Archive for the ‘volatility’ Category

Via the Beeb:

Iraq’s prime minister has threatened to exclude the supporters of radical cleric Moqtada Sadr from politics.

Nouri Maliki told CNN that the cleric’s movement would not be allowed to take part in elections unless it disbanded its militia, the Mehdi Army.

The prime minister and major Iraqi parties had already called for militias to be dissolved as the government waged a security campaign against the groups.

But it was the first time that Mr Maliki had singled out the Mehdi Army.

“A decision was taken… that they no longer have a right to participate in the political process or take part in the upcoming elections unless they end the Mehdi Army,” Mr Maliki said.

“Solving the problem comes in no other way than dissolving the Mehdi Army,” he said.

The provincial elections are scheduled for later this year.

Growing confrontation

Mr Maliki took power with the help of Moqtada Sadr, but broke with the cleric last year.

The BBC’s Adam Brookes in Baghdad says the confrontation between the two men is growing.

Two weeks ago the prime minister sent thousands of troops into the city of Basra to try to force the Mehdi Army into submission.

The militia withdrew from the streets, but the operation was inconclusive.

Mr Maliki said the government would continue the crackdown.

“We have opened the door for confrontation, a real confrontation with these gangs, and we will not stop until we are in full control of these areas,” he said.

Mr Maliki’s comments came after heavy fighting between US and Iraqi forces and the Mehdi Army at the weekend.

At least 22 people were killed and more than 50 others injured in clashes in the capital’s eastern district of Sadr City, a stronghold of the militia.

Five US soldiers were killed, including three who died during rocket and mortar attacks in Baghdad.

Two of those died in attacks on the heavily-fortified Green Zone.

Moqtada Sadr has called for a mass demonstration on Wednesday against the US military presence.

Al-Maliki’s offer is hardly in good faith: unilateral disarmament is not an option for the Mehdi Army.

The screws are being turned on Ahmadinejad.

I disagree with Stratfor’s assessment that the last year of Bush’s presidency gives Bush more leverage than he has had at any time since 2003/05. I think Stratfor has miscalculated on this for the same reason that they miscalculated the NIE’s implications last November. The US government is by no means a cohesive organism. The less time Bush has in office, the weaker/more improbable will be the consequences of disobeying his orders.

The optimal time to strike at Iran and her various regional proxies (Hezbollah, Hamas, the Mehdi Army) is “now, or very soon.”

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Yesterday I confessed my surprise at the Basra operation’s having ended so quickly. It wasn’t congruent with my picture of the Mideast — that the operation is politically driven by American and Iraqi Shiite interests viz. Iran. Iran’s dominant ISCI faction, along with al-Maliki’s much weaker Dawa faction, have their own incentives to cooperate: namely entrenching their standing ahead of Iraq’s October elections by muscling out their weaker political competitors (the Mehdi Army and Fadhila).

It seemed doubly incongruent in light of the UK’s decision to postpone its Basra withdrawal. If a remotely lasting accommodation had indeed been reached, why wouldn’t the UK withdrawal have resumed? If there is anything Gordon Brown needs, it’s good PR.

At any rate, it appears that the Basra operation is continuing.

April 1, 2008 1545 GMT
Iraqi forces entered the ports of Om al-Kasr and Khor al-Zobair in Basra late March 31 in order to secure the area against criminal activity, media reported April 1. Iraqi Deputy Prime Minister Barham Salih said the government would continue its crackdown against militias and criminal gangs.

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Evans-Pritchard, again:

… UBS is also gearing for a big rebound, convinced that the Fed’s move to shoulder $30bn of Bear Stearns liabilities has changed the game.

In its latest report -“Ready for a Rally” – it said financial shares rose 448pc in the 12 months after the Swedish rescue in 1992, 88pc after Japan’s Revitalisation Law in 1998; and 82pc after Roosevelt’s Emergency Banking Act in 1933.

The pessimists at Société Générale remain sceptical, even though the Fed has gone nuclear. “We expect global equity prices to fall by up to 75pc from their peaks as a deep global economic downturn unfolds over the next few years,” said Albert Edwards, their global strategist. He fears a 50pc collapse in earnings, compounded by an “Ice Age derating of equities”.

It may echo the Lost Decade in Japan, where stocks fell 80pc. The yields on state bonds kept falling as debt deflation engulfed the banks, thwarting efforts to nurse lenders back to health by the usual device: “steepening yield curve”. The authorities were left chasing their own tails. Having lived through this, Japan’s chief regulator Yoshimi Watanabe has advised Washington to go for a quick taxpayer rescue, rather than trying “to fix the hole in the bathtub”.

Whatever happens, there will always be tactical rallies. Mr Edwards cites four Wall Street bounces above 25pc in the 2001-2003 bust. The buying cue is when investor gloom nears black despair. The put/call ratio on options is now at a bearish extreme of 0.90.

