Europe’s Lehman moment
By Jeffry A. Frieden The opinions expressed are his own.
Europe is in the midst of its variant of the great debt crisis that hit the United States in 2008. Fears abound that if things go wrong, the continent will face its own “Lehman moment” – a recurrence of the sheer panic that hit American and world markets after the collapse of Lehman Brothers in October 2008. How did Europe arrive at this dire strait? What are its options? What is likely to happen?
Europe is retracing steps Americans took a couple of years ago. Between 2001 and 2007 the United States went on a consumption spree, and financed it by borrowing trillions of dollars from abroad. Some of the money went to cover a Federal fiscal deficit that developed after the Bush tax cuts of 2001 and 2003; much of it went to fund a boom in the country’s housing market. Eventually the boom became a bubble and the bubble burst; when it did, it brought down the nation’s major financial institutions – and very nearly the rest of the world economy. The United States is now left to pick up the pieces in the aftermath of its own debt crisis.
Europe’s debtors went through much the same kind of borrowing cycle. For a decade, a group of countries on the edge of the Euro zone borrowed massively from Northern European banks and investors. In Spain, Portugal, and Ireland, most of the borrowed money flooded into the overheated housing market. “At the height of the building boom,” Menzie Chinn and I write in our new book, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery:
One Spanish worker of every seven was employed in housing construction. Half a million new homes were being built every year—roughly equal to all the new homes in Italy, France, and Germany combined—in a country with about 16 million households. The amount of housing loans outstanding skyrocketed from $180 billion in 2000 to $860 billion in 2007. Over the ten years to 2007, housing prices tripled,second only to Ireland among developed countries; by then, the average house in Madrid cost an unheard-of $400,000. (pp. 49-50)
Greece was a different story. It borrowed, as we write, “mostly to finance a continual budget deficit and an American-style consumption boom.”
Greek borrowing went beyond the sensible: at its peak, in one year Greece borrowed an amount equal to nearly 15 percent of GDP, so that more than one euro in seven spent locally was borrowed from abroad. By 2009, the country’s eleven million people owed more than $500 billion to foreigners, more than the foreign debts of Argentina, Brazil, and Mexico combined (with thirty times the number of people and ten times the economic output of Greece). (pp. 186-187)
from James Saft:
Pension savers get the boot
From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.
Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.
This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.
Let's start with Ireland, which is kicking in 10 billion euros from its National Pensions Reserve Fund into an 85 billion euro package of support for its banks.
Trust me, this does not reduce the risk profile of the NPRF, which was set up as a sovereign wealth fund to help pay for state retirement benefits.
Putting aside jokes about sovereignty and wealth, of which there is appreciably less in Ireland than formerly, this is effectively a transfer of wealth from the Irish people to its banks. Or rather, to the institutions, mostly European banks, which hold Irish bank debt, none of whom as senior creditors will share in the pain.
In many jurisdictions if Ireland were a corporation and the NPRF part of the corporation's pension fund, then making such a move would be illegal, and quite rightly so.
Another good column by James Saft.
At the risk of appearing like a wild-eyed conspiracy theorist mumbling “Bilderbergers,” it does seem like a coup has taken place in the USA and the European Union. Nowhere in the bailout zone did we hear the sound of haircuts, though Angela Merkel hopefully has firmly grasped the clippers. Nowhere in the bailout zone did we hear that we could nationalize the banks, quickly reorganize them, and spit them out much smaller. Oh no, we just gave them billions of dollars with no conditions attached, leading to predictable bonuses and whining that they deserve obscene salaries for incompetence. Now we see the second act that Saft described, where the banksters raid pension funds to continue their quest for the holy grail — our grail.
I honestly think there is only one course of action left to the “little people”: a return to the heady days of Marie Antoinette and other characters whose intelligence and integrity were much improved by a skillful application of a heavy, sharpened blade.
http://saucymugwump.blogspot.com/
Europe’s speculator full Employment Act
Far from setting a trap for the “wolfpack,” Europe’s $1 trillion bailout package amounts to a full employment act for speculators, or should that be the reality-based community, for the foreseeable future.
Hoping to tame markets it accused of “wolfpack behavior,” the European Union on Monday unveiled a 750 billion euro package intended to avert a rolling sovereign debt crisis that has engulfed Greece and threatens to spread widely among the weaker euro zone countries.
The package can’t be blamed for being too simple: it contains loans from the International Monetary Fund, an EU emergency fund and euro zone governments, as well as an interesting undertaking by the European Central Bank to buy bonds in order to restore liquidity to supposedly poorly functioning parts of the bond market. In a move straight out of a Russian fairy tale, Spain and Italy, to name just two, are pledging money towards a package that may well be used to bail themselves out. Maybe they should have put up even more money.
