The New Fixers

The New Fixers
Daniel Gross
Oct 04, 2008

http://www.newsweek.com/id/162269

In 1907, one man saved us from financial collapse. Today it takes a troika.

"This is the place to stop this trouble!" J. P. Morgan said on the afternoon of Oct. 23, 1907. After the failure of several trust companies (unregulated banks, kind of like today's subprime lenders), the banker had decided that the collapse of the Trust Co. of America would cause too much damage to America's fragile financial system. He pulled together leading bankers and pooled funds to bail out the firm. Over the course of two weeks, as a fevered crisis gripped Wall Street and Washington, Morgan acted time and again: saving brokerage firms, rounding up $25 million in cash in 20 minutes to help the New York Stock Exchange stay open, underwriting municipal bonds for New York City, bringing in gold from Europe to bolster the dollar and replenish Washington's coffers. "He essentially singlehandedly saved New York City from failure," says Sean Carr, coauthor of "The Panic of 1907."

One of the troubling features of our current, rolling crises on Wall Street has been the absence of a single, Morganesque financial statesman-someone who can put a stop to the trouble. President Bush is essentially AWOL, and Federal Reserve chairman Ben Bernanke doesn't command the respect of the global markets the way his predecessor, Alan Greenspan (who, it is now clear, helped create this mess), did. "I don't think any one man in today's immense and immensely complex markets could play the role J. P. Morgan played in 1907," says Jean Strouse, author of the Morgan biography "American Financier." Indeed, the best we have is a troika of unrelated executives who are performing different components of Morgan's historic role.

John Pierpont Morgan, all paunch and haughty jowls, owner of a rhinophyma-ridden nose that launched a thousand caricatures, was the dominant banker of America's gawky financial adolescence. Today the most powerful banker in Gotham is Jamie Dimon, the CEO of a firm that descends (historical irony alert!) from the House of Morgan itself. Like J.P., he is aloof and willing to play hardball. In March, Dimon's JPMorgan Chase picked up the failed investment bank Bear Stearns, and in September he snagged the banking operations of ailing Washington Mutual, both for a nominal price. As a result, Dimon now commands a mammoth bank with more than $2 trillion in assets, 5,400 branches and $900 billion in deposits.

At his core, Morgan was an investment banker-a seeker of order, a dealmaker and adviser. Today the investment banker in chief is Treasury's Henry Paulson, the former CEO of Goldman Sachs. Morgan was known to bring feuding railroad executives aboard his yacht, the Corsair, and sail it around New York harbor until they made a deal. Paulson has repeatedly summoned Wall Street executives and political leaders to the offices of the New York Federal Reserve and the Treasury Department for marathon deal meetings.

Paulson has the balance sheet of the Federal Reserve and the taxpayer behind him. Morgan had only his name. But in his day, that was more powerful than any guarantee Uncle Sam could provide. Now it is Warren Buffett, the proprietor of Berkshire Hathaway, whose name commands such respect. With his folksy ways and desire to share his wealth and wisdom with the public, Buffett may appear to be an anti-Morgan. Yet a line from Alice Schroeder's new doorstop "The Snowball: Warren Buffett and the Business of Life"-"He was a man who loved money, a man for whom the game of collecting it ran in his veins as his lifeblood"-could just as accurately have described Morgan. In recent weeks, Buffett has stepped in with his own cash and reputation to stop runs on the bank at Goldman Sachs and General Electric (Buffett is a director of NEWSWEEK's parent, The Washington Post Company). Of course, like Morgan, who profited on some of his system-saving maneuvers in 1907, Buffett was also out to make a buck.

There are important differences between Morgan and his modern-day successors. Morgan was willing to save the financial sector without the government's help. Dimon and Buffett made their investments only because of the prospect of federal assistance. And all three lack his imperium: Morgan would never have strummed a ukulele to entertain shareholders, as Buffett does, nor gotten down on his knees to beg a congressional leader for support, as Paulson did to House Speaker Nancy Pelosi.

