James Saft

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 banks 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.

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.

"Historical arguments need to be based on a credible counterfactual, " Ferguson said. "Nobody has been able to tell me a credible story about how both Lehman and Merrill could have been saved. It wasn't possible."

My view is that the "Oh no, they killed Lehman" meme is just part of the denial phase of grieving. Few in financial circles wanted, or indeed want, to believe that things have changed fundamentally and that the good days won't be coming back any time soon. Blaming mom and dad is the last first refuge of the adolescent.

Jim Saft is a Reuters columnist. Any views expressed are his own.

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."

The understanding I came away with is that it is 1) unclear what the new model will be, who will produce what and who will consume what, and 2) the frugal countries like Germany, Japan and China face their own very stern tests as their business models were predicated on consumption in the English-speaking world.

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

Alan Greenspan hasn't been chairman of the Fed for three years, but his policy mistakes keep paying dividends in the form of blame at this year's World Economic Forum in Davos.

Polish Finance Minister Jacek Rostowski yesterday:

"This was the failure of one of the key institutions in the world." During the Greenspan era he said they continually met downturns and distress with easing and "eliminated fear."

Ken Rosen of Berkeley, who was writing about the housing bubble in 2005 or so, is in the same camp:

"Alan Greenspan personally prevented some needed regulations being put in place. The free market fundamentalism we had was a mistake, to go the other way would also be a mistake.

We had excessively loose monetary policy and regulations on these aggressive loans were not put in place. There were Fed board members who wanted to do it, and Greenspan himself said the had too much belief in the market. ...it was a global problem of excess credit led by the central bank in the U.S. but ratified by the central banks around the world."

Maybe history will be kinder to his reputation as a jazz musician.

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

So do countries which can borrow money more cheaply, Germany for example, have a higher obligation to borrow, spend and make things better for everyone across Europe?

Polish finmin Jacek Rostowski, speaking in a session on the outlook for Europe, seemed to think so:

“Fiscal policy … some countries which are far more able to afford increases in govt expediture and budget deficits than others. We should apply the principle that those with the lowest debt financing costs should consider the most expansive policies.”

He pointed out that Greece is now paying more for financing that Poland, and said further that Poland would not go down the stimulative route, seeing as how credit was still flowing, but instead “leaving space for interest rate reductions.”

He did make clear that this was the province of the central bank.

Rostowski did raise another point I think has legs: financial protectionism. Smaller countries without a big banking sector could see themselves really hurt if governments make lending at home rather than abroad a quid pro quo for bailout money. It is a slippery slope.

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

Duncan Niederauer, chief exec of NYSE Euronext, told a panel here at Davos that rather than inventing a whole host of new regulations, we’d be better off focusing on existing means of bringing order to markets, specifically taking a page from the exchanges books by having central clearing and more price transparancy for derivatives and off-exchange structured products. I think he’s actually got a great point about clearing and better price information, but I can’t see this as being anywhere near bringing regulation up to scratch.

The response from others on the panel was similar.

Nourial Roubini of NYU – “The ideology of the last decade was self-regulation which means no regulation. Reliance on ratings agencies with massive conflicts of interest.

“If we don’t want a backlash against trade we have to have prudential regulation of the financial system.”

Obama economic advisor Laura Tyson -

“We need regulation, we’ve tried self regulation and it doesn’t work. Psychology tells us that in a highly competitive game the insensitivity to risk grows. It’s like a drug addiction problem. They got so much pleasure that they simply stopped paying attention to the risk.”

At the end of the panel they held a vote on Niederauer’s idea and it won 71 percent to 29. Whether that was a vote for the sensible parts of his idea or for making that the whole of the regulatory effort I leave you to decide.

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

So what is Blackstone Group chairman Stephen Schwarzman’s prescription for solving the banking crisis?

More leverage and less transparency, apparently.

Schwarzman told a panel at Davos that you can’t mandate higher levels of bank capital at the same time losses are mounting and that mark-to-market accounting needed to be changed.

“You need lower capital. Do something with fair value accounting which is exacerbating things . . . We have to add more leverage to the system.” He further took issue with what he described as a “fixation on transparency” and said “We have to use regulators to schedule out losses.” By that I presume he means keep the bank on life support until they can make enough to absorb their losses. It did work in the 1990s with some prominent U.S. banks, but…

Laura Tyson, an economic advisor to the Obama administration, didn’t seem to be buying in to the more leverage less disclosure meme.

“Nobody trusts the private system, why should they trust them?” she said. She also mentioned the Swedish solution, which you may remember imposed some pretty tough conditions on bank shareholders. She said that voters would be watching who made money out of bailouts and would be concerned by “compensation and dividends.”

