Defaulting banks - where will it stop?

[Jan Klimkowski]

Rather belatedly, I thought I should post the predictions of Genesis (Karl Denninger) of Ticker Forum for 2009.

First, here's his record for 2008 (I can vouch that this is correct and was posted at the beginning of last year):

Let's score the 2008 edition predictions first:

* US will enter a recession: Confirmed by NBER. Check.
* Unemployment will rise north of 5%. Check (bigtime)
* Housing will not turn in 2008. Major check.
* The story in 2008 will be defaults on prime mortgages. Check.
* Consumer lending practice stupidity exposed. Check.
* Recreational sector (boats, etc) smashed. Check.
* Government will meddle. Biggest check of all!
* Buffett will win on munis. Miss - a clean miss.
* Equity prices will at least touch 1220, target of 1070, no surprise on a three-digit handle for the SPX. Major check.
* Return of capital is the dominant theme. Check; 0% IRX anyone?
* No "hyperinflation". Check.
* Debt to be paid down and/or defaulted. Half a check. The hiding continues, and so far, there's no indication that the end of that rope has been reached.
* CRE will collapse. GGP anyone? Check.
* Business CapEx will go to hell. Check.
* Dollar will strengthen. Check.
* Market callers coming to the public "hat in hand". Nope; clean miss. Where's Cramer committing Seppuku on national TV? Oh well; hubris knows no boundaries.

16 predictions, two clean misses and one half-miss, the rest either panned out or were proved tremendously conservative.

He probably stole the Seppuku line from me since I've been advocating live on-screen seppuku for MSM Business Anchors for some time :aetsch:

Otherwise it's pure Genesis....

Here are his 2009 predictions:

Ok, so with that cheery backdrop, here you go with my predictions for 2009.... and I will prefix this by saying this is a list I hope proves to be entirely incorrect. Perhaps there really is a Unicorn that craps skittles even though I've yet to find it - this is one round of predictions I'm willing to take a zero score on come December 09.

