I was feeling a bit better having listened to corporate types at Davos say that their businesses still look good, but it was all undone by a real blizzard of negative statements on Saturday.

First off, at least for me, was Merrill supremo John Thain. He said that the credit crisis was beginning another wave, as consumer debt started to have problems. Thain, in one of the bleakest such assessments I’ve ever heard from an investment bank chief:

“Problems in credit markets are spreading to the consumer sector…Credit cards receivables, auto receivables, home equity loans.

“Consumer bankruptcies are up 40 percent in 2007. This will be exacerbated by a rise of unemployment.”

While Thain said he was not concerned about Merrill’s remaining exposure to distressed instruments, you have got to think that banks generally are looking at more pain if the huge credit card and auto loan sectors go the way of risky mortgages.

Also really notable was a comment from the IMF’s Dominique Strauss-Khan, who said that fiscal policy has to “complement” monetary policy, which I took to be a call for fiscal stimulus.

So did former Treasury Secretary Larry Summers, who said:

“We have been present for a mildly historic event. For the the first time in a quarter century the managing director of the IMF has called for an increase in budget deficits and fiscal stimulus.”

These are calls for risky policies by serious people, and I take them, along with the Fed’s intermeeting rate cut, as further evidence that the U.S. economy and the global banking system are in a bad way.

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

(photo: Yuriko Nakao/Reuters)

By Swiss law (and believe me there are some funny Swiss laws) it is illegal to blog about Davos without a funny, lighthearted piece about how rich everybody is. I don’t know why this law came into being, but I imagine it was as a result of international negotiations intended to insert irony and self-awareness into a very self-serious event. It also makes us poor media types feel better.

Here is ours, culled from overheard conversations this week:

I was sitting at a table, blogging, when a man politely asked me if he could sit in an unoccupied seat. After a while, two other men began talking to him very solicitously. It was clear, as these things are, that the seated man was important to the others.

After a time, one standing man said: “You know what his problem is, his jet is too big to land anywhere near here.”

Second standing man: “Why don’t you do like they do on yachts, carry a little plane around inside the big one?”

Stay tuned for more…

Here’s the short version of a panel on private equity at Davos today: smaller new deals, rising defaults on older ones but no re-run of the mass defaults of the 1980s.

“Those (big) buyouts will come back in time, but money over next few years will be made not by doing new deals, but by improving companies they already have,” said Carlyle Group founder David Rubenstein.

“There will be leveraged buyouts (in 2008), but deals will be smaller — most likely $1, 2, 3, 4 billion deals as opposed to $30 to 40 billion deals,” he said on the sidelines.

While there are some meaningful differences to the bad, old days - less aggressive structures and better resourced private equity firms - there are quite a few areas of concern.

The economy is turning sour, recent vintages of deals were highly leveraged in their own right and anyone hoping to refinance to buy time is likely to be disappointed. And while the lack of strong covenents on many deals will give them room to manoevre, eventually you gotta repay debt.

Still, we can all agree the next 18 months will be a very good test of private equity’s vaunted management skills. If they come through this with their reputations and returns intact, they will deserve all the praise they get.

Someone remind me to write a nice story if it happens.

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

Since you asked, I am convinced that the Fed’s rate cuts, bold as they are, will help but are far from a solution.

The two big issues are credit markets and a falling housing market. Housing in the U.S. has further to fall on a valuation basis, and is taking on a downward momentum just as it did on the way up.

And credit markets won’t be fixed by interest rate cuts; it will require clarity about losses, rebuilding of balance sheets and the passage of time.

One thing that will help is the plan to raise the limit of loan’s that Fannie Mae and Freddie Mac can make by $300,000. With secondary markets for loans not issued by Fannie and Freddie more or less closed, the interest rate cuts were not going to be of much use to a homebuyer in California needing a $600,000 loan. I spoke to Yale economist Robert Shiller, the man behind the Case-Shiller indices of house prices, here at Davos. His take was that it would help, but that housing still faced big falls that might take “years” to resolve.

Beyond the mudslinging against bankers (fraud+subprime=grief), there seems to be a real difference in opinion in Davos about the health of the economy. People from finance are a lot gloomier than many of their peers from industry.

Dow Chemical Co. boss Andrew Liveris, whose customers represent a broad range of industries, sees a soft landing and a possible pick-up for the U.S. economy in the second half of 2008.

“I’d still use the word ‘growth’ — I might put the word ’slow’ in front of it,” he said. “What’s going on now should not have a ‘Chicken Little’ atmosphere. The sky is not falling.”

It strikes me that, while the truth may be some where in the middle, there are reasons to side with the downbeat banking and financial services view.

Corporate chiefs are by nature optimists - that’s a good thing. Naysaying negatavists don’t usually rise to the top of big companies, but can sometimes get work as economists.

It’s also true that optimism at the corporate level usually takes a while to adjust in the early stages of a downturn or recession.

And beyond that, this is a downturn that is coming from finance, and finance really is having grave difficulties.

(Ed’s note: James Saft is a Reuters columnist. The opinions expressed are his own.)

