“Oct. 9 (Bloomberg) — Confronting the worst financial crisis since the Great Depression, Gordon Brown and Henry Paulson went in different directions.

Brown, who opted to spend 50 billion pounds ($87 billion) to partly nationalize at least eight British banks, took the most direct route to shore up the system. The U.K. prime minister’s approach contrasts with the one taken by U.S. Treasury Secretary Paulson, who crafted a more complicated $700 billion plan to buy financial firms’ bad debts. Yesterday, Paulson signaled he may follow and invest directly in banks.

“The U.S. is just less predisposed toward nationalization than all the European countries,” said Joseph Mason, a professor at Louisiana State University in Baton Rouge who used to work at the Treasury’s Office of the Comptroller of the Currency. He praised the British plan as more straight-forward. “I just think they’re way ahead,” he said.

Brown’s plan returns his Labour Party to its roots, reflecting post-World War II policies of taking ownership of industries ranging from airlines to mining. Margaret Thatcher‘s Conservative government reversed those policies in the 1980s, and they were rejected as Labour doctrine under the leadership of Tony Blair and his successor….”

Comment: 

The Brown idea is nothing more than what George Soros and Paul Krugman advocate. It’s official international socialism. [Paulson’s is unofficial corporate socialism, i.e., thuggery].

No mention that Brown has nuclear energy ties, dumped Britain’s gold at the bottom of a 20 year trough in gold prices, and supported monetary intervention ala Greenspan, thus making him culpable for the boom in credit too.

“Iceland’s reinvention from the poor cousin in Europe to one of the region’s wealthiest countries dates to the deregulation of the banking industry and the creation of the domestic stock market in the mid-1990s. Those free market reforms turned Iceland from a conservative, inward-looking country to one of a new generation of internationally educated young businessmen and women who were determined to give Iceland a modern profile far beyond its fishing base.

Entrepreneurs become its greatest export, as banks and companies marched across Europe and their acquisition wallets were filled by a stock market boom and a well-funded pension system. Among the purchases were the iconic Hamley’s toy store and the West Ham soccer team.

Back home, the average family’s wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.

But the whole system was built on a shaky foundation of foreign debt.

The country’s top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland’s gross domestic product of $14 billion…”

More here.

Comment:

The usual muddled and dishonest blanket indictment of the free markets will begin. But look at the facts. It was massive deregulation of one sector – banking and finance, allowing it to become the target of what amounts to predatory lending. Debt. Speculation. Possible criminality.

“The krona is suffering in part from a withdrawal by a falloff in what are called carry trades — where investors borrow cheaply in a country with low rates, such as Japan, and invest in a country where returns, and often risks, are higher.”

Icelandic bonds? Remember those? Just a while back, every investment newsletter you read was urging you to get fantastic rates of return on those bonds. What you have is interest rate arbitrage, speculators making money off the difference between interest rates. They aren’t to blame, of course. Give people an incentive, and they will act on it. But that’s the result of unrestricted printing of paper money, artificially low interest rates, and artificially abundant credit. Don’t blame the free markets.

And this gem from Jim Willie:

REALITY CHECK, INVESTMENT ALTERNATIVE: If you had purchased $1000 of Delta Airlines stock one year ago, you would have $49 today. If you had purchased $1000 of AIG stock one year ago, you would have $33 today. If you had purchased $1000 of Lehman Brothers stock one year ago, you will have $0 today. However, if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling, you would have received $214 today at redemptions. Based on the above, the best current investment plan is to drink heavily & recycle. It is called the 401-KEG Plan.

“Developments just prior to and immediately after the bailout illuminate interesting political and potentially ominous market realities. The political reality is that George W. Bush, unlike his father, is most likely a Morgan man. Press reports indicate that W himself was involved in these transactions. Comparing the transactions shows that Morgan received the federal 800-pound gorilla’s unbridled support whereas federal coercion in the Citi-Wachovia transaction was, by comparison, restrained. In “facilitating” the JP Morgan–WaMu deal, the FDIC first wrestled WaMu to ground, executing a midnight foreclosure and repossession of all its assets. The FDIC then sold WaMu’s $302 billion in assets to Morgan for $1.9 billion and wiped out the WaMu equity holders, including a group that had invested $7 billion six months ago. Monday JP Morgan further announced that had no intention of hiring or retaining WaMu management. Wachovia was just the latest bone thrown to JP Morgan. In another federally “facilitated” transaction, on March 17, 2008 JP Morgan acquired global securities giant Bear Stearns for $236 million, or $2 a share. After shareholders complained, JP Morgan increased its “offer” fivefold, to $10 per share. In February of 2008, Bear Stearns stock had a market value $93 per share. Citi, by comparison, has not received the same level of government support. In the Citi-Wachovia transaction, the FDIC did not actually seize Wachovia’s assets. It only threatened to seize Wachovia’s assets, allowed Wachovia to survive as a legal entity and gave Wachovia until December 31 to close the deal with Citi. If W is not a Morgan man, then he is not a good negotiator, because the delay has opened the door for Wachovia to negotiate a better deal…..”

More by Bill Butler at Lew Rockwell.

The Fed cut rates this morning by 50 basis points:

“Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.. ..”

“The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.

“The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors” have become increasingly reluctant to buy commercial paper, especially longer-dated maturities. As the market for commercial paper shrank, the Fed said rates on the longer-term debt “increased significantly,” making it more expensive for companies to borrow.

The Treasury Department, which worked with the Fed on the program, said the action is “necessary to prevent substantial disruptions to the financial markets and the economy.”