* The economy will not recover in 2009. Job loss will continue through the year and unemployment will reach 8% in the "headline" statistic by the end of the year. U-6 (broad unemployment, or the closest to "real" unemployment without government "cooking") will top 15%. All the "talking heads" are predicting a turnaround in the second half of 2009. They will be wrong. Look at their records for 2008 - all of them were predicting closes at or above 1500 for the S&P 500. Why does CNBC continue to put people on the air who, if you listened to them, cost you 40% or more of your money?
* Deflation, not inflation, will become evident well beyond housing. Other capital goods beyond housing will see real price declines for the first time since the 1930s. Debt is inherently deflationary; the "hyperinflationists" will once again be shown to be wrong (how many years running will it be now?)
* Housing prices will continue to decline. I believe we're about halfway done with the price correction. Those who think we will turn this in 2009 are wrong - unless we get an all-on collapse in prices in early 2009, which I do not believe will occur. I've heard several claims we will have positive year-over-year home price changes in 2009. I'll take the other side of that bet.
* The Fed's attempt to "pump liquidity" will be shown to be an abject failure. We will see either a Treasury Market selloff or worse, severe instability in the dollar at some point in 2009.
* GDP will post a 12-month negative number and there is a decent shot that we will actually see an official depression print before the end of 2009, defined as a 10% decline peak-to-trough.
* The Stock Market has not bottomed although you may think it has for a few months. The annual range will be quite extreme; I would not be surprised at all to see 1,000 touched on the SPX in the first part of the year. I believe the SPX will at least touch 500 in the next 12-24 months and the current bottom will not hold. It is possible that we could see a crash to SPX 300 and DOW 3,000 some time this year, probably after the spring (when the "Obama Halo" wears off - if it isn't blown off by economic events first.) Yes, this means I am predicting a fifty percent swing in the SPX in 2009. Lots of money to be made as a trader if you're quick and good, but an absolute minefield if you're a long-term investor.
* Precious metals will not be a safe haven. The callers for $1600 and above on gold will be wrong, unless there is a major military conflict. I do not rate that probability as particularly high, but it is an event (along with a major terrorism incident - nuclear or biochemical - that would cause a rocket shot in Gold prices), so I am hedging that call. The risk of this sort of "response" to the economic crisis is, however, real, and will rise significantly going into 2010 and beyond. We'll revisit this one (a major war) next year.
* The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are. Last year pundits were all calling for the dollar to collapse to 40 - it didn't happen. Now they're calling the dollar's strength a "Bear market rally." Nonsense; the simple truth is that while we're in bad shape the rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example.
* The pound or euro - and perhaps both - will likely be where the FX dislocation initiates if it occurs. I see the potential for the pound and euro to both reach par with the dollar, although I'm not going to go that far out on the tree limb and predict it - yet. Needless to say that would rocket the Dollar Index but it won't be our strength that does it - it will be their weakness.
* The US Consumer will go from a negative savings rate to a seriously-positive one. I am predicting 4% in 2009 but it could go as high as 10%. The math on this is simple - the "consumerist legion of more" has run its course and all that's left is debt. It hurts and bad; expecting the American Consumer to cut off his other arm is just plain dumb. By the way this is a good thing in the longer term for America once the excess debt is forced out and defaulted through the system.
* Commercial Real Estate will effectively collapse and most commercial Real Estate REITs will be either insolvent or limping on life support. There will be calls for bailouts (which may be attempted; the calls are already starting to be heard) but it won't matter - a failed business is a failed business, bailout or no, and overcapacity must go away before sustainable business conditions can return.
* Along with the above, expect 10% of all retail stores to close, and that number could go as high as 20%. That's not going to be fun; there will be hundreds of malls that wind up literally shuttered across America. Stay away from most retailers and property groups as investments. Firms like SPG and VNO are levitating on the strength of their dividends (7-10% yields at present); I believe this is a sucker play; if retailer defaults force dividend cuts (and I believe they will) the commercial REITs will go straight into the toilet.
* Several states will get in serious financial trouble and outright default of one or more is possible in 2009. California leads this parade. But even if there is a default on a state basis, the effect will be highly localized, as county and municipal governments vary in their wisdom and budget process. The real pain comes in state-wide social and educational programs. Be very careful if you are in municipal bonds or thinking of getting back into them (I recommended they be dumped in 2007 - look at what has happened to the closed-end funds in 08! Aieeee!) as the default risk is VERY REAL. If you're buying individual issues and do the work to determine not only the risk of default but also the likely recovery if they do default there are some good deals out there - but only if you're doing the work. "Trust me" (as in buying funds, whether mutual funds or closed-end stuff) is very dangerous.
* Mortgages are not done. The story last year was "Subprime." This year's will be "ALT-A", "Option ARMs" and so-called "Prime". The Fed and Treasury know this, which is why they are playing games with "agency" debt in a desperate attempt to clear this market before the ticking nuclear devices go off. The amount of debt involved in these "bad deals" is vastly higher than that in the "subprime" space and if they fail to contain it (a near certainty) Round #2 of severe bank instability gets served up on us in the second half of 2009.
* If you want to refinance a mortgage you may get one brief shot at it with long rates around 4%. You're nuts to buy outright unless you intend to die in the home, but if you have a solid reason to be obtaining a mortgage or wish to refinance you will probably get the opportunity. This assumes the "buydown game" gets going before Treasuries dislocate; if you get the opportunity take it as it is likely to be fleeting. The few places in this country where homes wind up selling for 2.5x incomes (on average) and you have an opportunity to finance at 4% and change will be decent buying opportunities - if you're sure you can cash flow the note (e.g. your job and/or income stream is not in any danger of collapsing.)
* Those who have said that the corporate bond market is being "unreasonable" in its expectation for defaults will start to look like the jackasses they are. Actual default rates (not projections) on non-investment-grade debt will skyrocket starting in 2009 and there will be no sign of it turning around this year. If you're playing in this area of the market thinking that "the worst is behind us", I hope you like walking around bald as the haircuts handed out to folks like you will be especially severe and delivered with a straight razor.
* The calls for "more lending" to consumers and businesses will go exactly nowhere. The problem isn't credit availability - there's plenty of money available to lend if you are credit-worthy. Those who are being turned down now simply aren't credit-worthy when one looks at what they want to do with the money and what they're backing their repayment capacity with. The more "credit stimulus" is thrown into the economy (and there will be more) the worse the downturn will get.
* General Motors and Chrysler will fail to meet their targets and it will be labor that sinks the deal. At least one and probably both will wind up in some form of bankruptcy in 2009. The UAW is insane; Gettlefinger needs to be strung up by his genitals and pelted with rotten tomatoes by his union "brothers", and if they had a lick of sense they'd have already done it. They obviously don't. I give this mess six months tops, with Ford as the only possible survivor. The recent GMAC games show exactly how desperate they are; 0% 5 year loans to people with 620 FICO scores are flat-out insane and the default rates on those loans are going to wind up in economics textbooks five years hence.
* Protectionism and currency manipulation will rear their ugly heads in 2009, originating not here but in Asia as their economies go straight into the toilet. China and Japan are at severe risk here.
* Commodities will appear to be headed for a new bull market but this will turn out to be a false hope as demand continues to collapse. Attempts to manage oil output to prop up the price will fail. Several oil-producing nations will find themselves in serious economic trouble, with Russia being in the lead but by no means alone.
* Sovereign debt defaults will number at least three with many other nations on "watch" for same; we had one last year (Iceland.) Noise about a US "AAA" downgrade will continue. Highest on the list for probables are Russia, which needs oil at roughly double its current price - and stable - to be financially viable. Not going to happen in the near term.
* China will have its first large-scale rumbling of civil unrest as a consequence of collapsing export demand and thus employment. They'll manage to tamp it down - this year. Don't take a bet on that holding together longer-term. Those who think China will be "ok" are deluded; they have a horrifying overcapacity problem (debt-financed, of course) and there is no way for them to get out of it. They are truly going to "take it in both holes" down the road, but the worst of it won't be in 2009 - that is still a year or two in the future.
* Foreign uptake of Treasuries will be choked off - by necessity. It won't be because they want to screw the US (although they should have a long time ago, given our profligate and unsustainable habits), it will be because they will be forced to redirect their resources inward as their own economies collapse.
* "The City" (London to be precise, Britain generally) will be recognized as getting it "worse than we are" (in America.) This will be the first of many validations of my thesis "we're screwed, they're gang-raped."
* Things will get "revolting" in a number of nations. Not here in America. Yet. If we're lucky the American Sheep will wake up and stage some of that peaceful protest stuff I outlined above. If we're not so fortunate 2010 could be really bad.