Stephen Roach of Morgan Stanley, who pretty much called it at last year’s Davos, when consensus was for no recession in the “real” economy and decoupling of emerging markets, is gloomy again. Speaking with him this morning after he did an interview with Reuters on Davos Today, Roach said that there was a real threat of protectionism as politicians come under pressure from rising unemployment. The U.S. and China relationship will be key, he said.

On U.S. real estate – a continuing issue for banks and the economy:

“The interplay between the property and financial sectors has been ground zero of this crisis.

The problem was the banks played the property bubble just like consumers did and so we are all in this together.”

Not a big fan of equities, it seems:-

“Equities have pretty much discounted a dire outlook for 2009. The problem with equities as an asset class is that they are pretty much based on optimistic earning expectations for 2010 and 2011. We will challenge those expectations this year. I’d be pretty cautious before committing new funds to the equity market in this climate.

So what is Blackstone Group chairman Stephen Schwarzman’s prescription for solving the banking crisis?

More leverage and less transparency, apparently.

Schwarzman told a panel at Davos that you can’t mandate higher levels of bank capital at the same time losses are mounting and that mark-to-market accounting needed to be changed.

“You need lower capital. Do something with fair value accounting which is exacerbating things . . . We have to add more leverage to the system.” He further took issue with what he described as a “fixation on transparency” and said “We have to use regulators to schedule out losses.” By that I presume he means keep the bank on life support until they can make enough to absorb their losses. It did work in the 1990s with some prominent U.S. banks, but…

Laura Tyson, an economic advisor to the Obama administration, didn’t seem to be buying in to the more leverage less disclosure meme.

“Nobody trusts the private system, why should they trust them?” she said. She also mentioned the Swedish solution, which you may remember imposed some pretty tough conditions on bank shareholders. She said that voters would be watching who made money out of bailouts and would be concerned by “compensation and dividends.”

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

It is, no doubt, going to be the most gloomy World Economic Forum in years ever. Fewer parties, lower profiles for the masters of the universe TARP.

OK, don’t get too excited but is it just possible that Davos is meeting at the bottom point for the global economy, which means, for those of you keeping score at home, that things might actually get better from here? It’s not much to go on, but some of this morning’s German IFO numbers were encouraging, particularly the forward looking expectations bit. Further, US home sales were higher than expected yesterday, though that is likely just the beginning of a foreclosure sale boom that will wither values and bank balance sheets. Credit markets are a bit less clogged too.

Weeellll, probably not really. A bottom isn’t a recovery after all and for one thing we’ve yet to get the inevitable multiplying effects fully from crashing demand in emerging markets. Still somewhere under that snow shoots must be forming, right?

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

So, back we go next week to Davos for the World Economic Forum 2009, titled this year “Shaping the post-crisis world.”

Except the crisis ain’t over yet and shaping the world while it is happening is proving to be about as easy as tying your shoes while riding a bicycle.

Let’s dial back briefly to those more innocent days in 2008 and remember what was being discussed at Davos then.

Q – Will Sovereign Wealth Funds save the world financial system through equity investments? Are they a menace?

A – No, and even if they are it doesn’t much matter.

Q – Isn’t this just about a bunch of red-neck American sub-prime borrowers and the banks that were dumb enough to lend to them?

A – No and no. It is all of us, every one, and if the heart isn’t pumping sooner or later the limbs stop moving.

In fact this year’s SWFs, the people everyone wants meetings with, are just plain old governments, which are more or less the lenders of only resort and increasingly the owners of the global banking system. Think of them not as Sovereign Wealth Funds but Sovereign Debt Funds. One unofficial theme of Davos this year will be the positioning that is now madly going on by businesses which feel a new shall we say, urgency, to get close to government. Davos used to be a way for politicians to seem cool, cutting edge and productive by being seen with business people. That now would be just about reversed, but the point is no longer to seem cool but to be viable.

From that perspective Davos is arguably more relevant now, but oh lord has the balance of power changed.

Another theme, in my opinion at least, is how people are trying to position themselves for what promises to be an absolute blizzard of new regulation, on everything from how much banks can borrow to what they can pay, and to whom and how they can lend.

One person probably not coming back this year is John Thain, the now former CEO of Merrill Lynch, who left the company amid a flap over a reported $1.2 million office redecoration and the payment of billions of dollars of bonuses just before the firm was sold to Bank of America. Ironically, he was among the most downbeat about the prospects for banks last year.

Remember too that the villain last year was SocGen rogue trader Jerome Kervial, whose antics, just coming to light as Davos met, seem quaint in comparison with his 2009 counterpart Bernie Madoff. Come back Jerome, all is forgiven.

Here is the Davos pre-presser, which gives a more traditional read on the agenda.

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