Defaulting banks - where will it stop?

[Jan Klimkowski]

Interesting Jan. The Daily Bellylaugh opines and the world cringes (in far more ways than one).

So, the spook-meisters are in on the act trying to scare us all to death so we accept our $1.5-2 trillion medicine with a wry grin and a sigh of relief.

Spook-meisters? Yup - I was looking to see if Ambrose Evans-Pritchard's byline was attached to this latest act of spin-doktoring...

[Jim Norman]

I think the short answer is "yes." Despite about EUR6bn of writedowns over the past year, Fortis is still carrying about EUR42bn of assets with about EUR 37bn of that in "credit spread" investments. A detailed breakdown of the balance sheet is available here: http://www.fortis.com/shareholders/media...tation.pdf. See pp 71-81 for specifics on the portfolio.

Even though it has already reserved for about 60% of its June 30 problem loans, the bank apparently must be facing massive further value errosion since this 2Q report in August. DJ Marketwatch says Euro central banks have stepped in with a EUR16bn bailout (see: http://www.marketwatch.com/news/story/ho...t=hplatest). China's Ping An (5% owner of Fortis) is also being hammered.

[Gary Loughran]

Work this out - Lehman Brothers is one of the 10-12 banks which 'owns' the larger private bank known as the Fed. The Fed receives around $300billion annually from the US taxpayer for printing money to bailout it's own owners. Lehamn brothers has only 'failed' on paper. Of course Jefferson knew all this when he decried the monster of a system which utilises 'the Fed'.

As for the MSM - they are mostly owned by the same 10-12 banks in ownership of 'the Fed' ( I know years ago anyway this was the case, esp. with CBS) - thusly don't expect any honest appraisals from that estate.

Today we have Cameron in the UK outlining policy that even more power should pass to the BoE. Deary me, Hitler was right, Governments really are lucky the people don't think...and every day our politicians and beyond highlight this fact.

[David Guyatt]

I think the short answer is "yes." Despite about EUR6bn of writedowns over the past year, Fortis is still carrying about EUR42bn of assets with about EUR 37bn of that in "credit spread" investments. A detailed breakdown of the balance sheet is available here: http://www.fortis.com/shareholders/media...tation.pdf. See pp 71-81 for specifics on the portfolio.

Even though it has already reserved for about 60% of its June 30 problem loans, the bank apparently must be facing massive further value errosion since this 2Q report in August. DJ Marketwatch says Euro central banks have stepped in with a EUR16bn bailout (see: http://www.marketwatch.com/news/story/ho...t=hplatest). China's Ping An (5% owner of Fortis) is also being hammered.

Thanks Jim. My guess is that the EUR16bn bailout is just the first tranche...

Btw, I have posted a question about your new book THE OIL CARD in the books section: http://www.deeppoliticsforum.com/forums/...11#post111

If you are able to provide some more detailed insights without hampering sales, I'm sure we would all be interested in what you have to say.

[David Guyatt]

Work this out - Lehman Brothers is one of the 10-12 banks which 'owns' the larger private bank known as the Fed. The Fed receives around $300billion annually from the US taxpayer for printing money to bailout it's own owners. Lehamn brothers has only 'failed' on paper. Of course Jefferson knew all this when he decried the monster of a system which utilises 'the Fed'.

As for the MSM - they are mostly owned by the same 10-12 banks in ownership of 'the Fed' ( I know years ago anyway this was the case, esp. with CBS) - thusly don't expect any honest appraisals from that estate.

Today we have Cameron in the UK outlining policy that even more power should pass to the BoE. Deary me, Hitler was right, Governments really are lucky the people don't think...and every day our politicians and beyond highlight this fact.

There have been many questions raised over the years about our Oz friend Rupert Murdoch and how he came to his fortune. I remember hearing views expressed that Murdoch may have been the beneficiary of some quantities of WWII "black" gold from the Nazi/Japanese "Black Eagle Trust" loot. I mentioned this during a conversation I had with Richard Belfield, one of the authors of the Murdoch bio THE DECLINE OF AN EMPIRE,. He and his fellow authors had looked at Murdoch's rise to wealth and considered that there were indeed gaps in his known income stream that opened him up to questions of who from or how he came to his entire wealth.