In terms of recommendations its simple - rallies are to be sold, cash is to be raised and prudence is to be practiced in your own personal financial affairs. Don't get creative in all things finance, get stingy and prudent. Your personal financial survival could well depend on it.

The actual article is much longer, and can be found here:

http://market-ticker.org/archives/689-Wh...-2009.html

[Jan Klimkowski]

Russians hoarding dollars in safety deposit boxes?!?... :call2:

http://www.guardian.co.uk/business/2009/...hoard-cash

Muscovites are hoarding thousands of dollars in safety deposit boxes, as fears intensify that Russia is teetering on the brink of a full-blown economic crisis, after the government devalued the rouble five times in six days.

World oil prices have plunged from almost $150 (£102) a barrel to below $35, pushing the country to the brink of recession. "Russia is a volatile economy at the best of times: it's heavily dependent on commodity prices - on oil and gas," said Nigel Rendell, senior emerging markets analyst at RBC capital markets.

As the public frets about a repeat of the 1998 financial crisis, when the government defaulted on its debts, sending shockwaves through the world financial system, banks are reporting a surge in use of safety deposit boxes in the capital.

"Russians have a massive distrust of high finance even at the best of times," said Neil Shearing, of consultancy Capital Economics.

"At the first sign of trouble, they pull their money out and stick it under the bed."

Even in 2004, the OECD estimated that up to $80bn, most of it probably in dollar notes, was circulating outside the official banking system.

"The memories of 1998 loom large, and the rouble is taken as a bellwether of the health of the economy," Shearing said. "They're essentially trying devaluation by stealth, so that no one notices."