But mostly, the difference is that the financial world has changed. "When you look at the complexity of the system and all the interconnectivity and size of these institutions, that is the challenge," Henry Paulson told NEWSWEEK in September. J. P. Morgan, sitting in his fortress-like office at the corner of Wall Street and Broad Street, could easily survey the entirety of the U.S. financial system and get his arms around the problems. Today, as his modern-day imitators look at a chaotic, interconnected global economy, all they can do is play whack-a-mole.

Central Banks Coordinate Global Cut in Interest Rates

Central Banks Coordinate Global Cut in Interest Rates
Carter Dougherty And Edmund L. Andrews
Oct 08, 2008

http://www.nytimes.com/2008/10/09/business/09fed.html

In a move of unprecedented scope, the world’s major central banks lowered their benchmark interest rates Wednesday, a coordinated effort to halt a collapse of share prices and a freeze in credit markets that threatens to set off the first global recession since the early 1970s.

The action failed to calm gyrating markets, however, amid the growing realization that a serious and prolonged recession may be difficult to avoid.

The Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Sweden all reduced primary lending rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of Japan endorsed the moves without changing its rates.

In another monetary first, the Chinese central bank joined the effort — without explicitly saying it was doing so — by reducing its key interest rate and lowering bank reserve requirements to free up cash for lending.

The Fed’s benchmark short-term rate now stands at 1.5 percent. The European Central Bank’s is 3.75 percent.

Taken together with other moves in the United States, Britain and Continental Europe in the last few days, the rate cuts look like part of a broader, global strategy that embraces aggressive use of monetary policy and taxpayer recapitalization of ailing banks, generating cautious optimism among crisis-weary analysts.

Credit market conditions remained extremely tight, with the gap between yields on safe, three-month government securities and the rate that banks charge one another for loans of the same duration rising to more than 4 percentage points not long after the central banks acted — showing financial institutions remained deeply concerned about lending to one another.

The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.

But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their inability to do even routine financial transactions.

Making matters worse, none of the epic emergency measures taken in the United States — the passage of a $700 billion bailout plan to buy up distressed securities; a doubling and redoubling of emergency loan facilities at the Fed to $900 billion on Monday; and the Fed’s unprecedented decision on Tuesday to start buying up short-term commercial debt for businesses of all types — had prevented the stock markets from plunging at vertigo-inducing amounts day after day.

The central feature of the acute credit crunch, which began in the United States and is now spreading rapidly in Europe, is the reluctance of banks to lend at any rate because they have taken such heavy losses already and are hoarding cash.

Not only does that interrupt the normal flow of credit for activities as basic as modernizing production lines or meeting payrolls, it gums up the normal mechanisms central banks use to ease credit and stimulate economic activity.

After a rushed series of rate reductions last fall and early this year, bringing the overnight Fed funds rate down to 2 percent in April, the central bank had concentrated its efforts on injecting hundreds of billions of dollars into the financial system to keep banks lending to one another and to their customers. But policy makers held back from further reducing interest rates, which reduce the overall cost of money, because they were worried about rising inflationary pressures.

Consumer prices have climbed sharply, largely because of huge increases in energy and commodity prices. As recently as the Fed’s policy meeting three weeks ago, the central bank’s official position was that its concerns about slowing economic growth were roughly equal to its concerns about rising prices. In reality, many policy makers were more worried about the onset of a recession — which many private economists say has already arrived. But there were still disagreements among members of the Federal Open Market Committee, which sets interest rates.

Will this be a depression?

Will this be a depression?
Anthony Mirhaydari
Oct 07, 2008

http://blogs.moneycentral.msn.com/topstocks/archive/
2008/10/07/are-we-facing-a-depression.aspx

Americans sure are in a gloomy mood. A recent poll finds that 60% of us believe that a full-blown depression is somewhat or very likely.

http://money.cnn.com/2008/10/06/news/economy/depression_poll/

Since a depression has no official qualities (besides being worse than recession), the pollsters cited a few economic measures from the 1930s during their survey: A 25% unemployment rate, widespread bank failures, and millions of people homeless and unable to afford basic necessities. Other measures of consumer sentiment corroborate these findings.

