Global Economy

[Paul]

“
Kamal Nath takes a dig at troubled American banks

Press Trust Of India / New Delhi September 17, 2008, 4:58 IST

Taking a potshot at the US financial sector, which is facing one of the worst turmoils ever, Commerce and Industry Minister Kamal Nath today said those “preaching” to others have not kept their own house in order.

Those who preached us best practices have not helped their own financial sector,” Nath told reporters here when asked to comment on the US financial crisis, worsened by collapse of investment bank Lehman Brothers.

Nath said the amount of exposure of the banks going down is small in Asia. “A very small fraction of that (US economic turmoil) is in Asia. This shows that the best practices have been adhered to in Asia,” Nath said.ouch!!!

However, he said, the economic turmoil in the US is causing concern to most of the global economies. “It still has to be assessed to what extent it will affect the economy in Europe,” he said.

The US credit crisis worsened yesterday with 158-year-old Lehman Brothers filing for bankruptcy protection after losing around $60 billion dollars in the sinking real-estate market. Earlier, the troubled investment bank, Merrill Lynch, was bought by Bank of America.

[Satya_anveshi]

Indira Gandhi would have had some unique reaction to all this

http://www.bloomberg.com/apps/news?pid= ... refer=home

Sept. 20 (Bloomberg) -- Following is the text of a legislative proposal by the U.S. Treasury to buy mortgage- related assets from financial institutions:

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.- -The authority of the Secretary to hold any mortgage- related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000. What in the f's name is this? Can anyone please peel this onion?

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term mortgage- related assets means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.--The term Secretary means the Secretary of the Treasury.

(3) United States.--The term United States means the States, territories, and possessions of the United States and the District of Columbia.

[Sanjay M]

How much longer until the dollar conks out?

http://www.youtube.com/watch?v=sZwPkTmqfpg

If all the central banks of the world are being forced into tighter cooperation, is India doomed to suffer the same fate? Or will we upend the system?

I'm thinking that post-123, we may be increasingly roped into their system.

[Sanjay M]

Why China Won't Come to the Rescue
By BILL POWELL / SHANGHAI Friday, Sep. 19, 2008

[Neshant]

> Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out
> the dollar limitation contained in such subsection and inserting in lieu thereof
> $11,315,000,000,000. What in the f's name is this? Can anyone please peel this onion?

they are increasing the limit on the debt.

it was 10.3 trillion.

then it went to 10.6 trillion.

now its going to 11.3 trillion.

11.3 - 10.6 = 700 billion (that's where the money is supposedly coming from). basically they are going to print up a load of dollars and foreigners holding US T-bills and US currency are going to take it up the ar$e.

[vishwakarmaa]

Here are my plans for the retirement fund investment:
1. 25% on inflation protected securities
2. 25% on global bonds
3. 20% on US Only Stock Funds
4. 30% on Global Stock Funds

I am looking for longterm 20 year + horizon....does this look like a good strategy?

I will put my faith in Rs.

[satya]

Krugman not so optimist about current Treasury Rescue Plan

Thinking the bailout through
What is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let’s talk.

First, a capsule analysis of the crisis.

1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.

2. The losses in MBS, in turn, have left the financial system undercapitalized — doubly so, because levels of leverage that were previously considered acceptable are no longer OK.

3. The financial system, in its efforts to deleverage, is contracting credit, placing everyone who depends on credit under strain.

4. There’s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.

So where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.

But the more I think about this, the more skeptical I get about the extent to which it’s a solution. Problems:

(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.

(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets(explains Paulson insisting special powers to execute ). And if that’s the real plan, Congress has every right to balk.

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.

[vishwakarmaa]

I will put my faith in Rs.

as in...open regular interest bearing rupee account and leave the rest to rupees growing strength from exchange rate?

As in Rupee denominated assets and domestic infrastructure mutual funds. As in, to be part of Indian progress and earning handsomely.

[vishwakarmaa]

Repeat-post.

[vishwakarmaa]

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

True. One very interesting thing has happened here.

No one in Indian Media or so-called western educated economic pandits(puppets mostly) is questioning about is, where is the f*cking "free market" economy that USA claims to be?

If USA is a free market economy as they love their naive followers to believe, then in that situation, falling American banks would have roped in Chinese,European,Japanese and global investors to raise capital. But, instead they roped in US government to save them from falling into the hands of overseas investors.

In other words, anglo-saxons used their own Government's intervention to save american banks. Otherwise, today Lehman and Freddie Peddie, AIG would have been barely American but owned by Chinese,European and Japanese, if they had followed "free market" principles which they ask others to follow.

[Satya_anveshi]

No one in Indian Media or so-called western educated economic pandits(puppets mostly) is questioning about is, where is the f*cking "free market" economy that USA claims to be?

Preserving U.S. Economy Over Free Markets

U.S. policymakers are obviously willing to go to any length to avert a financial Armageddon, including changing the rules of the game in midstream. The latest, of course, was banning short selling in some 800 U.S. stocks, which effectively engineered a massive squeeze on the short sellers and produced a dramatic rebound.

The short sellers are right of course about the rot in the U.S. financial system but they are underestimating policymakers’ ability to pull rabbits out of the hat. And policymakers will keep on ignoring the rulebook and reaching for rabbits as long as it takes, because the alternative is worse. Short selling is a hard way to make money anyway in the stock market — if only because of the long run tendency of stocks to rise by some 7% to 9% annually on average.

Yet, the abolishment of short selling does not necessarily mean stocks can now only go up. Take China. Its stock market has had one of the steepest declines (over 50%) during the past year even though short selling was banned throughout. There was a recent rally in Chinese stocks but it was linked to announcements that the Chinese government is now going to prop up the stock market by buying stocks. How’s that for breaking the rules?

Many stock-market bloggers were outraged by the U.S. decision to ban short selling. But the preservation of free markets seems a lesser virtue compared to preserving the U.S. financial system, economy, and indeed, status as a world power.

Let’s acknowledge it: the U.S. is in a desperate competition with upstart emerging economies. The latter have made major inroads by pegging their currencies, suppressing domestic oil prices, banning short selling, currency controls, prohibitions on derivatives/options, and a host of other market manipulations. They aren’t playing by the free-market rulebook either. The U.S. may need to untie the hand behind its back with some interventionist measures of its own — until stability returns.

It's zimble onree..When everyone knows how to play the game, it is time to change the rules of the game Stupid mofos...

After the US Treasury buys back all the assets they will also have the balls of all those "foreign investors" and will be able to squeeze them according to their wishes and needs.

[Sanjay M]

Get out your begging baskets everybody! Fed Chairman Henry "Blank Cheque" Paulson is going to offer a bailout to every financial institution in the world who bought US assets!

http://www.nytimes.com/2008/09/22/busin ... lobal.html

So not only will US institutions be bailed out, but everybody can now queue up for some Fed money!

The farce is now being pursued to its maximum conclusion!
They're trying to keep the dollar alive, of course.

[John Snow]

so all this economic last minute cramming by treasury secertary Paulson will put hold on Iran War

[Satya_anveshi]

Interesting!!

Fed Allows Goldman, Morgan Stanley to Become Banks

So, they all have become full service banks then and hence consolidation. Now, these guys will buy up the tier 2 banks to get the depth. Wachovia's goose is coocked definitely, capital one, and thrifts like Amegy, key bank, compass, comerica (not to mention wamu etc) are up for taking.