One of the better themes emerging at Davos is how everybody is mad at bankers. Here’s the thinking - First they lose billions and billions of dollars making subprime loans, quite possibly bringing down the economy in the process, then they go and allow some kid trader to lose $7 billion dollars playing with matches, or, er derivatives, or futures or something.

And their bonuses just go up and up.

Heres one comment:

“I’ve got 200,000 employees working every day, many of them in factories, doing an honest job. What I do is about bricks and mortar,” said a senior executive at one of the world’s largest companies, who spoke on the condition of anonymity.

“But when I look at these bankers, I have to say that I’m a bit ashamed for them. There needs to be a little bit more common sense.”

And another:

“Greedy bastards?” mused one head of an international holding company, who declined to be named.

“The guys in the real economy are out there managing factories and supply lines and product delivery. They’re just chasing higher yields.”

That’s not what the companies were saying when the banks were passing out debt like candy, but we now live in different times.

At one session a man identifying himself as a former banker stood up and inveighed against his former colleagues for their greed and their bonuses. He spoke for a while, then stopped. Everyone looked at their shoes, then someone changed the subject.

I think this is a theme that will run and run.

(Ed’s note: James Saft is a Reuters columnist. The opinions expressed are his own.)

Coming into Davos, with the world seemingly on edge, the biggest cry was for coordination from the “authorities,” but to judge from the noises coming from the Europeans yesterday, that isn’t likely if what you are hoping for is rate cuts soon.

ECB chief Jean-Claude Trichet was in no mood to budge on the fight against inflation. The absolute best illustration of the huge split over what central banks should do was Trichet’s reception in the hall after his panel.

OECD chief Angel Gurria and former Italian finance minister Domenico Siniscalco greeted Trichet with hugs of encouragement for not bowing to calls for interest rate cuts.

But then up marched an angry business representative from his native France who asked the central bank chief if he wanted to see European industry leave the continent. “I take note,” Trichet said, making no commitment.

Who knows though, if the thinking of some who believe the Fed was hoodwinked into cutting due to misinformation, the ECB’s course may be fully vindicated.

The story, as it is being told, is that the Fed’s inter-meeting cut was an unintended consequence of the $7 billion Societe Generale fraud scandal. Soc Gen discovered the fraud, by an equities trader, over the weekend and was a forced seller of enormous positions on Monday, as it sought to close out unauthorised trades. This huge dumping of equity exposure fuelled the downdraft in European and global share markets, as did the rumours of a bank in trouble.

If then the Fed was cutting because it was spooked by equities market, it was in part reacting to a false signal. The Fed has said it was not aware of Soc Gen when it made its decision.

My best guess, and that is all it is, is that the Fed was only in small part reacting to equity falls. If you want to look for a skeleton in the closet spooking the Fed, look at the monoline insurers, whose vulnerable situation threatens write downs on up to $2.4 trillion of structured and municipal debt. That puts one rogue trader in the shade.
James Saft is a Reuters columnist. The opinions expressed are his own.

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The morning session on sovereign funds pretty much boiled down to them saying, “Why regulate us when we’ve never yet done any of the things you are worried about?”

Mohamed Al-Jasser, vice governor of the Saudi Arabian Monetary Agency, said that it was as if they were being presumed “guilty until proven innocent.” Bader Al Sa’ad, of the Kuwait Investment Authority said they’d been in business 55 years without any politically enforced decisions:

“All this fear about sovereign wealth funds has no real basis.”

Stephen Schwarzman, Chairman and CEO of Blackstone, was, as might be expected from someone with a substantial shareholder in the form of the Chinese, nearly lyrical in his praise.

“Our experience with sovereign wealth funds is they are smart, long term, highly professional. All they are looking for is higher rate of return.”

I cannot fail to point out that China took a 10 percent stake in Blackstone in May, paying $3 billion. Blackstone shares have more than halved since they went public in June.

A note of caution came from former U.S. Treasury Secretary Lawrence Summers, who said there was cause for concern over political meddling in business.

He was also worried lest sovereign funds entrench bad management.

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

Day two at the World Economic Forum at Davos and Sovereign Wealth Funds top the agenda, with a major panel discussion this morning.

There was a definite sense yesterday that a number of business leaders and policy makers were trying to head off anti-SWF sentiment.

You can kind of understand why, should nationalistic or protectionist sentiment rise and block SWF investment, especially in the ailing financial sector, a key source of very much needed funding, perhaps the biggest source, would be lost.

SWFs have ploughed some $60 billion into banks thus far, and with trillions to invest, there is scope for more.

I have to say that, for me, the quote of the day from Davos was Michael Klein, Chairman and co-CEO of markets and banking at Citigroup:

“I would make an argument today that the greatest single benefit to the longevity of the U.S. financial structure is investment made by sovereign wealth funds into (financial institutions),” Klein said.

Jeez, do you mean there is a doubt about the longevity of the U.S. financial structure? The rate cuts, if not the market rebound afterwards, begin to make sense.

Citi, you will remember, has already written down massive amounts of debt and taken capital injections from SWFs twice, so they should be in a good position to know.

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