But it would be intriguing if Murdoch really did get some black gold funds (we will never know of course) as this would place him everlastingly in the favour of certain gentlemen from Langley, who are regarded as administrators of this vast war loot.

[Jan Klimkowski]

Wow - those politicos REJECTED the thing!

The ever-interesting Nouriel Roubini wrote this before the vote:

http://www.rgemonitor.com/roubini-monito....

It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown…

It is no surprise as financial institutions in the US and around advanced economies are going bust: in the US the latest victims were WaMu (the largest US S&L) and today Wachovia (the sixth largest US bank); in the UK after Northern Rock and the acquisition of HBOS by Lloyds TSB you now have the bust and rescue of B&B; in Belgium you had Fortis going bust and being rescued over the weekend; in German HRE, a major financial institution is also near bust and in need of a government rescue. So this is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

And the strains in financial markets – especially short term interbank markets - are becoming more severe in spite of the Fed and other central banks having literally injected about $300 billion of liquidity in the financial system last week alone including massive liquidity lending to Morgan and Goldman. In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.

After the bust of Bear and Lehman and the merger of Merrill with BofA I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnite liabilities. Instead Morgan and Goldman went for the cosmetic approach of converting into bank holding companies as a way to get further liquidity support – and regulation as banks – of the Fed and as a way to acquire safe deposits. But neither institution can create in a short time a franchise of branches and neither one has the time and resources to acquire smaller banks. And the injection of $8 b of Japanese capital into Morgan and $5 b of capital from Buffett into Goldman is a drop in the ocean as both institutions need much more capital. Thus, the gambit of converting into bank while not being banks yet has not worked and the run against them has accelerated in the last week: Morgan’s CDS spread went through the roof on Friday to over 1200 and the firm has already lost over a third of its hedge funds clients together with their highly profitable prime brokering business (this is really a kiss of death for Morgan); and the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress losing business, losing money, experiencing a severe widening of its CDS spreads and at risk of losing most of its values most of its lines of business (including trading) are now losing money.

Both institutions are highly recommended to stop dithering and playing for time as delay will be destructive: they should merge now with a large foreign financial institution as no US institution is sound enough and large enough to be a sound merger partner. If Mack and Blankfein don’t want to end up like Fuld they should do today a Thain and merge as fast as they can with another large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan; in Europe Barclays has its share of capital trouble and has just swallowed part of Lehman; while most other UK banks are too weak to take over Goldman. The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way Mack and Blankfein should sell at a major discount of current price their firm before they end up like Bear and be offered in a few weeks a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up as they are both much bigger than Bear or Lehman and their collapse would have severe systemic effects.

When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system. We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system. Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds - is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.

[David Guyatt]

The situation certainly is as the above writer said "a crisis of confidence" - but that is not a new thing.

As the former deputy chairman of the Bank of England, and (now long since retired) chairman of the ill-fated Midland Bank, Sir Kit McMahon, once uttered on television, banking is a "confidence trick".

Yup. That sums it up very nicely

Sooner or later "con-men" get caught out. That's what we're witnessing now, I think.

The thing we forget more often that not is that it's our money bankers play with everyday anyway. Banks simply shuffle our money around to other banks in order to earn interest on theirdaily surpluses, or pay interest to other banks by borrowing our money on the interbank market to cover their daily shortfalls.

This, in a nutshell, is what banking is about at it simplest level.

It's always our money they play with. Always has been.

Where things differ from the past - even 30 years ago - is that we're now completely locked into their system. We couldn't get all our money (supposing we have any to begin with) out of their system now no matter how hard we tried. The days of stashing your wealth in five pound notes under the mattress are long gone.

In other words, our money really is their money. They just let us place our name on it to keep us dumb but happy and every month or so, they send us paper thingy's called statements, that pretend to show us how wealthy we are (or not).

But our money is really their money. See.

They play with it and sometimes they loose it. When they loose it they take your name off the money and stop sending you paper thingy's. They can no longer lend it or borrow it. I's gone. Whoosh! Tough. Work longer and harder, eat less, get cold in winter. And maybe, one day, you'll have some more money they can play with and send you paper thingy's to keep you dumb and happy.