The currency has shed 7% of its value in just five days, ending the week at 37.32 versus a euro-dollar basket. It has lost a fifth of its value since August, and Russian stock markets have lost 70% of their value since May.

Moscow has blown over a quarter of its foreign currency reserves over the last five months in a desperate bid to ensure that depreciation is gradual. Dealers estimate the central bank spent $26bn on interventions this week alone.

Rendell, of RBC, added that a number of small Russian banks have made very risky bets on the country's property bubble, and may have to be bailed out by the government in the coming months. "Russia has over a thousand banks, which is probably about 950 too many," he said.

Former Soviet leader Mikhail Gorbachev yesterday joined a chorus of influential Russians criticising the handling of the economic crisis. "Resources are directed not so much at protecting the interests of a majority of citizens as at saving the assets and property of a narrow circle of influential businessmen," said their letter, published in the Vedomosti newspaper. Oligarch Alexander Lebedev, who is buying the Evening Standard, was also a signatory.

The crisis echoes the fate of credit crunched states across central Europe. Latvia and Bulgaria have seen street protests over the economy in the past week, while Turkey is in talks with the IMF.

[Keith Millea]

You can put your gold and silver with the Lakota Sioux.Their warriors will protect it with their lives.:ahhhhh:

http://press.freelakotabank.com/aboutfreelakotabank.php

Keith

[Jan Klimkowski]

Even Will Hutton, who's been in denial for a couple of years, finally thinks that Britain is in dire trouble.

His proposed solution is tosh.

Unless we are decisive Britain faces bankruptcy

Our financial institutions are fighting for their lives and the Treasury may not be able to bail them out. The government needs to get serious to avert meltdown