JPM, BoA, GS, MS, and Citi have become the 5 major full service banks.

[vina]

Cash For Trash .. What a fall my brothers..

It is not for nothing I like Paul Krugman. That guy is smart as a whip and like me, largely agnostic about anything (aka Kafir). I think this planned bail out is going to be a disaster. They will pump tax payer money into the banks , without any accountability. Well Goldman and Morgan are now commercial banks.. But so what ? .

It does not solve the current problem and the massive write downs that are to come when the fed finally announces the buyout price. If they overpay and give a free gift to the financial sector , there will be massive outrage and the average american who has been suffering so long in such difficult times since 2001 is going to be hopping mad that his tax money are going to feed the fat cats who many ways were responsible for his misery. Buy them at the "correct" price and wall st will threaten to implode like Pakistan and take down everyone with it!.. . Caught between the rock and a hard place.

Solution. --> Nationalize Wall St, like the Swedes did with their banks when they went bankrupt in 1990s.. So like Bade Saar said, USA will become USSA.. United Socialist States of America! . Commie China and USSA , same same onree !

September 22, 2008
Op-Ed Columnist
Cash for Trash
By PAUL KRUGMAN

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

[Singha]

seems NRI resumes from wall st are pouring into the mailboxes of Indian financial
cos.

per TOI.

[vina]

seems NRI resumes from wall st are pouring into the mailboxes of Indian financial
cos.

per TOI.

I fully commiserate with them. It could have been me.

Thank goodness I cut and ran back to Mama Bangalore when i did. I let go of fat bonuses from 2004 onwards , but gained tremendously in quality of life and stability. A great trade if there was one.. .

We at BRF know the trends don't we.. This thread is thick as fleas with R2I types..BRF ahead of the curve as always ?

[svinayak]

From:
http://www.nakedcapitalism.com/
Sunday, September 21, 2008
Why You Should Hate the Treasury Bailout Proposal
Listen to this article. Powered by Odiogo.com
A mere two weeks ago, the Fannie/Freddie rescue was called "the mother of all bailouts" by some commentators. If the plans of the Administration come to fruition, it will shortly be surpassed by the $700 billion mortgage rescue plan proposed by Hank Paulson late last week.

The increase of the request from the initial $500 billion and the release of the shockingly short, sweeping text of the proposed legislation has lead to reactions of consternation among the knowledgeable, but whether this translates into enough popular ire fast enough to restrain this freight train remains to be seen.

First, let's focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it's the ceiling on the outstandings at any one time. It's a balance sheet number, not an expenditure limit.

But here is the truly offensive section of an overreaching piece of legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.


This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.

But far worse is the precedent it sets. This Administration has worked hard to escape any constraints on its actions, not to pursue noble causes, but to curtail civil liberties: Guantanamo, rendition, torture, warrantless wiretaps. It has used the threat of unseen terrorists and a seemingly perpetual war on radical Muslim to justify gutting the Constitution. The Supreme Court, which has been supine on many fronts, has finally started to push back, but would it challenge a bill that sweeps aside judicial review? Informed readers are encouraged to speak up.

Nouriel Roubini does not think it passes the smell test:

`He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''


It would be best if this provision were expunged, but failing that, the Treasury should articulate what scenario it is worried about and any shield against legal intervention should be made as narrow as possible.

Now to the substance. The Treasury has been using the formula that it will buy assets at "fair market prices". As we have noted, there is simply huge amounts of cash ready to bottom fish in housing-related assets (we saw an estimate of $400 billion a couple of months ago). The issue is not lack of willing buyers; it's that the prospective sellers are not willing to accept prices that reflect the weak and deteriorating prospects for housing. Meredith Whitney, the Oppenheimer bank analyst who has made the most accurate earnings and writedown calls of her peer group, has noted how the housing market price decline assumptions used by major banks fall short of where the market is likely to bottom, given traditional price to income ratios and expectations reflected in housing futures prices.

In addition to the factors that Whitney (and others) have cited, the duration of the 1988-1992 US housing bear market and major financial crises suggests that that a peak-to-trough decline of 35-40% is realistic (obviously, this average masks substantial variation across markets and housing types). We are thus only a bit more than halfway through, as measured by the fall in prices.

Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices." The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won't sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that's because he didn't want to admit that the government would just keep offering more and more.

I don't think that our leadership has been very good during this negotiation (or really, during any showdowns with this administration) at forcing the administration to own their position. If Paulson wants this plan, then he needs to sell it to the public, and if he sells a different plan to the public (the nonsense buying-at-market-price plan) then we should pass that. I'd rather see the government act as a market maker for the assets to get them transferred over to private equity firms and sovereign wealth funds and other willing holders. And if we need to recapitalize these companies, it seems like the cheapest way for the taxpayer is to go in and buy up the distressed debt and then convert that to equity.


So unlike the Resolution Trust Corporation, which took on dodgy assets which had fallen into the FDIC's lap due to the failure of thrifts, and the Home Owners' Loan Corporation, which was established in 1934 after the housing market had bottomed, this program is going to swing into action with the clear but not honestly disclosed intent of buying assets at above market prices when future markets and the analysts with the best track records on forecasting this decline (you can add Robert Shiller, CR at Calculated Risk, and Nouriel Roubini to the list) believe it has considerably further to fall.

As we said earlier, this is a covert, not particularly well designed, inefficient, and unduly costly recapitalization of the banking system. Why?

Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. The failure to be honest about it upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).

Taxpayers have no upside participation.

There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

There appears to be no intention to do triage. The financial services industry, on the back of an explosive growth in debt, has reached an unsustainable size. The industry will have to shrink. Yet the Administration does not address this issue; indeed, it appears it intends to forestall the inevitable. Regulators need to decide who will make it, who won't, and figure out what to do with damaged institutions. Instead, the reaction is ad hoc. The stunner was the contemplation of a possible merger between Morgan Stanley and Wachovia. As far as I can tell, the only thing the two firms had in common was coming into crisis on roughly the same timetable. For all I know, their IT systems are not compatible (many an otherwise promising bank merger has been scuttled over IT integration issues).


Reader Marshall forwarded a note from Jon Hatzius, the Goldman analyst who was an early housing/financial firm bear and has forecast that credit-related losses to the economy will reach $2 trillion. His outline of what the rescue program must do:

Basically, I see three main conditions for resolving the crisis (a slicker marketer would call them "The Three R's"):

a) Recognition. We need to find out what the assets on the balance sheets of banks and other financial institutions are really worth, and what the balance sheets of the most troubled institutions look like under a regime of realistic marks.

b) Recapitalization. The US banking system needs a lot more capital. Credit losses are depleting equity capital, and deleveraging increases the required equity capital per unit of balance sheet capacity. So capital infusions are needed to avert a sharp contraction in lending.

c) Relief. In many cases, we need to restructure the loan terms of homeowners who lack the ability (or economic incentive) to service their mortgage. This isn't just in the interest of the homebuyers, but it's often also in the interest of the lender (given the cost of foreclosure) and certainly in the interest of the macroeconomy (given the feedback effects between foreclosures, home prices, and economic performance)....

