Author Archives: Lila

Defaulted Home Loan in US = No Pension in China

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“Chanting slogans “Return my blood money” and “Stealing elderly money,” protesters rallied outside the territory’s legislature building in the downtown Central financial district to urge newly elected lawmakers to investigate the sales of Lehman-backed bonds in Hong Kong.

The investors, many of them near or at retirement age, also swarmed several major banks, including Bank of China and Standard Chartered, in small groups in hopes to recoup their money.

Organizers said about 1,000 people attended the rally. Police did not offer an estimate.

Protesters accused banks that sold them Lehman-backed bonds failed to explain to them the products were linked to the bankrupt U.S. company as they thought their investment carried low risk.

“I was only told it was an investment with principal protection,” said electrical repairman Chan Hong-ming who bought $30,000 worth of Lehman-backed bonds two years ago from Bank of China.

The 50-year-old said the bank salesman had deceived him by not telling him the bonds were secured by swap obligations guaranteed by Lehman.

“The bank just cheated me … Now I don’t even know how much my investment is worth.”

Housewife Annie Ng also said she was misled by banks when she bought the $15,000 bond.

“I’d never heard of Lehman Brothers before. I wouldn’t have bought it if I knew Lehman was involved,” said the 60-year-old mother who planned to passed on the money to her children.

Billions of dollars in souring debt forced Lehman Brothers Holdings Inc., once the fourth-largest investment bank in the U.S., to file for bankruptcy last month amid the world’s worst financial crisis in decades….”

Fed Cuts Rate as European, Asian Markets Slide Down

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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.. ..”

Worse Than 1929? Emergency Fed Purchase of Commercial Paper

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“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.

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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.

Bank Wars: Market Machinations – Update on Bush

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“The US House of Representatives voted in support of the Wall Street bail-out package. As the vote began at 1:00pm, Europe’s equity market gains of +1.5% across the board had been locked in, but the US equity markets started to plunge, down -4.0% in the final three hours of trading.Was this a message from Humungous Bank & Broker that the Paulson Package was not a Wall St bail-out after all? You betcha. Deceitful stuff, this. And when Europe opens well down on Monday, will that be a message from HB&B that they want the same bail-out from the governments there? You betcha.

Interventionists are now in full control of the global equity market. Paulson has won. The banks have won. The people’s representatives caved in and the people can take a hike for all the banks care at this point….”

That’s the excellent Bill Cara who agrees with my take that this crisis was exploited to pave the way for mega-bank consolidation at the expense of the weaker banks.

Comment:

Giving credence to that view, the fight between Citigroup and Wells Fargo heats up. The NY State Supreme Court blocked the incipient merger of Wells with bank-in-distress, Wachovia. Then Wachovia successfully appealed the decision. Now Citi, which has an exclusivity contract with Wachovia, plans to appeal the appeal.

Meanwhile, Wachovia has gotten a restraining order from a N. Carolina judge to prevent Citi from enforcing the exclusivity contract, charging that following the Wachovia-Wells merger announcement, Citi had taken steps to force Wachovia’s collapse.

The Citi offer (for $2.2 b) has the backstop of the FDIC and would cannibalize Wachovia, taking over only the banking operations, not Wachovia’s asset management or retail brokerage. Wells Fargo’s deal, on the other hand, would leave the bank intact and would give it $15.1 b.

Over at the postmortem for Lehman, unsecured creditors have filed a claim that JP Morgan prevented Lehman from accessing its assets, causing the bank to collapse.

And at the Congressional probe into AIG’s contribution to this mess, documents seem to show that AIG’s auditor, Pricewaterhouse Cooper gave a confidential warning that internal overseers weren’t allowed proper access to the highly-leveraged desks. (Of course, if you go back to 2005 and earlier, you’ll find Pricewaterhouse itself was being questioned for its behavior).

Secrecy has been the complaint for years over at Goldman Sachs. What beats me is why no one called these firms on any of this.

Speculation Nations: Russian equities; Update: Where to put money?

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“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.

United Sachs of America: Goldman’s Kashkari Finance Czar; Update: More Goldman

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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

Banking Blow Up: Eurozone Joins the Panic

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The financial fireworks continue. Over the weekend, the Europeans found that they weren’t insulated from the crisis at all:

“Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.

Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.”

More by Ambrose Evans-Pritchard (who seems to be relishing his role as Jeremiah) at the Daily Telegraph.

Comment:

While I agree in general, I think the hysteria is misplaced. Things aren’t good, but we are only making it worse by fanning public hysteria. The essential problem is that banks are fearful of counter-party risk, because the rating agencies weren’t doing their jobs – so much for more regulation). Many of these assets are illiquid because they are marked up too highly. That includes houses. Prices are deflating, but they are still not back at realistic values. Mark them down and you will find buyers in the market. Instead, everyone is trying to keep prices at artificial levels by getting the government to buy them (and here, in the US, we can print money to support any price level). Ergo – confidence grows less and less, as prices and values become even more completely unhinged.

That’s why, this morning, the Dow is down, sinking below 10,000 for the first time in 4 years. I want to say, I told you so, to the entire political, academic, financial, and cultural establishment which has been out in force telling us to sign that bill, or else.

And remember Jim Cramer saying he liked this market just this past June? Well, today Cramer’s telling people who need their money in the next five years to pull it out of the market asap. Almost makes you think we hit a bottom (only half kidding).