It's no wonder that so many Icelanders are angry. They live in a country bankrupted by the excesses of their bankers, who took on liabilities 10 times the nation's GDP, betting billions in Britain's property bubble. Bailed out only by a jumbo IMF loan, inflation and interest rates are now 18% and rising. Many are considering emigration. Only membership of the euro, if it can be secured, offers a lifeline.
Ireland made the same bet, and on Friday the government had to nationalise its third biggest bank - Anglo Irish. Like the Icelandic banks, it had been speculating in Britain's property bubble. The joke across the Irish sea is that the only difference between Ireland and Iceland is one letter and six months. But there is another, more crucial, difference. Ireland is in the euro; otherwise, like Iceland, it would be bust.
After what happened to the world's banks last week - and to Barclays Bank in particular, whose share price collapsed 25% in an hour on Friday - it's clear that Britain is at risk of being next in line. We too have a banking system that is huge in relation to our GDP, but, like Iceland, we are not in the euro. Unless we act quickly, decisively and cleverly, the difficulties of our banks could overwhelm us, triggering an enormous run on the pound. Britain, in short, risks bankruptcy.
Friday's warning from the deputy governor of the Bank of England, Sir John Gieve, that more will almost certainly have to be done to save the banking system is a statement of the obvious. As was his grim assessment that the recession will be deeper and longer than anyone thought, even late last year.
Britain's problem is threefold. We have an American-scale property crisis and a credit crunch in our own banking system. But on top, we were uniquely reliant on foreign banks and foreign capital. They support up to a third of all UK lending, and they have gone bust or fled. Britain's banks are in no position to plug the gap. So, the UK government has to put the system back together with a weak, non-reserve currency.
Events in America last week showed how the contagion in so-called investment banking - I prefer casino banking - is murdering honest-to-God commercial banking. Bank of America and Citigroup are fighting for their lives as they are engulfed by losses from their investment/casino operations.
Citigroup has had to break itself up, siphoning off its toxic assets in a separate entity insured by a $306 billion US government guarantee. Bank of America has been shattered by titanic losses in "investment bank" Merrill Lynch, which it bought just months ago. Without $20bn of taxpayer support and a $118bn guarantee of its toxic assets, it would be in receivership.
On top the US is able to keep finance flowing to its housing market only by offering federal guarantees on mortgage-backed securites. It also buys securities backed by car loans, student loans and credit card debt - anathema to the hyper-conservative Bank of England. Americans have the advantage that the dollar is the world currency - 64% of all foreign exchange reserves are held in dollars - so that it can do what it wants. Nonetheless it has taken monumental US taxpayer investment, guarantees of up to $500bn toxic loans and the willingness of the Federal Reserve to buy trillions of dollars of securitised assets even to begin to stabilise matters.
Britain, by contrast, has not begun to mobilise on anything like the same scale - even though in many respects our crisis is more acute. Barclays, for example, is in a position analogous to Citigroup and Bank of America. In 2007 close to half its profits came from "investment banking", now so perilous for its American counterparts. Barclays is the leader in so-called corporate "synthetic" structured investment vehicles - complex and even more dodgy than the securities that have brought low Citigroup and Bank of America. On Friday credit-rating agency Moodys announced new and more demanding criteria for how "synthetics" will be valued in future - implying that bank guarantors will need to find billions extra in capital to support them. Barclays could have to raise up to another £10bn capital to support its investment bank operation; impossible, except from the taxpayer. With the ban on short selling lifted on Friday - an asinine genuflection to the interests of hedge funds - it was an obvious target. The bank rushed out a statement late in the evening declaring good 2008 profits and solid capital ratios. But the issue is 2009, given the new rules. A taxpayer bail-out for Barclays - a view shared by a growing number of officials, if not all - is close to inevitable.
The prime minister is incandescent; the bank has not been straight with either the government or its shareholders about its balance-sheet risks. It did not share in the first round of bank recapitalisation, instead raising cripplingly expensive funds from Arab sovereign wealth funds. When Britain needs all its big banks to act together to stop a credit crunch-induced slump, Barclays, putting its own interests - and bonuses - first instead triggers a second phase of the crisis.
HSBC may also need to raise money - £20bn in the view of analysts at Morgan Stanley. But although it is headquartered in London and formally the responsibility of the UK, the Hong Kong Monetary Authority (a lesson here for the Bank of England and FSA?) has independently regulated its Asian operations, and strictly. It is not - a Barclays, RBS or HBOS - yet. UK depositors owe Hong Kong a thank you.
The cumulative cost of what has to be done is stunning, thanks to the City being such a vast part of our economy. The government must ensure that the banking system, Barclays included, has got sufficient capital to underpin the outstanding loans (at a much cheaper rate). Next it has to be prepared, like the Americans, to offer insurance guarantees on toxic loans which freeze the banks from new lending. Then it has to offer US-style guarantees on new issues of financial securities backed by mortgages, student loans, company loans and even credit card debt; and the Bank of England must be instructed to buy them.
On top of this, there is a budget deficit next year of £118bn, which may have to increase again - with another big Obama-style fiscal stimulus - if the recession deepens. My view is that the financial markets will accept actual spending only if Britain pre-announces that after financial stabilisation has worked, it intends to join the euro - otherwise we will find ourselves in the same position as Iceland.
These are the grimmest economic circumstances since the 1930s. Lives and businesses are being wrecked as I write. There will be little appetite for my proposed measures; how much better to hope that we can muddle through, looking for "green shoots" of recovery and doing little radical.
But after last week the government - and the opposition - have to get serious. Britain is on the edge.

http://www.guardian.co.uk/commentisfree/...on-banking

[Myra Bronstein]

...
* Precious metals will not be a safe haven. ...

Got that Damien?

[Jan Klimkowski]

...
* Precious metals will not be a safe haven. ...

Got that Damien?

Myra - yes, but....

Karl "Genesis" Denninger, who made that original comment, has a very different geopolitical viewpoint from me, and I suspect from you.

Denninger's full prediction was:

* Precious metals will not be a safe haven. The callers for $1600 and above on gold will be wrong, unless there is a major military conflict. I do not rate that probability as particularly high, but it is an event (along with a major terrorism incident - nuclear or biochemical - that would cause a rocket shot in Gold prices), so I am hedging that call. The risk of this sort of "response" to the economic crisis is, however, real, and will rise significantly going into 2010 and beyond. We'll revisit this one (a major war) next year.

I think a major war in 2009 is more likely that Denniger does.

However, as I posted earlier in the thread, I have more fundamental objections to gold as a safe haven. Namely because:

i) you can't eat it;

ii) you can't shoot with it (unless you have a foundry to melt it down into golden bullets);

iii) when TSHTF, They are likely to confiscate gold held in private hands, as They did in the 1930s.