In any case, recognition is only a start. In fact, recognition actually increases the need for recapitalization because it brings capital shortfalls out into the open. So it will be important to see how the Treasury proposal addresses this. Do they force banks to seek equity infusions from private investors in a specified time period? Do they simply "pay over the odds" for the assets (this would promote recapitalization but jeopardize recognition)? Is part of the program earmarked for the purchase of preferred stock in banks? Or is there a public/private partnership scheme such as an issuance of publicly financed puts in e xchange for warrants for would-be private investors?


As we read from the Congressional staffer, they simply want to "pay over the odds".

Although I agree broadly with Hatzius, I quibble with his idea that the goal is to avoid a sharp contraction in lending. The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however painful, is necessary. Our excesses have been so great that there is no way out of this that does not lead to a general fall in living standards (note that the officialdom in the UK is willing to say that, but since perpetual prosperity is a God-given right in America, admitting we will be getting poorer is verboten). Thus, a sharp contraction in lending seems inevitable; the trick is to prevent it from crossing the tipping point into a vicious, accelerating downward spiral.

But regardless, there has been broad agreement that private capital will not enter the mortgage/housing market until investors have confidence that a bottom is nigh. The Treasury program, by quite deliberately propping up asset prices, will delay finding a market clearing level and thus attenuate the financial crisis.

The unacknowledged dead body in the room is whether our foreign creditors will support this plan. As we have noted before, sentiment in Asia (remember, China, Japan, and Taiwan are among our biggest funding sources) has turned against the US, particularly as AIG, a once-trusted company with a very large client base in the region, both retail and corporate, nearly went bankrupt.

The reason the US economy has not suffered much despite the magnitude of our financial mess is that we have been the beneficiary of what Brad Setser has called "the quiet bailout" as foreign central banks and sovereign wealth funds continued to buy Treasuries (and until recently, agencies) to the tune of $1000 per person. Now consider what we have in store. From the New York Times:

Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.


Given that continuing to buy US assets will come under increasingly harsh scrutiny overseas, the US needs to bend over backwards to devise a plan that at least looks credible in terms of directing the funds that come from taxpayers and lenders to their highest and best uses and implementing reforms that will restore active and prudent oversight of financial firms. The Administration's demand for a free pass, even if Congress unwisely goes along, is likely to backfire with our foreign creditors. As reader and sometimes contributor Richard Kline commented:

This approach screams, literally screams "DEFAULT," because however sensible any one such guarantee may be, in aggregate we don't have the dough, and aren't going to get it from overseas, either. So if Congress is fool enough to vote for these upfront, they have just killed our currency and sovereign debt a few quarters on, rather like the hapless homebuyers taking out an ARM on a home ten times their annual income 'because the opportunity is there.'


If you think this is a tad melodramatic, consider the summary at VoxEU by Carmen Reinhart of her work with Kenneth Rogoff on financial crises (italics hers):

Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe....

Another regularity found in the literature on modern financial crises is that countries experiencing large capital inflows are at high risk of having a debt crisis. Default is likely to be accompanied by a currency crash and a spurt of inflation. The evidence here suggests the same to be true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global level since 1800, if not before.

Also consonant with the modern theory of crises is the striking correlation between freer capital mobility and the incidence of banking crises,... Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.


We have said more than once that the the US in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It looks like we will have the opportunity to see how those two assets influence the end game.

Update 5:25 AM: I see Paul Krugman is opposed to the plan for similar reasons:
However, so far, Krugman seems to be in a minority among Serious Economists in opposing the plan, or perhaps more accurately, the ones who support it are the ones quoted in the media. I am far from having a complete tally, but Brad DeLong has provided a list of requirements (the plan in its current form falls notably short), while Alan Blinder and Nouriel Roubini give a thumbs up.
-----------------------------------------------------------------------------------------------------------------------------------

[svinayak]

http://delong.typepad.com/sdj/2008/09/n ... lf-po.html

September 20, 2008
Note to Self: Potential Dealbreakers:

For political viability and rough equity, the financial rescue plan requires:

* Pay reform
o Cancellation of current golden parachutes
o Look backs in the future--pay over $1M conditioned on the long-term profitability of the enterprise over more than a decade
* Substantial upside for the government
o Immediate substantial equity dilution via warrants for companies that put any substantial share of their assets to the Treasury
* Congressional approval of terms
* Personnel: I wouldn't vote for anything that could give a McCain-appointed Treasury Secretary this much authority. I don't think I know Paulson well enough to trust him with this much authority. (I would trust Bernanke.)

[svinayak]

Sep 18 (3 days ago)


Reply


BIG PICTURE by Barry L. Ritholtz Director of Equity Research - FusionIQ This guy is well known in investment community.CNBC seeks his opinion frequently.

link:

http://bigpicture.typepad.com/comments/ ... .html#more


Sample excerpt :

....Here is tonite's theater of the absurd SEC headline:

SEC intends to temporarily ban short selling, but it's not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections -- especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility -- upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction....................

---------------------------------------------------------------------------------------------------------------------------

Plan Accordingly to your own perception of events occurring and risk tolerance

30% cash, 10% against the Mkt and 60% long on the Mkt. (I reduced my BEAR ETFs/Mutual Funds to less than 5% from 30% yesterday PM and increased my long from 40 to 60% this morning catching the tail wind of rising Mkt). NOT always this lucky!

Today MKt came back roaring late afternoon b/c of possible RTC type solution entity to solve the credit/housing problem. Mkt is reacting as if this is the solution which I ( several of blogs I read) DON'T believe.

So there is still a need for going against the Mkt not only as defensive position but also giving some stability by adding uncorrelated assets into one's portfolio . ETFs (exp ratio relatively cheap) are quite volatile and need be monitored on a daily, if not hrly basis. They can go and down by up to 20 points! You can start with 50 shares ( each share is around $100 each), add or substract depending how they function. These are good in retirement plan where one can trade without any tax liability.

The other option is here to add BEAR Mutual funds from PRO SHARES or RYDEX Shares. Check on their web sitesThey have all kinds of funds to against or accentuate (X2 i double inverse in both directions ). Please read about them and also ETFs before investing.

The following is some of the BLOGS on the NET where I happen to read more than year ago and happen to get educated and enlightened You will never this info from the main stream media ( WSJ, NYT, CNN. CNBC etc) BloombergTV or .com is somewhat reliable b/c of international pundits. There is no substitute for critical thinking and your own intution./gut tolerance!

There is commentary on any financial issues affecting the Mkt. I trust these guys than WSJ or Barron's!

http://www Financialarmageddon.com

http://www. nakedcapitalismt.com

http://globaleconomicanalysisblogspot.com

http://calculatedrisk.blogspot.comcom

http://bigpicture.typepad.com - one of the BEST commentary

http://www.rgemonitor.com - Nouriel Roubini the one predicted the crisis 2-3 yrs ago!

Read also attached articles re USA credit risk and BEAR ETFs /Mt funds

[vishwakarmaa]

No one in Indian Media or so-called western educated economic pandits(puppets mostly) is questioning about is, where is the f*cking "free market" economy that USA claims to be?