“That would historically suggest that a joyous 25pc spring rally is close at hand,” he said. Yet Mr Edwards remains wary as long as analysts cling to their belief that earnings will rise 11pc in 2008. This is not the sort of “washout” level of gloom required to clear the air.

Still, the oldest adage on Wall Street is “never fight the Fed”. In short order, Ben Bernanke has slashed interest rates by 300 basis points to 2.25pc, and invoked the emergency clauses of Article 13 (3) of the Federal Reserve Act for the first time since the Great Depression to take on direct credit risk.

The Bush administration has told the housing agencies Fannie Mae and Freddie Mac to absorb $200bn of extra mortgage debt. It has implicitly nationalised them in the process. The network of Federal Home Loan Banks has mopped up $900bn of mortgage securities. Congress has rushed through a $170bn fiscal blitz.

This is not to be sniffed at. It is worth a good spring rally, until the inexorable logic of a 25pc house price crash prevails once again.

Bernard Connolly at Banque AIG, who foresaw this crisis with uncanny accuracy, believes central banks will resort to full-throttle reflation, setting off a fresh boom in shares and gold. But this will occur only after the economic slump has spread to Europe and beyond.

The authorities will wait too long to act, believing their own decoupling myth. Unemployment will ratchet up. Civil unrest may rock Latin Europe.

In the end, the whole industrial world will stoke a fresh credit bubble to put off the day of reckoning, for another cycle.

The capitalist system is now so deformed by debt that it requires ever lower interest rates to keep going. It survives on perma-bubbles. Monetary rigour at this late stage would endanger democracy. …

Volcker and Thatcher proved that democracies can weather more pain than conventional wisdom will ever expect. Other than that I have nothing to add …

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When a country’s government starts to blame “unscrupulous dealers” for economic collapse, reach for your wallet.

Iceland Bank Default Swaps Rise Amid `Unscrupulous’ Speculating
By Abigail Moses

March 31 (Bloomberg) — The cost to protect the bonds of Iceland’s three biggest lenders from default rose after central bank Governor David Oddsson said “unscrupulous dealers” are trying to break the country’s financial system.

Credit-default swaps on Kaupthing Bank hf, the nation’s largest lender, increased to a record 1.65 million euros ($2.6 million) in advance and 500,000 euros a year, up from 1.58 million euros upfront, CMA Datavision prices show. The cost implies a 59 percent risk of default within five years, according to a JPMorgan Chase & Co. valuation model.

Oddsson called for an international investigation into attempts to drive Iceland’s economy “to its knees,” in a speech on March 28. The central bank was forced to raise its benchmark rate to a record 15 percent last week to defend the krona after a 30 percent slump against the euro this year.

“The longer this goes on, the worse it gets,” said Olivia Frieser, a London-based bank analyst at BNP Paribas SA, France’s biggest lender. “It is a question of confidence.”

The cost to protect the country’s lenders from default is the highest of 81 banks worldwide with credit-default swaps listed on Bloomberg.

Credit-default swaps on Glitnir Banki hf, Iceland’s third- biggest bank, traded at 1.7 million euros upfront and 500,000 euros a year, according to CMA, up from 1.6 million euros in advance. The cost implies a 60 percent risk of default, according to the JPMorgan model. The contracts have soared from 202,000 euros with no upfront payment at the start of the year.

Landsbanki Islands

Contracts on Landsbanki Islands hf, the second-largest lender, rose 25 basis points to 807, CMA prices show. The credit-default swaps traded at 950,000 euros upfront and 500,000 euros a year before closing at 782 basis points with no advance payment on March 28, according to CMA.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default is equivalent to 1,000 euros a year.

Attacks on the country’s Reykjavik-based banks “give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” Oddsson said at the central bank’s annual meeting in Reykjavik. “They will not get away with it.”

Debt Speculation

Investors use credit-default swaps to speculate on a company’s ability to repay debt. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

“Its very important that the Icelandic financial supervisory authority, in cooperation with other countries, investigates the market and determines whether the allegations are true,” Glitnir spokesman Bjoern Richard Johansen in Reykjavik said in a phone interview today.

Landsbanki spokesman Andrew Walton and Kaupthing spokesman Jonas Sigurgeirsson were not immediately available for comment.

Kaupthing may take legal action against Bear Stearns Cos., the collapsed U.S. broker, which arranged a trip to Iceland in January by three of its own executives and representatives of four hedge funds, the Financial Times reported today. If Kaupthing decides to file a lawsuit, it will be able to subpoena e-mails and records from Bear Stearns and possibly the hedge funds, the newspaper said.

Bear Stearns London-based spokeswoman Jessica Shepherd- Smith didn’t have an immediate comment.

Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 22 basis points to 577 today, according to JPMorgan.

The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 3.75 basis points to 121.25, JPMorgan prices show.

The CDX North America Investment Grade Index increased 1.25 basis points to 142.75 in New York, according to broker Phoenix Partners Group.

I am sure a few large hedge funds are doing most of the “damage,” as they always do. It’s basic to functioning markets — a “run on the bank” effect usually doesn’t start until the biggest players yank all their money out of the country.

The level of Iceland’s banks’ CDS is shocking. The international markets are treating the entire country as one pile of toxic waste.

The Federal Reserve can move to protect US banks, and US debt. It cannot, however, stop a run on Eastern Europe. Iceland is the leading edge of a brutal rebalancing in Eastern European assets, banks in particular … the regional profile is even worse than Thailand/ Indonesia/ the Philippines/ Korea/ Taiwan in 1997.

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Ambrose Evans-Pritchard:

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia’s bank rescue proved successful and is now a model for central bankers, unlike Japan’s drawn-out response, where ailing banks were propped up in a half-public limbo for years.

While the responses varied in each Nordic country, there a was major effort to avoid the sort of “moral hazard” that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.

“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

Stefan Ingves, governor of Sweden’s Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against “blackmail” by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed’s bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed’s piecemeal approach has led to “appalling moral hazard”.

“Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank’s dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan,” he said.

Any taxpayer bailout of the system needs to be combined with a massive purge of those not footing the bill for their own mistakes — banking management — and the complete slaughter of banking shareholders.

At the moment, Washington Mutual, Citigroup, and Countrywide are just three of the best-known “banks” whose debt to Uncle Sam — mostly to the Federal Home Loan Banks — exceeds their net assets. They are effectively the property of the US government.

A price must be paid. Under the free market ideal that never happens in real life, the banks fail, everyone freaks out for six months, and the economy experiences torrid growth afterwards.

In the real world, the future individuals of the (banking) institutions are forced to pay for the mistakes of the current institutional occupants. Future Wall Streeters will pay for the mistakes of today’s Wall Street by paying billions more in homage to stupid regulations, oversight that isn’t, and market share lost to more competitive, less cosseted overseas competitors.

The three regulatory options are as follows:

1) Do nothing; reward the bankers for their naked pursuit of risk without reward.

2) The aforementioned Nordic route.

3) A massive patchwork of new regulations and controls, which almost-exclusively subsidizes the institutional malfeasance of the past nine months at the cost of choking future Wall Street vibrancy.

The Nordic option is by far the most attractive of the three. It allocates responsibility, discourages future bad behavior, and punishes prior bad behavior. It keeps the system relatively healthy — assuming the banks are returned to private ownership within less than four years.

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Iran’s state of play is as follows.

  1. Ahmadinejad wants Barack Obama, not John McCain, as the next US president.
  2. Ahmadinejad is facing severe inflation at home, brought about by an oil windfall combined with US financial sanctions. This constitutes a political threat to his survival.
  3. The Ahmadinejad faction of the Iranian military-industrial apparatus has the most to lose in Iran’s upcoming second parliamentary round, and both presidential rounds of elections, scheduled for May 7, June 17 and June 24, 2008, respectively.
  4. Ahmadinejad appears to be losing control of its Iraqi proxies under heavy US and Iraqi pressure. Nouri al-Maliki’s Dawa party seems to be the main Iranian faction gone renegade, but segments of the Mehdi Army appear to be disobeying Iran as well.
  5. Nouri al-Maliki’s Dawa party, and the normally reliably pro-Iranian ISCI, are using the security operation to strengthen their own political hands at the expense of the Sadrites, Fadhila, and other smaller groups in Basra (Iraq’s richest province), ahead of Iraq’s October 1 elections.
  6. Therefore, Dawa and ISCI — who call the shots from Baghdad — have the motive as well as the means for destabilizing Iraq, 2 months before Ahmadinejad faces Iranian voters.

So what does Ahmadinejad do? He has one of his main allies, Ahmad Jannati, call for “dialogue” and “reconciliation”: “Oh [al-Sadr], if you have something to say, come sit with the government. The government is popular and so are you.” A day later Sadr had received Teheran’s orders, so he called upon his militias to stand down.

Iraqi Shia cleric Moqtada Sadr has ordered his fighters off the streets of Basra and other cities in an effort to end clashes with security forces.

He said in a statement that his movement wanted the Iraqi people to stop the bloodshed and maintain the nation’s independence and stability.

The government, which had set a deadline to hand over weapons in return for cash, called the move “positive”.

The fighting has claimed more than 240 lives across the country since Tuesday.