Once again, those in power look at a solvency issue and pronounce gravely that is a matter of mere liquidity.
Well, it isn’t.
That move worked, at least for the time being, when the United States bailed out its banks, but the U.S. was able to create easy conditions in which its banks could earn their way out of the hole. Rather than create easy conditions, this bailout imposes tougher ones. Greece, Spain and Portugal will face even greater austerity as a result of budget cuts, austerity that will make it even tougher for them to earn their way out.
The plan was greeted with joy on financial markets, with bonds and stocks rallying sharply, but the rally had the feel not of speculators heading for the hills but of children learning how to push their parents’ buttons more effectively.
PIIGS will face a tough time, but the stronger EU countries may face a difficult choice between keeping the union, growth, and the welfare state.
Fed’s wondrous printing press profits
– James Saft is a Reuters columnist. The opinions expressed are is own. –
Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.
Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.
Combine news of the Fed’s biggest profit in its 95-year history with a report from the Troubled Asset Relief Program that its investments in banks are now showing a $7 billion gain and you’d be forgiven for concluding that this whole bailout malarkey is the next best thing to striking oil.
The two notional profits are of course related and prove little more than that if you have bottomless pockets you can make the price of a given asset rise. And while the trick for the Fed will be in how it exits its currently profitable positions, the real costs are more complicated and potentially much greater.
The means by which the Fed turned this magnificent profit are eerily similar to what Wall Street has been practicing: they grew their balance sheet and took on more risk. Its profits were generated by two related moves: it bought far more bonds than it had in the past and, perhaps more importantly, it bought bonds of lower quality as part of the rescue efforts. Those risky bonds have risen in price, as anything that the Fed decided to start buying in size would, be they baseball cards, Florida time shares or limited edition commemorative plates.
Thanks to Mr. Debusmann and the Reuters for bringing the facts before its subscribers and readers
When the clerical dictatorship in Iran Rvrzanh suppresses the Iranian people. When the Iranian regime’s main threat is global peace and stability, when the Iranian people themselves, relying on themselves and resist the force of this regime are standing wild, at least do the work that the U.S. government to the people of history and head thrown not be impartial in this battle is keeping a list PMOI by the U.S. government and the Iranian regime takes a good message for those who believe democracy is not, it is shameful that date must be replicated again and the U.S. government along with the enemy Iranian people stand
from Rolfe Winkler:
Bailout “profit” is taxpayers’ loss
Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.
That's a nice chunk of change, but taxpayers shouldn't be fooled into thinking this -- or any other bailout -- is a good deal.
A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.
"As big banks repay bailout, U.S. sees profit" read the headline in the New York Times on Monday. The story was parroted on evening newscasts.
The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.
So when those recipients pay back TARP -- at a decent profit for taxpayers -- bailouts all of a sudden don't seem so bad.
But the bailout was much larger than TARP. There is FDIC's debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve's emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don't know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.
Really, what can the average american do. He has no say because his representatives are bought off by the banking group and numerous other groups. Does anyone know if we still teach civics in our schools or ethics. Seems like we tell our children that they go to school so they can get a fat paycheck and enjoy life. Citizenship is more than complaining. It is getting involved and making changes, such as starting a third, or fourth political party, to replace the puppet parties we have now that say Rah Rah follow me, with their hand out for payment of “selling their vote”
from Commentaries:
Time to get tough with AIG
It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.
Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.
And in the short term, Benmosche's vacation strategy appears to be paying dividends.
This week, AIG's shares surged 44 percent, to nearly $50, after Benmosche said that he intended to move slower than his predecessor in selling off AIG's still viable divisions.
Maybe Benmosche should consider relocating AIG's headquarters to Dubrovnik.
But the big run-up in AIG shares is merely a sideshow for momentum players, speculators and Hank Greenberg, the former AIG chieftain who controls about 11 percent of the company's outstanding shares.
The reality is that AIG exists today only because of the $180 billion lifeline the insurer has received from the federal government. Even Benmosche acknowledges that, telling The Wall Street Journal: "If the U.S. government doesn't continue to support AIG, we will fail."
They should have changed the whole management team right away, and appoint a new team to restructure the whole company.
from Ask...:
Bailout bonuses: Does the public have a right to know?
Is it anybody's business how much money you make?
When it comes to Wall Street and the meltdown that whacked financial markets and emptied investors' pockets, the normal rules of etiquette don't seem to apply.
Wall Street salaries seem to be everybody's business lately. Nevertheless, the Obama administration's pay czar may try to keep a large portion of the compensation plans he is reviewing under wraps.