Preserving U.S. Economy Over Free Markets

U.S. policymakers are obviously willing to go to any length to avert a financial Armageddon, including changing the rules of the game in midstream. The latest, of course, was banning short selling in some 800 U.S. stocks, which effectively engineered a massive squeeze on the short sellers and produced a dramatic rebound.

It's zimble onree..When everyone knows how to play the game, it is time to change the rules of the game Stupid mofos...

That article is by some Macdonald guy.

I was expecting someone from western educated Indian economists camp, to say that about non-existent "free economy" of USA.

[Singha]

bonus for these firms should be capped at 20% of gross to enhance fiduciary responsibility.
its supposed to be a business not a inbred looters club

and no special bonus grades for the investment side, the whole bank including retail has to
get equal-equal.

[Abhijeet]

What are the likely long-term effects of the financial crisis on the American standard of living, and power abroad?

It seems that seemingly apocalyptic financial events occur quite frequently in America (stagflation and gas shortages in the 70s, the S&L crisis in the 1980s, the dotcom bust etc). BR would probably have gloated at the prospect of the US getting cut down to size during each of those crises. However, the effects of each of those periods seem to be entirely short-lived, and the American economy always bounced back. Even the Depression didn't result in any significant long-term degradation in the standard of living for the average American - the latter half of the 1940s and the whole of the 1950s were one of the high points of abundance in the US.

What makes it different this time? Is it the federal deficit? Or the fact that the titans of Wall Street have collapsed? Or the federal bailouts that are effectively funded by foreigners? Or something else?

In 2028, will we look back on this time and laugh, or is this is a real inflection point in the history of the US?

A dispassionate analysis (without schadenfreude, entertaining as it is) would be interesting. Insights welcome.

[vishwakarmaa]

Failure and collapse of American financial firms like Lehmann and others shows one thing. The so called Rating system run by Standard and Poors, Moody's are all forgeries. Just a political rating system which suits these jokers.

[vishwakarmaa]

What are the likely long-term effects of the financial crisis on the American standard of living, and power abroad?

What makes it different this time? Is it the federal deficit? Or the fact that the titans of Wall Street have collapsed? Or the federal bailouts that are effectively funded by foreigners? Or something else?

In 2028, will we look back on this time and laugh, or is this is a real inflection point in the history of the US?

A dispassionate analysis (without schadenfreude, entertaining as it is) would be interesting. Insights welcome.

Let me suggest one - Following self-interests, f*cking the "free market" economy herself, using forgeries in Rating system to sustain the rotten empire, make the world pay for own mistakes and at the same time ask other world to follow "free market" economy system.

[vishwakarmaa]

One less known but bright stock broker at NSE, has said in public about how USA has spread its economic disaster all over the world.

Instead of allowing market forces(chinese,Japanese and europeans, others) to buy up stakes in American financial institutions, Americans have asked their Government to step in and buy Americans financial banks, institutions to save themselves from going into foreigner's hands.

One naked example of how much Americans follow so called "free market" principles. Now, let me call up my friend who boasts about "superior" and clean, fair western market system.

[Singha]

Nomura is taking Lehman's asia unit.

and

Japanese Bank to Buy Up to 20% of Morgan Stanley

By REUTERS
Published: September 22, 2008

TOKYO — Mitsubishi UFJ Financial Group, Japan’s largest bank, said on Monday that it planned to buy 10 percent to 20 percent of the common stock of the investment bank Morgan Stanley.

UFJ Financial said it would decide on the amount it would pay after carrying out due diligence.

[Singha]

WSJ

Big Pay for Big Bosses Under Fire
By PHRED DVORAK

The U.S. government's massive intervention in the financial industry may also bring new limits on executive pay.

As the U.S. Treasury asks Congress for about $700 billion to bail out troubled financial firms, key Democratic lawmakers including House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd say they want the bill to include curbs on what executives can earn.

Speaking on C-SPAN on Sunday, Mr. Frank blamed the mess in part on a "perverse incentive" that encouraged executives to take huge risks in exchange for multi-million-dollar payouts, and said he'll ask for compensation guidelines for companies that want money, to make sure that doesn't happen in the future.

The bailout puts a harsh spotlight on the millions of dollars earned by the leaders of failed firms like Fannie Mae and American International Group Inc. -- and fuels long-running calls to temper those paydays. Martin Sullivan, who was ousted as CEO of AIG in June, was promised an exit package valued at the time at around $47 million; his successor Robert Willumstad, who was asked to step aside by the government last week, was due $22 million when he left.

But in one sign of the shifting attitudes, Mr. Willumstad over the weekend informed his successor Edward Liddy he would not accept the severance, which had been guaranteed in his contract. In an email, Mr. Willumstad said it wouldn't be right for him to keep the money when so many shareholders and employees had lost money.

Last week, housing regulators said the former CEOs of Fannie Mae and Freddie Mac would not be paid millions of dollars in severance owed them under their employment contracts, although they would still be eligible for pension payments. The Treasury seized control of Fannie and Freddie earlier this month.

The compensation curbs could provoke a political dispute. Treasury Secretary Henry Paulson said Sunday he didn't want the compensation curbs added to the bailout bill, which could delay its passage. Appearing on Fox News Sunday, Mr. Paulson said there had been "excesses" of executive pay, adding, "Pay should be for performance, not for failure." But Mr. Paulson said such changes should be considered separate from, and after the bailout bill.

Shareholder activists who have long sought to curb executive pay excesses also are seizing on the financial crisis to push their agenda. "It's a huge, incomprehensible sum of money," says Richard Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, one of the most vocal lobbyists for executive pay reform. "If they're asking for money, we're asking for structural reform that will prevent abuses in the future."

Mr. Ferlauto says AFSCME will push harder for legislation that will require public companies to put executive compensation packages to a shareholder vote, as well as laws that would make it easier for investors to nominate independent directors to corporate boards. The shareholder vote, also known as "say on pay," passed the House of Representatives earlier this year, but has not been considered in the Senate. Presidential candidates Barack Obama and John McCain both support the measure.

Mr. Ferlauto says the union is also lobbying for caps on "deferred compensation" -- the common practice of letting executives postpone receipt of millions of dollars in pay until after they retire, thus reducing their tax bills.

[svinayak]

JP Morgan biography
The most influential banker in history
http://www.financial-inspiration.com/JP ... raphy.html

John Pierpont (JP) Morgan was born on April 17, 1837 in Hartford, Connecticut to parents Juniet Spencer Morgan and Juliet (Pierpont) Morgan. His father was a partner of the firm George Peabody & Co. so by no means was JP Morgan born into a poor family. After he completed school at the English school in Boston, he went to the University of Gottingen in Germany.

When he returned to the US in 1857 he got a job working for the private banking house Duncan, Sherman and Company. In 1860 he was appointed as the American agent and attorney for George Peabody & Company in which his father was a partner. This later became J.S. Morgan & Co and when his father died in 1890 he left it to JP Morgan giving him important European connections and enabling him to run a large foreign reserve business.

By the time of his father's death, JP Morgan had already established himself as a financier through Dabney, Morgan & Co. and later Drexel, Morgan & Co. It was after the Civil War that he started buying distressed businesses and especially railroad companies. Some of these railroads include the West Shore, Philadelphia and Reading, Richmond Terminal, the Erie and the New England railroads. His process of buying and consolidation of railroads came to be known as Morganization.

