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from James Saft:

Overheard in Davos

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Original Post Text: One of the best things about Davos is the conversations you overhear. It's like no place else.

Sitting minding my own business, typing away I became aware of a central banker from a medium sized emerging market sitting nearby. He was joined by a gentleman from a bank in his home country. After a few muffled preliminaries the central banker said:

"So, how much trouble are you in?"

The banker responded in what sounded like soothing tones but I couldn't make out exactly what he was saying. The only other line that came through clearly was that after a long speech the banker said to the central banker, with an air of exasperation:

"The prices are very low, but there are no buyers!"

That's it, in a nutshell.

from The Great Debate:

The end of the Davos consensus

-- James Saft is a Reuters columnist. The opinions expressed are his own --

It's not exactly a wake, but participants at this year's World Economic Forum have witnessed many of their most cherished beliefs being challenged, upended and sometimes ground in the mud.

Think of it as the "Davos Consensus," a loose alignment of principles that held sway in this Swiss mountain resort and in large parts of the world over the past decade.

This consensus, which generally favoured the market over the state, "light-touch" regulation of financial services and the free flow of goods and capital across borders, is somewhere between on the defensive and in full, not always organised retreat.

What is a lot less clear is what might replace it.

It's true that the global economic crisis and the debt bubble that preceded it did not deliver on much of the promises made by defenders of globalisation and market forces. Instead it was one of the biggest misallocation of resources in history; to housing and consumption that either wasn't needed or really couldn't be afforded.

Banks wiped out much of their capital base and their regulators failed spectacularly too, missing everything from the dangers of a build up in leverage to the Madoff Ponzi scheme.

from Davos Notebook:

Davos Today – 30th January

Watch interviews with top business and world leaders including the following:

• Stephen Green
• Jeroen Van Der Veer
• Simon Crean
• Kris Gopalakrishnan
• John Chidsey
• Steve Pagliuca

[youtube]http://uk.youtube.com/watch?v=nEQLJbKkis8[/youtube]

from Davos Notebook:

London — warmer and cheaper

London is cheaper and warmer, at least compared with Davos, says London Mayor Boris Johnson.

"The fall in the pound is of huge value to London's exports and all sterling-denominated assets. We're seeing a very impressive effect here. We take advantage of the upside and the upside is that the pound is competitive," Johnson told Reuters.

"And everybody in Davos, once they finish this massive negotiation of egos, this complete vanity, should come to London. It's considerably cheaper and considerably warmer."

from Davos Notebook:

Hank Paulson is not Gavrilo Princip, Lehman is not the Archduke Franz Ferdinand

Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.

Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:

"My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles' and if you can change one thing in the story it would have a happy ending.

It's like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn't have been a First World War.

If you go through the events of September of last year you will find it incredibly hard to produce a counterfactual scenario in which it could have been possible to save both Merrill Lynch and Lehman. There is one bank which could be bought by Bank of America but there couldn't have been two.

This is a crisis of too much bank leverage which began in August of 2007 and indeed had it roots far before. A bank leveraged 25-1 only needs a 4 percent decline in their assets to have their equity wiped out. And the notion that saving one investment bank could somehow have prevented or mitigated the crisis is a fantasy. The problem would have happened at some point somewhere else. There is a fundamental problem of bank solvency."

Ferguson argues that without another buyer for one of the two, one would have needed to have been taken into a kind of Treasury conservatorship, as Fannie Mae and Freddie Mac were. But those were already quasi-government and such a move would have required Congressional approval, which given that Congress turned down the first version of the TARP, was not likely.

from Davos Notebook:

Reality bites in Davos dramatization

"Oh! Can I cover this story?!"

I ran over to my assignment editor and thrust the press release under her nose.

"A refugee camp simulation? Full of CEOs? Great idea for pictures. Go for it," she said.

"Great, I'm going to cover a war zone," I thought. "They'll dress me up in combat gear and I can make my name as one of those cool reporters that covers the World Economic Forum in Davos each year."

According to António Guterres, the U.N. high commissioner for refugees, the financial crisis is really making it hard for humanitarian causes.

So what better place than a gathering of the world's economic leaders to raise awareness of the global refugee crisis?

Guterres has teamed up with the not-for-profit foundation Crossroads, which created a simulated environment using actors to recreate what it is like to be a refugee in a war zone. It is running several times a day here in Davos this week.

from Davos Notebook:

The ugly math of foreclosure

Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos. Foreclosures cost 50-60 percent of the value of the mortgage whereas you might be able to keep someone in their house for 30 percent, he said. A house with a modified loan isn't sold on, which further depresses house prices and errodes bank capital.