[David Guyatt]

It'll be interesting to see what does happen to metal. I do happen to know that very wealthy types are piling into it big style, as they no longer trust currency.

If I had money to spend I'd lash out and buy some small coins - 10th Britannias, 20th Oz nuggets etc., and stash them. Not because I think the gold price will go up (although I think it will) but because of having something of historic and immediately recognizable value to barter/trade if the muck ever does hit the fan.

[Jan Klimkowski]

The bankers' coup continues.

BOHICA! heep:

Report: Over 8 in 10 corporations have tax havens

By KEN THOMAS
WASHINGTON (AP) - Eighty-three of the nation's 100 largest corporations, including Citigroup, Bank of America and News Corp. (NWSA), had subsidiaries in offshore tax havens in 2007, and some of the companies received federal bailout funding, a government watchdog said Friday.

The Government Accountability Office released a report that said Bank of America Inc., Citigroup Inc. © and Morgan Stanley (MS) all had more than 100 units in countries that maintain low or no taxes. The three financial institutions were included in the $700 billion financial bailout approved by Congress.

Insurance giant American International Group Inc. (AIG), which has received about $150 billion in bailout money, had 18 subsidiaries. JPMorgan Chase & Co. (JPM) had 50 units and Wells Fargo & Co. (WFC) had 18; both financial institutions received government bailout money.

Sens. Carl Levin, D-Mich., and Byron Dorgan, D-N.D., who requested the report, have pushed for tougher laws to fight offshore tax havens around the globe. Levin, who leads the Senate Permanent Subcommittee on Investigations, has estimated abusive tax havens and offshore accounts cost the U.S. government at least $100 billion a year in lost taxes.

"I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that," Dorgan said.

General Motors Corp. (GM), which received $13.4 billion from the federal rescue package, had 11 offshore subsidiaries while GM's financing arm, GMAC LLC (GOM), had two offshore units. GMAC, whose majority owner is private equity firm Cerberus Capital Management LP, received $5 billion from the Treasury Department in late December.

Citigroup said in a statement that it has more than 4,000 subsidiaries around the globe "which enables us to serve hundreds of millions of individuals and institutions in more than 100 countries." A News Corp. spokeswoman declined comment. Messages were left with several of the companies identified in the report.

Separately, the GAO said 63 of the 100 largest federal contractors maintain subsidiaries in 50 tax havens.

Levin noted that many competitors use the tax havens to varying degrees. PepsiCo Inc. (PEP) has 70 subsidiaries while the Coca-Cola Co. (KO) has eight units. Caterpillar Inc. had 49 while Deere & Co. had three.

"We need to put an end to the use of offshore secrecy jurisdictions as tax havens," Levin said.

The GAO said the subsidiaries could be established in the countries "for a variety of nontax business reasons" and said having a business unit in one of the countries "does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden."

Citigroup had 427 units in 23 countries, including 91 subsidiaries in Luxembourg and 90 in the Cayman Islands. Morgan Stanley had 273 units, News Corp. had 152 and Bank of America had 115. Procter & Gamble Co. had 83 subsidiaries and Pfizer Inc. had 80 in the jurisdictions.

Several major corporations have announced plans to leave Bermuda, a leading offshore business center, amid the global financial crisis and fears of tighter tax rules. Tyco Electronics Ltd., which makes electronic components, and Foster Wheeler Ltd., an engineering and construction company, are reincorporating in Switzerland - which has a tax treaty with the U.S. - for tax and other reasons. Covidien Ltd., a health care products company, is heading to Ireland.

http://apnews.myway.com/article/20090116/D95OHIB80.html

[David Guyatt]

Part 2 on the road to wholesale nationalization, I wonder? Not that nationalization would necessarily be a bad thing, except that once all the toxic waste had been treated and rendered harmless -- thanks to taxpayers -- and once bank balance sheets are back to a healthy glow, they would all be privatized again at bargain basement prices.

The most interesting statement from the below story is that the senior bods at Royal Jock are "...said to be unhappy about the Government having majority control."