On several occasions, JP Morgan also helped the government in its finances. In 1877, together with August Belmont and the Rothschilds, they floated $260 million in US government bonds. After the government ran into some gold problems, he bought $200 million worth of government bonds with gold thereby preserving the credit of the United States. Some of his detractors had, however, heavily criticised him for the harsh terms of the loan. This had also resulted in a Congressional hearing in 1912, but he walked away largely unscathed.

Perhaps the biggest deal he was ever involved in was the forming of the US Steel Corporation, the first billion-dollar corporation. He had bought some mills from Andrew Carnegie and together with some other steel assets formed US Steel - worth approximately $1.2 billion. He was also involved with several other companies and sat on quite a few boards. A few of the better known ones include Western Union Telegraph Company and General Electric.

At the time of his death on March 31, 1913 he had an estate worth $80 million (today around $1.2 billion). Compared to his peers of the time, especially Rockefeller, it was not such a large estate. In fact, it was Rockefeller's comment at the time, "And to think he wasn't even a rich man." Yet, JP Morgan's power did not lie in the millions he had, it lay in the billions he controlled.

[Singha]

does anyone know the history behind goldman sachs...is it a new co or derived from one of the old
robber barons?

[John Snow]

Although I agree broadly with Hatzius, I quibble with his idea that the goal is to avoid a sharp contraction in lending. The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however painful, is necessary. Our excesses have been so great that there is no way out of this that does not lead to a general fall in living standards (note that the officialdom in the UK is willing to say that, but since perpetual prosperity is a God-given right in America, admitting we will be getting poorer is verboten).

Now read this written about a century ago and I read in my 7th grade.

THE BABUS OF NAYANJORE




I
ONCE upon a time the Babus of Nayanjore were famous landholders. They were noted for their princely extravagance. They would tear off the rough border of their Dacca muslin, because it rubbed against their skin. They could spend many thousands of rupees over the wedding of a kitten. On a certain grand occasion it is alleged that in order to turn night into day they lighted numberless lamps and showered silver threads from the sky to imitate sunlight. Those were the days before the flood. The flood came. The line of succession among these old-world Babus, with their lordly habits, could not continue for long. Like a lamp with too many wicks burning, the oil flared away quickly, and the light went out.

Rabindranath Tagore

[vsudhir]

TN Ninan on the global fin mkt crisis

Good read, IMHO.

[John Snow]

How We Became the United States of France
By Bill Saporito Sunday, Sep. 21, 2008Antony Edwards / Getty
This is the state of our great republic: We've nationalized the financial system, taking control from Wall Street bankers we no longer trust. We're about to quasi-nationalize the Detroit auto companies via massive loans because they're a source of American pride, and too many jobs — and votes — are at stake. Our Social Security system is going broke as we head for a future where too many retirees will be supported by too few workers. How long before we have national healthcare? Put it all together, and the America that emerges is a cartoonish version of the country most despised by red-meat red-state patriots: France. Only with worse food.


Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by a half dozen short sellers in Greenwich, Conn. and FedExed to Washington D.C. to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We're now no different from any of those Western European semi-socialist welfare states that we love to deride. Italy? Sure, it's had four governments since last Thursday, but none of them would have allowed this to go on; the Italians know how to rig an economy.

You just know the Frogs have only increased their disdain for us, if that is indeed possible. And why shouldn't they? The average American is working two and half jobs, gets two weeks off, and has all the employment security of a one-armed trapeze artist. The Bush Administration has preached the "ownership society" to America: own your house, own your retirement account; you don't need the government in your way. So Americans mortgaged themselves to the hilt to buy overpriced houses they can no longer afford and signed up for 401k programs that put money where, exactly? In the stock market! Where rich Republicans fleeced them.

Now our laissez-faire (hey, a French word) regulation-averse Administration has made France's only Socialist president, Francois Mitterand, look like Adam Smith by comparison. All Mitterand did was nationalize France's big banks and insurance companies in 1982; he didn't have to deal with bankers who didn't want to lend money, as Paulson does. When the state runs the banks, they are merely cows to be milked in the service of la patrie. France doesn't have the mortgage crisis that we do, either. In bailing out mortgage lenders Fannie Mae and Freddie Mac, our government has basically turned America into the largest subsidized housing project in the world. Sure, France has its banlieus, where it likes to warehouse people who aren't French enough (meaning, immigrants orAlgerians) in huge apartment blocks. But the bulk of French homeowners are curiously free of subprime mortgages foisted on them by fellow citizens, and they aren't over their heads in personal debt.

We've always dismissed the French as exquisitely fed wards of their welfare state. They work, what, 27 hours in a good week, have 19 holidays a month, go on strike for two days and enjoy a glass of wine every day with lunch — except for the 25% of the population that works for the government, who have an even sweeter deal. They retire before their kids finish high school, and they don't have to save for a $45,000-a-year college tuition because college is free. For this, they pay a tax rate of about 103%, and their labor laws are so restrictive that they haven't had a net gain in jobs since Napoleon. There is no way that the French government can pay for this lifestyle forever, except that it somehow does.

Mitterand tried to create both job-growth and wage-growth by nationalizing huge swaths of the economy, including some big industries, including automaker Renault, for instance. You haven't driven a Renault lately because Renault couldn't sell them here. Imagine that. An auto company that couldn't compete with a Dodge Colt. But the Renault takeover ultimately proved successful and Renault became a private company again in 1996, although the government retains about 15% of the shares.

Now the U.S. is faced with the same prospect in the auto industry. GM and Ford need money to develop greener cars that can compete with Toyota and Honda. And they're looking to Uncle Sam for investment — an investment that could have been avoided had Washington imposed more stringent mileage standards years earlier. But we don't want to interfere with market forces like the French do — until we do.

Mitterand's nationalization program and other economic reforms failed, as the development of the European Market made a centrally planned economy obsolete. The Rothschilds got their bank back, a little worse for wear. These days, France sashays around the issue of protectionism in a supposedly unfettered EU by proclaiming some industries to be national champions worthy of extra consideration — you know, special needs kids. And we're not talking about pastry chefs, but the likes of GDF Suez, a major utility. I never thought of the stocks and junk securities sold by Goldman Sachs and Morgan Stanley as unique, but clearly Washington does. Morgan's John Mack calls SEC boss Chris Cox to whine about short sellers and bingo, the government obliges. The elite serve the elite. How French is that?

Even in the strongest sectors in the U.S., there's no getting away from the French influence. Nothing is more sacred to France than its farmers. They get whatever they demand, and they demand a lot. And if there are any issues about price supports, or feed costs being too high, or actual competition from other countries, French farmers simply shut down the country by marching their livestock up the Champs Elysee and piling up wheat on the highways. U.S. farmers would never resort to such behavior. They don't have to: they're the most coddled special interest group in U.S. history, lavished with $180 billion in subsidies by both parties, even when their products are fetching record prices. One consequence: U.S. consumers pay twice what the French pay for sugar, because of price guarantees. We're more French than France.

So yes, while we're still willing to work ourselves to death for the privilege of paying off our usurious credit cards, we can no longer look contemptuously at the land of 246 cheeses. Kraft Foods has replaced American International Group in the Dow Jones Industrial Average, the insurance company having been added to Paulson's nationalized portfolio. Macaroni and cheese has supplanted credit default swaps at the fulcrum of capitalism. And one more thing: the food snob French love McDonalds, which does a fantastic business there. They know a good freedom fry when they taste one.