The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said. It did not say how much.

If a company’s commercial paper is not backed by assets or other forms of security acceptable to the Fed, the company could pay an upfront fee, the central bank said.”

(The emphasis is mine).

That’s breaking news right now.

Comment:

This afternoon, Bernanke explained this highly unusual and drastic move as necessary to take the edge off a recession that he admitted was now in store.

Here are the terms and conditions for the new Commercial Paper Funding Facility (CPFF).

The Fed lends to a Special Purpose Vehicle (SPV). (Those are the off-book entities that caused some of this mess, in the first place) at the Fed Funds Rate. The collateral would be the assets of the SPV (which would be the bad debt they are selling to the CPFF).

The SPV buys 3-month dollar denominated commercial paper from eligible issuers at a rate over the 3-month overnight index swap rate (OIS).

Question: Who determines this rate?

Answer: Why, market participants – the firms doing the borrowing.

Question: Can the Fed make unsecured loans?

Answer: Yes – there is a vague option for loans secured ‘through other means.’

Question: Can foreign issuers sell paper to the CPFF?

Answer: Yes – as long as they have a US parent.

Question: How long does this go on for?

Answer: The SPV stops buying paper on April 30, 2009, unless its term is extended. But the Fed can keep on lending money after that until the SPV’s assets (that would be bad debt) mature (who knows when that would be….and what they would be worth at that point).

Question: Who pays for it?

Answer: The Treasury (tax-payers) provides money to the NY Federal Reserve. The money doesn’t follow under the $700 billion bail-out (actually, $800 billion plus with sweeteners added) that just passed.

Unbelievable.

_____________
Meanwhile, we’ll file this under G-Sax Watch:

“Kashkari, who was a vice president in Goldman’s San Francisco office before joining the department, is one of four former executives from the firm now working feverishly to resolve the financial crisis…” (see my earlier post on this for the names and positions)

James Kunstler says we may be in for a bout of emergency measures this week, a tectonic shift in the capital markets next to which the events of the 1930s look orderly.

This was University of Chicago Business School Professor John Cochran’s opinion (low) of the original and revised Paulson plan (before it went though). He called it the “nuclear option” and wrote:

“Since the Treasury will not be able to raise overall market prices, it will end up buying from banks that are in trouble, at prices fantastically above market value. This is transparently the same as simply giving the banks free money. Make sure the taxpayers get a thank-you card.”

Pensioners may not be feeling up to sending out thank-you’s. The loss to pension funds in the last 15 months is over $2 trillion, according to a top Congress budget analyst, says AP.

“Oil and gas stocks, as well as metals and mining shares, suffered the steepest losses Monday.

The RTS Oil and Gas index fell 22%, with shares of state-controlled Gazprom (UK:OGZD: news, chart, profile) and oil giant Lukoil (UK:LKOD: news, chart, profile) suffering double-digit declines.

The RTS Metals and Mining index fell 15%, with shares of Russia’s largest mining company Norilsk Nickel (UK:MNOD: news, chart, profile) going into free fall. In London trading, Norilsk tumbled 44%.

The Russian equity market is dominated by resource stocks, particularly oil and gas companies, and as a result the recent tumble in commodity prices has hit Russia particularly hard.”

More at Marketwatch.

Comment:

That makes the RTS the biggest loser globally, down 62% year to date and 19.1% today.

As energy and commodity speculators have been flushed out by the banking crisis, markets dominated by them have been hit the worst.

Update:

Steve Saville writes that in the last two weeks the Fed’s (Federal Reserve, not the government or Treasury) balance sheet has increased by 50% and says that this portends a massive increase in true money supply that is going to be hugely inflationary. He advises against stocks, bonds, or real estate and suggests that industrial commodities may be in a slump for a while – leaving only precious metals viable. He also thinks we’ll see the PM’s go up in advance of any really severe inflation because of the big players taking positions ahead of the crowd. But technically, GLD, from what I’ve seen hasn’t shown a clear break-out from its trend lines. And SLV has been quite volatile to the downside and restrained to the up. I’d be cautious yet.

Then again, for a stock market untouched by the ongoing earthquake, check out the Iraqi stock exchange.

Latest news:

“Neel Kashkari, the Treasury’s assistant secretary for international affairs, was selected Monday to be the interim head of Treasury’s new Office of Financial Stability.

The designation was made by Treasury Secretary Henry Paulson, who was the head of Goldman Sachs before he joined the Bush administration in 2006. Kashkari, 35, will head the office created by the emergency legislation enacted Friday to fund the largest government bailout in history…”

Comment:

Kashkari worked for Goldman as a Vice-President. How brazen can they get?

Side-note: he has a connection to NASA.  That is, he’s a rocket scientist turned investment banker.

Rocket science. Hmmm…wasn’t it top-heavy math which got LTCM into that mess in 1998? And isn’t top heavy math a part of the problem today? Not enough banks have the money to hire the people who understand the most complex finance, and that’s why they let a lot of things through they should have checked. So, you have a Goldman quant who’s been vetted at the highest level of security, who has a background in defense and information technology in the key financial position.

Update: The are now four Goldman execs working on the crisis , Dan Jester and Ken Wilson, both financial institutions bankers, and Steve Shafran, who focused on corporate restructuring while at Goldman. Others on the team who are not from Goldman are: Anthony Ryan, the assistant secretary for financial markets; David Nason, assistant secretary for financial institutions; and Bob Hoyt, Treasury’s general counsel.

CALL CONGRESS AND TELL THEM GOLDMAN SACHS OUT OF THE US GOVERNMENT