Poor wee things.

The second interesting thing is that Brown is said to be furious that Royal Jock bought ABN-Amro -- overflowing with toxic debt - for a mere £49 billion in October 2007.

Furious? I'd shoot the buggers (whoops, can't say that these days or I'll get arrested under a terrorism charge -- so how about "I'd rap them on the knuckles very severely?" instead). They paid a magnificent price for massive debt that (imo) they knew to be worthless. Why? Well, cynics like me might well opine that they were de facto rescuing the Dutch bank with British taxpayers money in advance of the catastrophe to come. ABN-Amro is one of those connected banks don't ya' know.

Brown announces further £300 billion rescue package for British banks:

http://news.sky.com/skynews/Home/Busines...1315205821

19/01/2009 11:10
Chancellor Alistair Darling To Stake Billions On A Second Bank Bail-Out | Business | Sky News

£300bn Bank Bail-Out Confirmed
11:00am UK, Monday January 19, 2009

A £300bn rescue package has been announced by the
Government in an attempt to get British banks lending again.

New bail-out deal could increase Government stake in banks
Chancellor Alistair Darling set out plans for a new insurance scheme to protect banks from so-called toxic assets, a move which it is hoped will encourage institutions to restart lending to businesses and households.

Mr Darling is staking hundreds of billions of pounds of taxpayers' money in an attempt to free up "blocked" credit markets and head off a worsening recession.

Bank of England Fund £50bn to buy quality securities and get cash flowing freely.

Royal Bank of Scotland Measures to strengthen bank’s position but no extra cash

Money Supply BoE gets green light to print extra cash if needed
Mr Darling told Sky News: "In each case money is being provided for assets from the banks.

"These are assets we can sell as the economy recovers. "If we do not do anything, the cost will be far, far greater.

"The recession would be longer and deeper than it otherwise would be."
The move follows last year's injection of £37bn into the banks, which appeared to ease the crisis but failed to solve it.

The plans were given added urgency by Friday's dramatic stock market falls amid fears that the banks were set to reveal further massive write-downs.

In a statement, the Government said: "The likely impact of today's
announcements on the public finances will be mostly temporary, as
investments will be held for no longer than is necessary to ensure stability and protect taxpayer interests; liabilities will be backed by assets; and fees will be charged for relevant schemes."


It said the new measures were necessary because of the continued
deterioration in the global financial and economic situation over the past two
months.

"The Government is clear that meeting lending demand to otherwise
creditworthy businesses, homeowners and consumers is essential for
supporting economic recovery," it added.

Royal Bank of Scotland also reached agreement with the Treasury to replace
£5bn of preference shares with new ordinary shares, effectively increasing the Government's stake in the bank.

The Government bailed out the banks in October - so why wasn't that state aid package enough?

The Treasury was also proposing to swap preference shares it took in HBOS for ordinary shares - effectively freeing-up cash for the banks concerned.

If the deal goes ahead, it could take to 50% the Government stake in Lloyds, which today begins trading today as Lloyds Banking Group after its merger with HBOS.

The group is said to be unhappy about the Government having majority control.

This further assistance comes as a number of banks prepare to announce another set of gloomy results.

RBS today said it alone expected losses of between £7bn and £8bn for 2008, prior to any write-downs on the value of its acquisition of ABN Amro.

[Jan Klimkowski]

For your amusement, the HateMail wants to stick it up the Krauts.....

http://www.dailymail.co.uk/debate/articl...rough.html

How long can PIGS feed at the German trough?

By William Rees-Mogg
Last updated at 7:53 AM on 19th January 2009

In the early months of the current recession, it was widely assumed that the impact on Europe would be less serious than the impact on Britain and America.

It was thought the recession would vindicate the European model of integration and go against what is called the Anglo-Saxon model.

There were even calls for Britain to join the euro.

It would be difficult enough to negotiate British entry to the eurozone at the top of a boom, and quite impossible in the trough of a recession.

However, the recession is the first big test of the euro in its ten-year life. When the euro started to operate, its critics said it was a fair-weather yacht, well adapted to short cruises in sheltered waters, but dangerously vulnerable to the pressure of the high seas.