***
From Time Online

[SK Mody]

Interview with K. Vaman Kamath, CEO, ICICI Bank, India

ICICI Bank dismisses solvency fears

[Suraj]

Instead of allowing market forces(chinese,Japanese and europeans, others) to buy up stakes in American financial institutions, Americans have asked their Government to step in and buy Americans financial banks, institutions to save themselves from going into foreigner's hands.

That is because no one's coming forward to buy the assets outright, nor do they wish to let go of such control into foreign hands (I don't speak for the relative merits of the 'free market' talk here, just explaining). Instead, they swap the debt of these entities for pennies on the dollar with US treasury debt, which they are then trying to sell to others, including the Chinese, Japanese and Arabs. Now if no one bought those newly issued treasury debt (which they've indeed had some trouble selling), that would be a big problem.

[svinayak]

does anyone know the history behind goldman sachs...is it a new co or derived from one of the old
robber barons?

I know a tool called google and I know the history of google ...

[ArmenT]

Mr. J.P. Morgan was one of the original robber barons. Right around the civil war, he managed to acquire a bunch of defective rifles from Springfield Arsenal that were being sold for scrap, for next to nothing ($3.50 each). He then turned around and sold the rifles back to the US Government for $22 each, which the war department happily paid for, since they were short of rifles. The reports of barrels bursting in the field came back and there was an investigation. However a Federal judge ruled that deal was a valid fulfillment of the contract and J.P. Morgan got away with it.

[John Snow]

Here comes $500 oil
If Matt Simmons is right, the recent drop in crude prices is an illusion - and oil could be headed for the stratosphere. He's just hoping we can prevent civilization from imploding.
By Brian O'Keefe, senior editor
Last Updated: September 22, 2008: 1:12 PM EDT



Matt Simmons argues that Saudi Arabia's oil supplies are much more limited than everyone thinks.
(Fortune Magazine) -- Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

"I find it ironic that here we have the biggest industry on earth, and I'm one of the few people to figure out that we have a major problem," he says, in his confident if not quite brash way. "And I did it all in my spare time. How stupid and tragic is that? I shouldn't be one of the only folks that actually has a handful of ideas of how we can keep from blowing each other up and get through this."

Indeed, Simmons isn't the obvious candidate to be the bearer of bad news about oil. He's spent his career working in the business, has lived in Houston for decades, and is such an industry insider that he helped edit the Bush campaign's comprehensive energy plan in the 2000 election - the document that was ultimately more or less rubber-stamped by Vice President Dick Cheney's infamous secret Energy Task Force. Over the past 35 years, his boutique investment bank, Simmons & Co., has helped finance and shape much of the country's existing oil-services business. With profits gushing, you might expect him to be celebrating.

Not to mention that the 65-year-old banker doesn't have the personality of a prophet of doom. He has a puckish wit, a relentlessly cheerful and enthusiastic demeanor, and the appearance of a rosy-cheeked cherub in a navy blazer. He routinely refers - in earnest - to his daily experiences as "tremendous fun." His closest business associates have a hard time recalling him ever showing anger. But when it comes to oil and gas, his message is downright scary.

An unlikely maverick
Simmons was transformed overnight from an influential industry expert to an A-list pundit by the publication in 2005 of his book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," a fairly technical read which argues that Saudi Arabia's oil supplies are much more limited than everyone thinks.

Since then he has moved to the forefront of the peak-oil movement - a once fringe but now growing contingent of oil industry veterans, independent consultants, investors, and academics who believe that world oil production is at or near an inflection point, after which it will fall inexorably and fail to meet projected future demands. According to Simmons, we have already passed that peak. And while we're not going to run out of it anytime soon, the era of easy oil is over, and the world is about to enter a period of convulsive change. (Hint: Learn to garden, and buy some comfortable walking shoes.)

The soaring price of crude - it has risen from below $20 a barrel in 2002 to as high as $147 earlier this year - has helped thrust Simmons further into the spotlight. He was one of the main voices, for instance, in the recent oil-shock documentary "Crude Awakening," and his book has now sold more than 100,000 copies. His willingness to make bold predictions about how high crude may go has made him an A-list guest for cable TV news programs and a go-to source for newspaper reporters covering oil and gas. In 2005, when oil was $58 a barrel, he predicted it would be at or above $100 within a few years. Now he sees it climbing to $200, $300, or higher. "There really is no roof on oil prices at this point," he says.

Being so outspoken, of course, invites criticism, and Simmons has endured plenty. But he has also won a lot of high-profile admirers. "Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied," says commodities guru Jim Rogers. "And now, of course, people are starting to say, 'Oh, well, I thought of that.'" Billionaire oil and gas investors Richard Rainwater and Boone Pickens both heap praise on Simmons's analytical abilities. Maine's Senator Susan Collins, a Republican who recently began consulting with Simmons on energy issues, says, "I think he's issuing a clarion call that policymakers need to listen to."

In his own upbeat way, he despairs about what is to come. As the price of oil has fallen this summer (to $101 at press time), Simmons has watched in dismay as complacency has returned and the champions of do-nothingism have popped out of the woodwork to say I told you so. Not that it's lessened his conviction about the road ahead. "I do think there are a growing number of people who are getting it," he says. "But I guess it just reminds me that as a society, we don't have the ability to actually come to grips with a crisis until it's hit us in the face. I am discouraged enough now to think that we're going to have to have a really nasty shock before we wake people up."

Has peak oil peaked?
On a Thursday morning at the end of July, Simmons is sitting in a wicker chair on the back porch of his six-bedroom summer home on the coast of Maine, waiting to do a live television spot on CNBC. Sun glints off Penobscot Bay below him. In the distance, sailboats glide in and out of Camden Harbor. It's the kind of scene that has captivated him since his Harvard days in the 1960s, when he started coming up here on weekends. Wearing a blue-and-white-checked shirt, cream-colored pants, and tasseled loafers, Simmons chats with Ellen, his wife, and Emma, one of their five daughters. His earpiece is chattering as CNBC anchor Melissa Francis teases his upcoming segment.

At the moment, the price of oil is hovering around $124 a barrel, and CNBC wants him to interpret why crude is suddenly tumbling. "Has peak oil peaked? I guess that's our topic," he reports to everyone within earshot, before the shot goes live.

It was on this same porch five years ago that Simmons had the insight that convinced him that the oil age had passed its zenith. During a trip to Saudi Arabia in February 2003 with his friend Herbert Hunt (yes, the son of H.L. Hunt who, with his brother Bunker, almost cornered the silver market in 1980), Simmons had become suspicious of the Saudis' claims about the vastness of their oil supply. In his four decades of working in the oil and gas industry, everyone he had ever talked to had taken it as gospel that the Saudis had enough oil to bail the world out when other supplies ran short. If that wasn't true, Simmons believed, the era of cheap oil was over. Demand for crude was on the rise worldwide, and supplies were getting tighter all the time. If the Saudis were pushing up against the limits of their oil production, the world needed to know.