It's Kenneth Feinberg's job to review salaries at the biggest corporate recipients of government bailout funds.
How much of his report will become public is the multimillion dollar question.
Privacy laws and fears that highly compensated executives will become targets for an angry public argue for limiting disclosure.
Definitely yes. Public companies as the name suggests belong to public. Every share-holder is entitled not only to know, but have a say in CEO’s salaries and compensations. I believe that their pay is currently determined only by who they know not what they do or even can do. I am really fed-up by not seeing any reform on this. The index number (average CEO pay divided by the lowest paid worker) has risen by thousands since 25 years ago. And then we are wondering why the moral of the workforce is going down the …
How the bailout feeds bloated banker pay
– James Saft is a Reuters columnist. The opinions expressed are his own –
Rising pay in the finance sector in the wake of the global financial crisis is no surprise and is driven partly by the government’s bailout itself and the underwriting of banks that are too big to fail.
News that some financial firms benefitting from government largesse actually increased the share of revenue they pay their employees sparked a lot of outrage but more heat than light.
The good news is this new bulge in pay may not be sustainable.
The bad news is it will probably only be stopped by further regulation, regulation which may never come.
To understand what is going on you need to understand the economic concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would be able to if there was perfect competition.
A monopoly will charge a very high price for goods or services because, well, they can. Needless to say economic rents are not a good thing, unless of course you are in receipt of them.
Well, if you think about it – maybe they do deserve more money than before. After all, the bankers and the media had a stellar performance hyping up the “meltdown”, and subsequently were rewarded with fantastic bailout programs (the exact details of which is a subject for a whole other discussion). Thus, not only did the bankers avoid the “noose”, they did so *without spending a dime of their own money*. With a great success like that can you really blame them for paying themselves more?
from Rolfe Winkler:
Buffett’s Betrayal
When I was 14, Warren Buffett wrote me a letter.
It was a response to one I'd sent him, pitching an investment idea. For a kid interested in learning stocks, Buffett was a great role model. His investing style -- diligent security analysis, finding competent management, patience -- was immediately appealing.
Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company's annual meeting. I was hooked. Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.
But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.
Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.
To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)
Just another example of Buffett’s hypocrisy (he advocates that companies pay dividends–but his own doesn’t. He rails against insider Boards, but look at his own packed with kids and cronies. He advocates corporate disclosure, but his own reporting is of the “trust me” variety.) Maybe at one time this guy could invest under the radar and buy undervalued companies and be a portfolio genius, but now he simply has too much money to make it worth his while to make money off doing good deals with private owners–the only entity left is the biggest sucker of them all–Uncle Sam, courtesy of Professor Ben and Easy Al.
As to the people who suggest that his only duty is to his shareholders–if it is, then he should stick to that and not give advice to the rest of us. Perhaps he could preface his well-publicized remarks that he is solely motivated by doing what is best for Berkshire Hathaway–somehow I doubt he would want that. But you can’t have it both ways.
from Commentaries:
Failing upwards at BofA
The ouster of Bank of America's chief risk officer, Amy Woods Brinkley, should not cause anyone to shed any tears.
Even though Brinkley was one of the few top female executives working on Wall Street, her departure is well deserved and has nothing to with gender inequality in the world of finance as some might suggest.
It's all about failure, and there's been plenty of that at BofA, in light of the more than $150 billion in bailout money and loan guarantees U.S. taxpayers have had to float the nation's largest bank by assets.
Presumably, Brinkley signed off on BofA's disastrous move into collateralized debt obligation underwriting on the eve of the mortgage meltdown.
A case in point is the ill-fated $4 billion CDO that the bank packaged and sold for two Bear Stearns hedge funds a month before the funds' collapse in June 2007.
BofA lost at least $2 billion and possibly more in that transaction. Brinkley will not be missed.
But replacing Brinkley with Gregory Curl, the architect of the Merrill Lynch acquisition and a crony of CEO Kenneth Lewis, is inexplicable and gives more ammunition to bank shareholders who are agitating for the ouster of Lewis.
For RussAbbott, the Spanish (and other non-Greek) fiscal deficits are very different from the Greek ones. They are the *result* of the crisis, not the cause. The Spanish government (like the Irish) went into substantial deficits as a result of the difficulties of the country’s financial system, and more generally due to the recession and the large increase in unemployment. This is one reason that the focus on large fiscal deficits is a little misplaced: the *origin* of the deficits varies greatly from country to country. There’s a big difference between running Greek-style deficits (and lying about them) in the runup to the crisis, on the one hand; and being forced into big deficits by the need to backstop the financial system and provide unemployment benefits, on the other.