We then argued there had been several 20th Century crises that would probably have caused any single European currency to break up.

The two World Wars of 1914 and 1939 would have made it impossible to maintain a single currency between the combatants. The Great Depression of the early Thirties forced Britain to abandon the gold standard in 1931.

In 1971, President Richard Nixon’s abandonment of gold convertibility for the dollar marked the end of the Bretton Woods exchange system.

In September 1992, at the Bath conference, Germany refused to lower interest rates, which forced Britain to leave the European exchange rate mechanism (ERM).

There were, therefore, five occasions in the 20th Century in which events caused a rupture of the existing European fixed-rate exchange system.

All of these represented real economic adjustments that could not have been made inside a single currency, or political conflicts that could not be resolved.

The European powers then decided a single currency, with no provision for withdrawal, would force the weaker European countries to make other economic adjustments because the option of devaluation would have been taken away.
To devalue its currency, a country would have to withdraw from the euro, and the departure of even a small European country would create a major political and economic crisis.

The critics foresaw a gradual divergence of the different European economies: that has occurred. German productivity has risen steadily and the costs of reunification with East Germany have been absorbed.

Other European countries, including the so-called ‘PIGS’ – the four problem countries of the eurozone, Portugal, Ireland, Greece and Spain – have been much less successful in maintaining their competitiveness. We shall be hearing much more about the ‘PIGS’, in the same way as we had to learn about sub-prime mortgages.

Some people think there should be two Is or that the I really stands for Italy.

No doubt Italy will, in the end, be a bigger problem for the eurozone than Ireland. I do not like to see the emerging pattern of a North-South divide in Europe, with Italy, Spain, Greece and Portugal suffering from the pressure of an overvalued currency.

Obviously, the deeper the recession, the greater the pressure on the weaker European economies.

The critics of the creation of a single European currency also pointed to a central contradiction.

In the eurozone, the European Central Bank (ECB) is responsible for managing the currency, but the governments of the European countries are responsible for national economic policy.

This is not the same as the arrangement we have in Britain, where an independent central bank sets interest rates.

In a crisis, as we have seen, the Government and the Bank of England co-ordinate their policies. If the Bank of England has a major disagreement with the Government on a critical issue, it is the Government that prevails.
The gap between the powers of the ECB and a national government shows up in the cost of borrowing. We can, therefore, measure the risk of a country leaving the euro in market terms.

Despite the setback last week when a German bond issue was under-subscribed, Germany was able to borrow on a ten-year, euro-denominated bond at three per cent.

France, almost as good as Germany, borrows at 3.47 per cent. The weaker countries pay a higher rate – Greece 5.34 per cent, Ireland 4.73 per cent, Italy 4.40 per cent, Portugal 4.12 per cent and Spain 3.97 per cent.

If there were market confidence that each country would be honouring its commitments inside the eurozone in ten years’ time, the prices ought to be the same.

Greek bonds yield 80 per cent more than German bonds of the same nominal value.

Of course, if the Greeks were to leave the euro their cost of borrowing would be much higher. Europe will fight hard to keep the eurozone together, but the market measures its perception of the risk of default, country by country.

In this situation, almost everything turns on Germany, Europe’s strongest economy.

In 1992, the Germans failed the test. They put the concerns of the Deutsche Bank ahead of the preservation of the ERM. Now Germany’s economy is under pressure.

Germany is a major manufacturer of high-quality heavy engineering equipment. In a recession, it is normal for investment equipment to be hit late, but hard.

For the first year or two, manufacturers are still completing existing orders. Then when the orders run out, customers do not reorder. The latest Berlin report is that the German economy contracted by eight per cent in the fourth quarter of 2008.

Belatedly, the ECB has cut interest rates to two per cent, with an overnight rate of one per cent. But it takes the ECB almost as close to zero as a central bank can get. The next step after zero rates is the printing of money.

The European governments are determined the euro should survive, but they also want their own administrations to survive. If the recession calls for a further stimulus, are they going to give the ECB a printing press?

Would Jean-Claude Trichet, the ECB president, who hates inflation as the devil hates Holy water, be willing to use a printing press if he were given one?