In his typically analytical fashion, Simmons went hunting for data. He found it in the form of hundreds of technical papers submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years. Simmons spent the month of August 2003 sitting on his porch in Maine and grinding his way through the minutiae of technical accounts of, for instance, reservoir pressure and water-cut percentages, trying to piece together the challenges that the Saudi geologists had encountered in managing their precious oilfields. In the end, his conclusion was clear. "I finished reading the last paper on a Sunday afternoon," says Simmons, "and I sat back and I thought, Holy crap, this is unbelievable. I've just discovered the biggest energy illusion ever in the world. We're in big trouble. I'm going to write a book."

And so he did. But writing the book didn't exhaust his passion. Today he is more convinced than ever that we've reached peak oil. If he's right, current world oil production- 86 million barrels a day- is about as high as we're going to go.

Of course, if demand goes up but supply doesn't, prices are apt to go through the roof. And unlike global oil production, global oil demand doesn't appear to be anywhere near a peak. Both the U.S. government's Energy Information Association and the independent International Energy Agency, based in Paris, estimate that worldwide demand will be more than 115 million barrels a day by 2030.


While demand growth in the United States has slowed recently due to higher prices, the EIA projects that China and India will more than pick up the slack. And the IEA recently warned that high prices won't slow demand growth in emerging economies. If demand wants to go north of 100 million barrels a day and supply can't break 90 million (or drops below 80 million, as Simmons believes will happen within five years), it will be a price squeeze felt around the world. The peak-oil crowd will be able to declare victory - but nobody will be celebrating.

The peak-oil theory
The concept of peak oil was introduced to the world in the 1950s by a curmudgeonly Shell geophysicist named M. King Hubbert, who observed that the production of oilfields tended to follow a bell-shaped curve, peaking and then turning down sharply. He came up with a formula to quantify his theory. And in 1956 he was ridiculed within the industry for predicting that U.S. crude oil production would max out in the early 1970s. Sure enough, though, in 1970 the United States reached its apex at just under ten million barrels per day, or roughly what the Saudis produce now, and began a long slide down. (Hubbert later predicted that world oil production would peak in 1995. He was a bit early on that call.)

No one disputes that oil production will top out some day. It is, after all, a finite resource. The argument is about how far off the peak is. As Simmons and others point out, many of the world's largest oilfields - Prudhoe Bay, the North Sea - have already gone into decline. The most optimistic estimate for the average depletion rate of the world's currently producing oilfields is between 4% and 5% annually, or about four million barrels per day at our current rate of production. That means that each year we must find enough new oil to first replace those four million barrels of lost daily production before we even add enough to meet new demand. This is all the more worrisome because world oil discovery of new reserves has been slowing since the mid-20th century.

Despite this gloomy case, most of the oil establishment insists that, while oil may be harder to find, there is still plenty of it, and any peak in production is decades away. OPEC, whose member nations sit on 75% of the world's reported reserves, pooh-poohs concerns about a peak.

Earlier this year Abdallah Jum'ah, CEO of Saudi Aramco, the kingdom's national oil company, called peak oil "a myth." The multinational oil giants are only slightly less optimistic. While they acknowledge that crude is getting harder to find and produce and that so-called unconventional oil (like natural-gas liquids) will be increasingly important, they don't think a peak is imminent either. Exxon Mobil (XOM, Fortune 500) has run ads that dismiss peak oil as a far-off problem. This summer Tony Hayward, BP's (BP) chief executive, bet a peakist that oil production in 2018 will be higher than it is today. "It's unbelievable," says Simmons. "These guys don't even understand their own business."

One difficulty in assessing the situation is the lack of transparent information about oil production and reserves, particularly in OPEC countries. Back in the 1980s, after OPEC decided to base its production quotas on reserve figures, several of the cartel's producers abruptly raised their claims of "proven reserves" by 40% or more. Saudi Arabia, for instance, raised its proven-reserve figure from 170 billion barrels to about 260 billion in 1988. Amazingly, that figure has stayed more or less constant since then - even as billions of barrels have been pumped out of the ground. "We need to send in the audit troops," says Simmons regularly in his speeches. "The major oilfields of the world need to be invaded by third-party inspectors so that we can figure out how bad things are and deal with it."

A favorite target of Simmons and other peakists is Cambridge Energy Research Associates (CERA), a leading provider of supply data to the major oil companies. Led by chairman Daniel Yergin, the Pulitzer-winning author of the oil history "The Prize," CERA rejects talk of an imminent peak and advises instead that the world may reach an "undulating plateau" of production at some point in the distant future, perhaps around 2030. The firm has opened itself to criticism over the past few years by consistently predicting that oil prices would fall back, only to watch them soar.

According to Peter Jackson, a geologist and CERA's director of oil industry activity, the firm's proprietary database of some 20,000 projects shows plenty of capacity growth through at least 2020. "Our analysis just doesn't support a peak in the foreseeable future," says Jackson, who declines to discuss Simmons directly. "I would love to see a decent analysis that shows something to the contrary."

For his part, Simmons would love to get a detailed look at CERA's proprietary information. "All this undiscovered oil they talk about has by definition not been found yet," he says. "And it is as unusable as my unearned net worth. I can guarantee you that I wouldn't have had the guts to go into any bank in the world and say I'd like a loan against my unearned net worth."

Earlier this year, Simmons and other members of the Association for the Study of Peak Oil in the U.S. offered to bet CERA $100,000 that the world would not meet CERA's production forecast of 112 million barrels per day in 2017. CERA didn't respond. "I'm very cognizant of how annoying it is to be the guy saying I told you so," says Simmons, leaning forward and peering over his bifocals. "It's much better to use a bit of ridicule."

Not a preordained prophet
When Simmons gets interested in something, he goes all out. In 2005, the same year that "Twilight in the Desert" came out, Simmons self-published a book of his watercolor paintings, the fruit of 30 years of carrying his paint set wherever he traveled. He and his wife sit on the board of the National Trust for Historic Preservation, and a few years ago he funded the restoration of an old movie theater in Rockland, Maine, near his house. Simmons is also an avid book and antique collector.

It's no wonder a topic as complicated as oil would beguile him. But his path to peak-oil prophet was anything but preordained. In fact, he was raised to be a banker. He grew up in a Mormon family, the second-oldest of six kids in Davis County, Utah, just north of Salt Lake City. His father, Roy, was a self-made man who in 1960 took over the struggling Zions National Bank, founded by Brigham Young, and built it into an empire. Roy always engaged his family in business discussions and even took a teenage Matt along on trips to New York to sit in on meetings. "I don't remember us sitting around the dinner table discussing who was going to win the Super Bowl or anything like that," says Harris Simmons, Matt's younger brother and current CEO of Zions Bancorporation (ZION), which has a market cap of $3.5 billion.

Simmons got his first exposure to the oil business in 1969. After graduating from Harvard Business School a couple of years earlier, he took a job writing case studies for one of his professors. (On the side he was also operating a booming business as a money manager; his clients included former Michigan governor George Romney, the father of both Mitt and Simmons's Harvard buddy Scott Romney.) That spring he traveled to Los Angeles for a case study interview and met up with his father, who was attending a conference in Palm Springs.