Before you blow all this off as the irrational rumblings of an unhappy electorate, know that Wall Street's economists are starting to see a similarly dour picture. David Rosenberg of Merrill Lynch penned the following comment in a note to clients on Monday:

"It truly is a modern-day depression, in our view -- what else do you call it when an entire industry vanishes (investment banks) in less than a year; the ranks of the unemployed soared more than 30%; and nearly one in ten homeowners with a mortgage are either in arrears or foreclosure?"

While a repeat of the Great Depression isn't likely -- automatic stabilizers like welfare and unemployment insurance are in place, the government and the Federal Reserve are accommodating -- the present situation needs to be put into perspective. After the successive failures of two of the largest asset bubbles in history, our present situation is an outlier; that is, it isn't a normal cyclical downturn of the business cycle.

Morgan Stanley economist Richard Berner is looking at two "adverse feedback loops" that could pull things lower:

"Spreading weakness beyond housing to consumer and capital spending, and from a global slowdown to U.S. exports, will promote further declines in employment, in turn pressuring income, consumers, and their lenders. A second vicious circle runs from tighter credit to a weaker economy, then to a deterioration in credit quality, in turn increasing reluctance to lend."

The depth and length of this downturn now depends on the policy response out of Washington D.C. and the willingness of foreign governments and investment pools to fund the resulting budgetary deficit.

FTSE 100 heads for sharpest fall since 1987

FTSE 100 heads for sharpest fall since 1987
Graham Ruddick and Malcolm Moore
Oct 07, 2008

http://www.telegraph.co.uk/finance/markets/3146097/
FTSE-100-heads-for-sharpest-fall-since-1987.html

The FTSE 100 tumbled more than 6pc and is heading for its worst day since 1987 as the global financial crisis deepens.

The UK's index of leading shares dropped more than 300 points shortly after the open and continued falling during a tumultuous day's trading. By 3:30pm in London the index was off 335 points, or 6.7pc. It has not fallen more in a day since October 1987.

Shares in HBOS, Royal Bank of Scotland, Barclays, Lloyds TSB and HSBC all registered sharp falls.

The intensity of the banking crisis that has spread from America to Europe's shores also rattled investors on Wall Street. The Dow Jones Industrial Average tumbled through the 10,000 mark for the first time in four years and the Standard & Poor's 500 Index was also lower.

Miners added to the pain for investors after investment bank UBS warned earnings in the mining sector could fall 46pc this year and warned commodity prices could drop another 25pc as the global economy slows.

The whole sector tumbled, with Kazakhmys and Eurasian Natural Resources leading the fallers.

In Europe, stock markets in Germany, France, Italy and Spain were also down between 4pc and 5pc, while Russian stocks tumbled 12pc as the rouble-denominated Micex index slumped to its lowest level since October 2005.

Mike Lenhoff, the chief strategist at Brewin Dolphin, said the markets needed to see leadership from politicians around the world in tackling the crisis.

In another turbulent day, on the foreign-exchange markets, sterling and the euro weakened against the dollar and oil slid to $86.18 as fears of a global slowdown mount.

Earlier in Japan, the Nikkei Exchange was down 322.35 points, or 2.95pc, in the early afternoon at 10,615.79. The benchmark Shanghai composite index lost 109.12 points, or 4.76pc, to 2184.68.

A similar picture emerged across India, South Korea, Hong Kong, Taipei and Australia as worries spread that Asia may be hit harder than many analysts initially thought.

"It's becoming increasingly evident that the fallout of the banking crisis is rapidly spreading around the world. It is clear Asia will not escape unscathed," said Timothy Bond, Merrill Lynch's chief Asia economist.

Simon Denham of Capital Spreads warned that the increasing trend across Europe of guaranteeing depositors savings, as seen by the Irish, Greek, Danish and possibly the German governments, could have serious consequences.

"If we effectively nationalize all our banks in Europe then what is that going to do in terms of growth?" he said. "If any loan or mortgage that anyone takes out is effectively approved by the government it's not good. People talk about the lost decade in Japan and we could say that money is going to be difficult to come by for a good few years here.

Lesson From a Crisis: When Trust Vanishes, Worry

Lesson From a Crisis: When Trust Vanishes, Worry
David Leonhardt
Sep 30, 2008

http://www.nytimes.com/2008/10/01/business/
economy/01leonhardt.html

For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.

Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.

But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.

Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.

“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.

As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.

The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.

Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.

The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

Bailout bill loops in green tech, IRS snooping

Bailout bill loops in green tech, IRS snooping
Declan McCullagh
Oct 03, 2008

http://news.cnet.com/8301-13578_3-10057618-38.html

Bailout type
Cost to taxpayers (Source: Reuters)

Financial bailout package approved this week
up to or more than $700 billion

Bear Stearns financing
$29 billion

Fannie Mae and Freddie Mac nationalization
$200 billion

AIG loan and nationalization
$85 billion

Federal Housing Administration housing rescue bill
$300 billion

Mortgage community grants
$4 billion

JPMorgan Chase repayments
$87 billion

Loans to banks via Fed's Term Auction Facility
$200 billion+

Loans from Depression-era Exchange Stabilization Fund
$50 billion

Purchases of mortgage securities by Fannie Mae and Freddie Mac
$144 billion

POSSIBLE TOTAL
$1.8 trillion+

NUMBER OF HOUSEHOLDS PER U.S. CENSUS
105,480,101

POSSIBLE COST PER HOUSEHOLD
$17,064+

Here's a look a some of the green-tech measures:

(1) One-year extension for wind and refined coal energy tax credits. A production credit for electricity produced from renewable marine energy sources (meaning through wave power and river power, or by exploiting the differences in ocean temperature). Energy credits for "small wind properties," geothermal heat pump systems, and energy-efficient residential properties.

(2) New renewable-energy bonds. Up to $800 billion in energy bonds may be offered to the public, with a third from "public power providers," a third from governments, and the remainder from "cooperative electric companies."

(3) Tax credits for "cellulosic biofuels" and for "carbon dioxide sequestration." An extension of an alternative fuel credit. Tax credits for "new qualified plug-in electric-drive motor vehicles." Bicycle commuters get a nod, as do regulations aimed at "residential top-loading clothes washers."

IRS undercover operations: Privacy invasion?
The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, "I'm not sure if that deduction is entirely legal, but it'll save you $1,000. Want to take it?") That section had expired as of January 1, 2008, and would now be renewed.

There's another section of the bailout bill worth noting. It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police. Intelligence agencies such as the CIA and the National Security Agency can also receive that information.

What's a little odd is that there's been little to no discussion of the IRS sections of the bailout bill, even though they raise privacy concerns. Treasury Secretary Henry Paulson said this week: "I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy." He never mentioned the necessity of additional IRS undercover operations.

Peter Schiff On The Economy, Gold, and the Coming Collapse of the Dollar

Peter Schiff On The Economy, Gold, and the Coming Collapse of the Dollar
Vito Rispo
Sep 29, 2008

http://csinvestor.com/peter-schiff-videos-the-economy
-gold-and-the-coming-collapse-of-the-dollar/

Peter Schiff is the Permabear who appears on all the financial shows as a foil to all the optimistic pundits. He’s told his clients to short sub-prime mortgages when everyone was buying, he told people to get out of tech stocks in 1998 and 99. Every financial call Schiff has made has turned out to be right, and this time he’s saying the stock market is headed even lower, gold prices are headed up around $1,500 by the end of the year, and at the minimum, the dollar will lose another 40 to 50 percent of its value. Schiff thinks we’re headed for a period worse than the Depression.

Schiff said, in a recent US News and World Report article:

“There will be a big increase in crime. People are going to be hungry. People are going to be cold. There’s a sense of entitlement in this country, and when a lot of people used to having things suddenly don’t, everybody looks for someone to blame. We’re going through a very rough period in our history.”

Check out a whole slew of Peter Schiff videos, with tons of valuable information:

One of the best videos, Peter Schiff laying out exactly what the problem is and what the solution is. Well done.

Every time Peter Schiff appears on TV, other pundits always seem to get upset, and it invariably turns into a screaming match, but he’s always right. Time has always proven him correct, consistently on almost every call he’s made. Learn from it, realize it’s happening, and most of all, take his advice, buy gold and Euro stocks and foreign currency. His track record speaks for itself, it’s just Common Sense.