"What we need is a moratorium on foreclosure while we get a plan in place. We could have five to eight million more foreclosures in the U.S. if we don’t do something about this. Banks have already written down these mortgages."

Big problem however is securities and contract low. Since so many of these mortgages are in complex mortgage securities it can be cumbersome or impossible to get everyone to agree to mods. The Fed is already moving to do just that on loans it has on itsbooks from Bear Stearns and AIG and is encouraging other owners to do the same.

A bad bank plan could also accelerate this, as the government will end up owning many more nonperforming mortgages which it can write down itself.

It is interesting to look at this in a British context, as they will be where the U.S. is shortly. There is a big difference between British and American law however, in that most U.S. mortgages are non-recourse, meaning that the lender can't pursue the borrower for the money but can only collect the house as collateral. Not true in the UK, which has led some to argue that the house price falls will be less severe, as borrowers will be stuck with the house rather than banks. Simon Gleeson, partner in the London office of lawyers Clifford Chance, points out however that it usually doesn't make sense to go after a borrower in the UK for their other assets, even if you have the legal right to.

"If they are giving up on what is usually their biggest asset, they probably don't have too much else," Gleeson said in Davos. So it was during the last UK crash, he said.

Bank of England loan mod programme anyone?

from Davos Notebook:

A climate deal: easier than trade?

Conventional wisdom has it that if the leaders of the world can't agree on a round of negotiations to liberalise world trade then there's no chance they will agree on measures to tackle climate change.

After all, a pact to cut greenhouse gas emissions will involve re-tooling vast swathes of industry and impact the way companies do business from Boston to Beijing.

But is that view right? British economist Nicholas Stern - author of a seminal report in 2006 on the economic fallout of global warming - thinks not.

"Actually, agreement on climate change, I think, will be easier than agreement on trade," he told reporters in Davos. "People understand climate change much better than trade."

The crunch will come in December, when world leaders meet in Copenhagen to hammer out a replacement for the current Kyoto protocol which expires in 2012.

from Davos Notebook:

Davos participants mull economic crisis

Two years ago businessmen and leaders coming to the World Economic Forum in snowy Davos were still betting on economic expansion.

They got it wrong, but this has not put off about 2,500 CEOs and policy-makers from coming here in the hope of catching a glimpse of how the world will evolve.

"I am here to get an idea of where this crisis is going," said Mario Moretti Polegato, Chairman and founder of Italian "no-sweat" shoe-maker Geox.

People have been coming to Davos since the early 1970s to "feel trends", said Jean-Pierre Cuoni, chairman of private bank EFG International and a veteran at Davos.

"In 1988-89 you could already feel that Communism was coming to an end. People back home thought this was crazy. But only a year later the Berlin Wall fell," he said while sipping a drink during a swanky reception at the Belvedere Hotel.

No one expects WEF participants to pull a solution to the crisis out of the hat in just a few days of discussions, but many feel the forum continues to be a great place to exchange ideas.

"The forum is needed now and these days more than ever," Swiss President Hans-Rudolf Merz said as he addressed the forum on Wednesday.

from Davos Notebook:

U.S. – They’re skint, they’re frugal, get used to it

Good session on the "Frugal American," an as yet undiscovered species that is coming to a global economy near you.

You know the general idea, a decade or so of living beyond their means, borrowing money against their rising house values to finance consumption is coming to a grinding halt. That's called a recession, but how long will this frugal thing last?

Ian Davis, the MD from consultants McKinsey & Co was blunt:

"Americans have no option but to be relatively more frugal over the next 10-20 years." This is irrespective of the crisis and is a structural issue due to overspending in the past and the huge host of baby boomers who are now moving into what they fondly hope will be their retirement years. Old people buy fewer ipods and ski boots apparently, and are less likely to remodel their kitchens and bathrooms. That is a problem for the global economy.

So who is going to pick up the ball on consumption? From the sound of the panel, it looks like some kid took the ball and went home. China was candidate one, but even if consumption increased there, as it will, its not likely to become the next America, nor should it be.

"We have to live with the frugal American. Think about how much wealth has been lost, half of world market cap" said Zhu Min, executive vice president of the Bank of China.

"You don’t have wealth, you don’t have liquidity, how do you come back? After a very deep adjustment ... the whole world will be a frugal world."