During a break, Simmons's father introduced him to a fellow attendee, a deep-sea diver named Lad Handelman who had been doing underwater work for the oil companies on rigs off Santa Barbara. Handelman explained that his fledgling company was growing faster than he could manage it, and he was planning to sell out. Simmons told him he should bring in new money instead. "I can help you with that," said Simmons. "Why don't we raise some capital?" The venture, Oceaneering, became one of the country's fastest-growing and most successful offshore-drilling service companies, and suddenly Simmons had a new career as an investment banker.

In 1974, Simmons moved to Houston with his younger brother L.E. to launch Simmons & Co. and take advantage of the exploding oil-services business. To get an edge over his bigger competitors from Wall Street, Simmons made it a point to learn his chosen industry inside and out. "He probably does more research than anyone I've ever seen in the energy business," says Bob Long, the CEO of offshore drilling contractor Transocean and a longtime Simmons & Co. client. "He's always been passionate about gathering and analyzing statistics." His business thrived until the mid 1980s, when oil prices crashed and, as Simmons says, the services industry "fell off a cliff." He found himself working on bankruptcies and liquidations. The fact that the experts missed the coming collapse of oil prices pushed him to study harder.

By the early 1990s, Simmons thought the industry had contracted too far and that at some point in the near future, America would be facing a new oil crisis as a result. He launched a securities business at Simmons & Co. to exploit the demand for research and trading that he envisioned in oil and gas. And at a stage in his career when most senior partners would be leaving the research to their young analysts and spending more time on the golf course, he did more and more independent research, publishing white papers for friends and clients. (He hates golf.)

In 1997 he wrote a prescient report called "China's Insatiable Energy Needs." And in 2001, when he realized there was no publicly available resource, he embarked on a study of the world's major oilfields. He found that an alarming percentage of today's oil production comes from a handful of giant fields that were mostly discovered decades ago. (Saudi Arabia's Ghawar field, by some estimates, still accounts for upwards of 6% of the world's daily output after 60 years of production.) By the time he arrived in Saudi Arabia in 2003, he began to suspect that worldwide oil production was reaching its peak.

Oil illiteracy
"John McCain is energy illiterate," Simmons is saying. "He's just witless about this stuff. As a lifelong Republican, I'm supporting Obama." A dozen oil and gas men sitting around a conference table in Lafayette, La., chuckle nervously as he continues. "McCain says, 'Oh, we're going to wean ourselves off foreign oil in four years and build 45 nuclear plants by 2030.' He doesn't have a clue."

On this humid day in early June, Simmons is visiting a gas exploration company called PetroQuest Energy. Lafayette is a hub for the Gulf Coast oil and gas industry, and Simmons is in town to give a talk at the local college this evening. But he and Mike Frazier, the CEO of Simmons & Co., have stopped off for a private visit with the PetroQuest board. After a bit of his usual sermon - "There's no end in sight to higher oil prices, unless the world economy absolutely collapses" - Simmons opens the room to questions. It's obvious that his rhetoric has surprised his hosts. But Simmons is not the sort to mince words. ("Matt is the smartest analyst I've ever seen on energy," said Frazier to me later, "but we don't always agree on everything. Including politics.")

McCain's midsummer move to begin campaigning on a platform of more offshore drilling has only hardened Simmons's position. "What a hypocrite," says Simmons, who supported McCain's rival Mitt Romney in the primary - no surprise given Simmons's history with the Romney family. "Here's a man who for at least the past 15 years has strenuously, I mean strenuously, opposed offshore drilling. And now it's 'drill, drill, drill.' And he doesn't have any idea that we don't have any drilling rigs. Or that we don't have any idea of exactly where to drill." (As for McCain's running mate, Sarah Palin, Simmons says: "She's a very colorful person, but I don't think there's a scrap of evidence that she knows anything about energy.")

For the record, Simmons has been advocating more drilling off the coast of the United States since the early 1990s, but now he says that treating it as our salvation is misguided. "I'm not saying we shouldn't do it," says Simmons. "We should, and the sooner the better. But we shouldn't think that it'll have any impact for a decade or two." The exception, he says, is the reservoir in the hotly debated Arctic National Wildlife Reserve. "ANWR," he says, "is the only place that we could drill right now and it might actually make a difference in a year or two."

As for some other currently voguish sources of fuel coming to the rescue, he's dismissive. Oil shale? "Buck Rogers stuff. It just can't work." Ethanol? "It's a joke. The numbers just don't add up."

Simmons believes that a radical change in the way we live is inevitable. "We should basically be going back to creating a village economy, so that we really reduce the energy intensity of how we live," he says. "We need bigtime conservation, not feel-good conservation. Make things where they're used. You'll end long-distance commuting, and we have the tools to do that now with webcams. Grow food locally. Grow food in your backyard. If they're not commuting, people will have time to do that."

Ocean energy
One afternoon in 2005, Simmons was sitting in his study in Maine watching waves crashing ashore when he started to think about all the potential power to tap from the ocean. "I thought to myself, Wouldn't it be fun to start an institute to study ocean energy?" he says. So he did. Sort of.

Today the sole employee of the Ocean Energy Institute is a physicist named George Hart, 62, who has spent the past 25 years working on the government's Star Wars missile defense system. (In the 1970s, at the Naval Research Laboratory in Washington, D.C., Hart helped develop the excimer laser, which is used today for tasks as varied as Lasik surgery and printing the freshness dates on Budweiser cans.) The institute doesn't yet have a headquarters, but it does have a big idea. And it doesn't involve waves.

Last spring Hart and Simmons cooked up a plan to build a floating wind-turbine farm 20 miles off the coast of Maine that they say could easily power the entire state - the equivalent of five nuclear power plants (and far enough from the coast not to be visible). The Gulf of Maine has 100 gigawatts of wind power, or 10% of U.S. daily consumption. The hope is that Maine can be an example for the rest of the country. Playing off the high profile wind-farm plan recently proposed by Simmons's buddy Boone Pickens, they're calling this idea the Pickens Plan Plus. Things appear to be moving fast. Senator Collins has thrown her support behind it.

The day after the CNBC interview, Simmons and Hart drove up to the University of Maine to visit the Advanced Engineered Wood Composites Center (AEWC), a 60,000-square-foot structural testing facility. The lab's director, Habib Dagher, is one of the world's leading experts in composite materials. He's working with Simmons and Hart to develop new windmill-blade technology.

The AEWC guys gave a presentation showing how the project could be ready by 2020. Simmons then donned a hardhat and safety glasses and got a tour of the testing floor. As it happens, the lab had already been hired by a large wind-power company to fatigue-test a prototype for a 55-meter turbine blade. A ten-meter segment of the blade was locked in a device called a hydraulic actuator - what looked like two massive steel vise grips - receiving 38,000 pounds of pressure up and down every second. "This is really incredible," Simmons announced. "I'm going to come back up here with two or three investor types I know."

On the way out, I asked Simmons if seeing the lab made his virtual institute feel more real. "Oh, yeah, very impressive," he said. "But we need to compress the time frame - 2020 is way too far out. That plan is fine assuming that we go along like we are now, and everything is okay in the world. But it's not going to be okay. We're going to need this stuff much sooner."


*****
From CNN Money

[vishwakarmaa]

CNN is not a credible source. They are only creating bad sentiments so speculations rise, oil price rise. Mostly its speculation, no basis. A fake system of generating more demand for dollar by rising Oil price.

[svinayak]