Unlike Cramer, Nadeem Walayat, a trader, has been right on the money. We are at 1929, he says, and yet, we’re not – because, today, it’s not a stock market crisis but a banking crisis. Walayat predicts a two-year recession.

Personally, and here, Evans-Pritchard’s use of the phrase shock and awe seems like a bit of a give away, I think there is more to this crisis than meets the eye. Remain skeptical – especially, when anything involves trampling the constitution and creating ever more powerful financial czars….

Just remember – as this piece says – a substantial part of the media shills for Wall Street and the government. They either print outright falsehoods, naively repeat what they are told, or co-opt the arguments of people who are right by appropriating a part of what they say but giving it their own misleading spin.

As for punitive measures for what’s happened, Michael Brush at MSN Money Central has a good piece on how CEO’s made out while their companies were tanking. He doesn’t have much hope that legislation will get the bad guys to cough up their ill-gotten gains but he does have a couple of links for you to get through to the government.

Regulatory overhaul is not the answer (although a few rules do need to be reinstated). Look at what’s happening in Europe? No lack of regulation there. And, the Eurocrats are even turning their backs on a Eurozone rescue modeled after the American.

“I reject a European shield because we as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used,”

says Peer Steinsbruch, Germany’s Minister of Finance…..suddenly, quite the nationalist.

Propaganda Nation: Two-Party Games

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“The argument that the two parties should represent opposed ideals and policies, one, perhaps, of the Right and the other of the Left, is a foolish idea acceptable only to the doctrinaire and academic thinkers. Instead, the two parties should be almost identical, so that the American people can “throw the rascals out” at any election without leading to any profound or extreme shifts in policy. “{p. 1247-1248}

Carroll Quigley, Tragedy and Hope, 1966

And this note for conspiracy aficionados from an admirer:

“Many people interested in Carroll Quigley take entirely out of context the references he made in his book Tragedy and Hope: A History of the World in Our Time about a high-level Anglophile conspiracy that, he said, flourished before World War II. It seems that many people believe Quigley thought this vast conspiracy somehow continues to operate right up to our own day.

But as Dr. Quigley once told me, the reality is much scarier. Instead of a secret cabal now being in charge, there’s no one in charge….”

Comment:

That, of course, is a clever disclaimer. Perhaps there is a group in control…perhaps not. But surely there is a system of thought in control. Corporatism (industrial capitalism as we know it) and socialism, apparently at odds but actually knitted together, with control in the hands of small groups of elites in finance and their apologists in the media and in academia….

That’s quite a plausible conspiracy. American history does indeed show an alliance between big business and so-called progressive reform ….certainly from the era of the Progressives onward. The ideology that has driven this is Fabian socialism, out of which developed theories of mass control, useful both for the work place and equally in politics.

Doug Boggs adds to this discussion with a very interesting post on how complex groups function, where he looks at some of the break-down today in terms of evolutionary change (if I understand him right).

Banker Bail-Out: JPMorgan Take Down of Lehman?

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“Oct. 3 (Bloomberg) — JPMorgan Chase & Co., the main lender and clearing agent for Lehman Brothers Holdings Inc., caused the liquidity crisis that led to Lehman’s collapse, creditors said.

JPMorgan had more than $17 billion of Lehman’s cash and securities three days before the investment bank filed the biggest bankruptcy in history on Sept. 15, the creditors committee said in a filing late yesterday in bankruptcy court in Manhattan. Denying Lehman access to the assets on Sept. 12, the bank “froze” Lehman’s account, the creditors claimed.

JPMorgan, the biggest U.S. bank by deposits, financed Lehman’s brokerage operations with daily advances, while money market funds and other short-term lenders provided overnight loans, according to bankruptcy court documents. When JPMorgan shut Lehman off from funds, Lehman “suffered an immediate liquidity crisis that could have been averted by any number of events, none of which transpired,” according to the filing….”

More at Bloomberg.

Bailing Out the Foolish Virgins

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“Rabbi Bush exploded in anger. “How dare you be satisfied with such a status quo! First, those foolish virgins were victims, for there is not enough affordable oil, and it is not right that only some have a full supply while others go empty-handed!”

He continued. “Second, the only just solution is for the wise virgins to bail out the foolish ones, or else people will have to live in darkness.”

“Uh,” Jesus replied, “I think that we already have established that if your plan is put into place, everyone will be in darkness.”

Rabbi Dodd interjected, “Rabbi Frank and I have long believed that oil should be affordable for everyone, and that is why we have worked to increase the access of everyone to oil.” “I know,” replied Jesus, dryly, “Your scheme forced up the price of oil so high that only those who had been wise and prudent with their money could afford enough of it at the end. It is harder now to get oil than ever.”

Rabbi Paulson stepped forward with a big grin on his face. “That is why we have a special plan,” he told Jesus. “Foolish virgins can borrow all of the money they want from King Herod, who plans to borrow that money himself from the people.”

“How will the payback work?” asked Jesus, concerned. “It seems that people will be in debt with no hope of repayment. You say you are borrowing from the people to lend to the people? Does not the Book of Proverbs say that the debtor is slave to the lender?”

“Not in our economy,” replied Rabbi Paulson proudly. “We will owe it to ourselves.”

And Jesus wept.”

Bill Anderson in Lew Rockwell.