But they still pay themselves huge salaries and bonuses from... wait or it... your money which is their money really.

Let's not forget that.

And the real key to the events of these months past is that they have simply stopped shuffling our money around between each other - because, they say, they don't trust any other bank - because there's no transparency anymore. And so they say they don't dare lend our money amongst themselves anymore.

But there's never has been any real transparency. That's the whole point of banking. If there was any transparency, then, for example, simple rich banking folk like Bernanke and Paulson would actually know how much extra of our money they needed to give their banking chums to keep them smiling. But they don't really know how much it will take. Because there's no such thing as transparency in banking (anymore than there's any regulation).

So let's scratch transparency from the list of excuses.

So the question I want answered is why did they suddenly stop shuffling our money - that really is their money - to each other?

Why did a shuffling system that has happily been chuffing along for hundreds of years, suddenly stop earlier this year?

After all, all our money - and theirs too - is still locked inside their banking system. It hasn't disappeared, it hasn't evaporated due to a hot summer, and nor has it been kidnapped by aliens. It's in the same place it's been in for decades past.

The shortage ("illiquidity" in banking argot) is not because there's a shortage of our - or their - money.

The just won't shuffle it anymore.

They call this a transparency problem.

I call it a devious-greedy-bastard strategy.

[Jan Klimkowski]

David - very clear & flamboyant exposition!

As if to make your point about playing with our money, the Fed just magically pumped another $630 billion into the markets. It's as if they didn't have to ask Congress anyway...

http://www.bloomberg.com/apps/news?pid=2...refer=home

Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''

The MSCI World Index of stocks in 23 developed markets sank 6 percent, the most since its creation in 1970. Credit markets deteriorated further as authorities tried to save more financial institutions from collapse.

European Rescue

European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed. The Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing dollars for three months rose to the highest since January. The rate for euros hit a record.

``If people think the authorities may give in to fears, they are wrong,'' Financial Stability Forum Chairman Mario Draghi said today in Amsterdam, where the international group of regulators and finance officials is meeting. ``There is willingness and determination on winning the battle to restore confidence and stability.''

Banks and brokers have slowed lending as they struggle to restore their capital after $586 billion in credit losses and writedowns since the mortgage crisis began a year ago. The bankruptcy of Lehman Brothers Holdings Inc. also sparked fears among banks they wouldn't be repaid by counterparties, driving up the cost of short-term loans between banks.

Funding Risk

``By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk,'' the central bank said.

The Bank of England and the ECB will each double the size of their dollar swap facilities with the Fed to as much as $80 billion and $240 billion, respectively. The Swiss National Bank and the Bank of Japan will also double their dollar swap lines, while the central banks in Australia, Norway, Sweden, Denmark and Canada tripled theirs.

All the banks extended their facilities until the end of April 2009.

The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales

In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year-end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.

The bank-rescue plan being debated by Congress today would give the Fed more power over short-term interest rates by providing authority as of Oct. 1 to pay interest on reserves held at the central bank by financial institutions. That would make it easier for the Fed to pump funds into the banking system.

Paying interest on reserves puts a ``floor'' under the traded overnight rate, which would allow a central bank ``to provide liquidity during times of stress'' without affecting the rate, New York Fed economists said in a paper last month.

[Jan Klimkowski]

Fwiw - over on the "Ticker Forum", in the membership section to which I belong, they claim to have found evidence of the following with regard to the revised "bailout bill":

Paulson and Bush threatened to veto the legislation if there was an explicit prohibition of transfers from foreign banks to an American subsidiary.

THE ASSETS DO NOT EVEN HAVE TO BE AMERICAN MORTGAGE ASSETS - THEY CAN BE AN OFFICE TOWER IN SHANGHAI!

YOU ARE GOING TO GET FLEECED FOR HUNDREDS OF BILLIONS OF DOLLARS IF THIS BILL PASSES - THAT MONEY IS GOING TO GO IMMEDIATELY OUT OF THE COUNTRY!

I don't know if the above is true. But it would be a smoking gun if it could be proved that Paulson & Bush explicitly vetoed any amendment as above...

