and powerful not demand such freedom? Why do they send their secretaries to queue for passports? Why do governments not grant those that play in the global capital markets the gift of statelessness? After all cruel and heartless governments bestow the 'freedom' of statelessness on millions of people around the world...why should it not also be bestowed on the rich and powerful?

What is it about passports that persuades the rich and powerful that the borders for money be eliminated, but borders for citizenship be retained?

Saturday, March 03, 2007


Bought the FT this morning; fear is lurking in the credit markets. There is now talk of pension funds buying into risky credit markets at just the point hedge funds have slyly slithered out of them; of companies - like California's Fremont General Corp - dangerously exposed to the sub-prime lending market; and, because of the bundling of sub-prime loans with other less risky loans in Collateralised Debt Obligations - of the broader threat defaults in this market pose to credit markets as a whole...

All very absorbing and indeed frightening. Then, because scaring myself was insufficiently unsettling, I felt the need to be both offended and outraged. So I picked up the FT's colour magazine 'How to Spend It'. The very first ad on the very first page is of a woman picking her way through what is a volcanic eruption (Hilo, Hawaii); but which I think is intended to tap into fears about dangerous climate change. Next to her are the words: Fearless Luxury. Just when climate change threatens to prevent us having 'the time of our lives' on this earth, the FT advertises a Rolex watch, optimistically branded...'Oyster Perpetual Datejust'.

Market participants have lived with the delusion that today's asset bubbles can expand perpetually. Now Rolex seeks to delude FT readers that consumption of luxury goods can overcome atmosfear and time itself.......If only.