OK - the evidence comes from a Congressman (? or Senator?) on CNBC here (there's a 15-second advert before the clip proper starts). Congressman (?) Sherman makes the claim at c5:31:

http://www.cnbc.com/id/15840232?video=873682522&play=1

[David Guyatt]

http://newsvote.bbc.co.uk/mpapps/pagetoo...646181.stm

Will the public buy a new bail-out plan?

Analysis
By Steve Schifferes
BBC News

Missouri voters are sceptical about the bail-out deal

The public is deeply divided about the wisdom of bailing out Wall Street. It may take more than tactical manoeuvring to pass a bill that gains popular support.

After the shock defeat of the $700bn bail-out bill in the US House of Representatives on Monday, the Senate passed a new version of the bill on Wednesday, which added additional protection for depositor savings and some tax breaks for small business.

But the changes are not substantial enough to change public attitudes - although they may influence some Republicans in the House, which is set to vote on the package later in the week.

The key is whether the public believes that the financial crisis is both serious and urgent - and whether they think the bail-out is part of the solution.

In fact, the public is even more pessimistic than politicians about the state of the economy, but still much more sceptical about the value of a bail-out.

According to a Rasmussen poll conducted on Monday, 41% of the public are "very concerned" that the US will slip into a Depression similar to the one triggered by the stock market crash of 1929.

Nevertheless, the public is deeply split over the value of a rescue. Some 44% of the public say that Wall Street should take care of its own problems, while 45% back Congressional action to solve the financial problem. Only 45% say the rejection of the plan will hurt the economy.

According to polling by the Pew Research Center, support for a bail-out plan has actually fallen from 57% to 48% in the past week (surveys conducted between 19-22 September and 27-29 September).

Blaming Wall Street

Democratic voters appear more concerned than Republicans that Wall Street is getting a free ride.

According to the Pew poll, 77% of Democrats (compared with 69% of Republicans) say that they are very concerned that "those who are responsible for causing this crisis will be left off the hook".

That finding suggests that tougher measures to limit the gains on Wall Street, and executive pay, may be needed to gain public backing.

Democratic voters are also particularly sensitive to the concern that the bill will not do enough to help homeowners in danger of losing their homes.

Here the partisan divide appears greatest, with 66% of Democrats, but only 37% of Republicans, sharing this worry.

This split explains why the Democrats in Congress failed to get provisions to expand help for homeowners into the bill.

Mistrust of Washington

The amount that the bail-out will cost the taxpayer is a crucial concern for many voters, especially Republicans.

In an earlier Rasmussen poll, those who thought that the government would get most of its money back from the bail-out plan (as the US Treasury claims) supported it by a two-to-one margin, while those who thought the government would not get any money back rejected the deal by 61% to 18%.

And among those who oppose the bail-out, 60% say the government is getting too involved in financial markets - while just 33% of those who support the bail-out hold this view.

But even so, a majority (58%) of those supporting the bail-out say that they are concerned that "government action won't fix the things that caused the problem", according to Pew data.

One reason for that mistrust may be people's doubts about those proposing the plan. The approval ratings of President George W Bush are at record lows, with just 26% of the public giving him a positive rating overall, and 22% approving of his handling of the economy. Treasury Secretary Henry Paulson does not fare much better.

This would suggest that in order to gain support for the plan, the size or cost of the bail-out will have to be reduced, and the presidential candidates will have to give a stronger endorsement.

Looking for 12 votes

The partisan nature of the public's differences in attitudes to the bail-out helps explain why it has proved so difficult to fashion a bipartisan deal in Congress.

In their tactical decisions, Congressional leaders now face a choice.

They could try to pass a bill without Republican support by adding more measures to help homeowners, which would bring more Democrats on board.

But the leadership may lack leverage with Democratic opponents of the bail-out, many of whom come from safe seats.

And the approach could risk alienating Senate Republicans.

So the leadership seems to be trying to win over some of the Republican hold-outs by trying to add benefits for businesses and savers.

But that has angered some fiscal conservatives on both sides who are already worried by the size of the bail-out, and by who will pay for it.

If public opinion is decisive and the House votes it down again, then a smaller, more targeted bill, which seems to benefit Wall Street less and the voters more, may be needed to build public support for the bail-out.