In Baghdad, the city’s military command has extended a round-the-clock curfew for an indefinite period. The curfew had been due to end on Sunday morning. …

Al-Maliki, however, prefers to continue consolidating power, and the Americans want to turn the screws on Ahmadinejad with as much local help as possible, because they believe Ahmadinejad will do likewise after he wins Iran’s presidential election. Since Sadr’s call falls short of what the Iraqi government is calling for, my guess is that the crackdown will continue, despite the Sadrites’ attempted voluntary cease-fire.

Iraqi troops will continue their operation in the southern city of Basra even though Shiite cleric Muqtada al-Sadr called on his followers to stop fighting, Reuters reported March 30, citing comments from Iraqi government spokesman Ali al-Dabbagh. Al-Dabbagh said the six-day-old operation is targeting criminals, not al-Sadr’s followers.

Iran seems to have elected to spend the next three months in a defensive crouch. Judging from everything out of Iraq and Syria, they have a lot of militia reorganizing to do on multiple fronts. Asif Shawkat, Syria’s head of intelligence, is suspected to be complicit in the Mughniyeh assassination, which means that Syria is effectively immobilized until Shawkat is eliminated.

If Ahmadinejad survives June 24, he will have a lot of new leverage, the Iraqi militias will snap out of their defensive crouch, and Iran will hold the initiative in Iraqi bloodletting while McCain prays that the violence doesn’t cripple his election prospects.

Until then, it appears that the initiative will be with the United States and its Iraqi allies.

The three months between now and June 24 would also be the ideal time for Israel to hurl a body-blow operation at Hamas, in Gaza. It would further diminish Ahmadinejad’s credibility, but would probably not provoke a response from Hezbollah.

I’m not sure anyone knows the extent to which Ahmadinejad might be able to rig the outcome of Iran’s elections. My impression is that so many Iranian elites hate Ahmadinejad, that Ahmadinejad’s “freedom to fudge” is fairly limited.

In terms of market outcomes this would imply a moderate tempo of oil-related bombings, and geopolitical jolts to the price of oil, over the next three months, followed by a dramatic upswing if Ahmadinejad goes all-in to secure a better bargaining position, by getting Barack Obama, not John McCain, elected to the presidency (through a cycle of Teheran-driven unrest in July through October).

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Things started getting very difficult with the internet about six months ago as the great firewall got tighter, but in the past few weeks internet access has been far more frustrating than it has ever been during my over six years living in Beijing.  It takes me hours (literally) to post anything on my blog.  My Peking University students tell me that they waste two or three hours a day more than they used to trying to access information on the internet.  When I ask them why it has become so difficult, they tell me that there are a lot more things now that the government doesn’t want them to know – although they don’t usually specify what that may be. …


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Rumors, rumors …

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Right on cue …. via the Financial Times:

US aids Iraq security forces with air strikes

By By Steve Negus, Iraq correspondent, and Demetri Sevastopulo in Washington

Published: March 28 2008 18:20 | Last updated: March 28 2008 18:20

President George W. Bush on Friday called the Iraqi government offensive in Basra a “defining moment” as violence continued to spread across the country and US troops were forced to send reinforcements to help Iraqi security forces.

“I would say this is a defining moment in the history of a free Iraq,” Mr Bush said. “This happens to be one of the provinces where the Iraqis are in the lead…and this is a good test for them.”

Nouri al-Maliki, the Iraqi prime minister, has stressed that the operation is primarily targeting ”lawless gangs” in the southern port city of Basra, but fighting has spread to other cities, with members of the Madhi Army, a group of Shia militants loyal to the cleric Moqtada al-Sadr, staging solidarity attacks.

Militias on Friday appeared to have seized control of the centre of the southern provincial capital of Nasiriya, while heavy fighting has also been reported in the towns of Kut, Amara, Diwaniya, and Hilla and in the Baghdad suburb of Sadr City. Militants in Baghdad have also kept up a heavy barrage of rockets and mortars at the heavily fortified Green Zone.

Iraqi security forces admitted on Friday that they were having difficulties subduing radical Shia militants. The death toll in the four days of fighting since Mr Maliki launched operation “Sawlat al-Fursan”, or Charge of the Knights, is unclear, but appears to have risen at least above 200.

While Mr Bush said the Iraqis were taking the lead in the operation, coalition forces were required to provide reinforcements on Friday, including air strikes at militants in Basra and Baghdad.

”We supposed that this operation would be a normal operation, but we were surprised by this resistance and have been obliged to change our plans and our tactics,” Abd al-Qader Jassim, the Iraqi defence minister, was quoted as saying by Reuters.

Stephen Biddle, an Iraq expert and former adviser to General David Petraeus, the US commander in Iraq, said the situation in Basra was “very serious”. He said the US was not clear whether Mr Maliki was targeting rogue elements of the Madhi army or taking on the mainstream faction of the umbrella group loyal to Moqtada al-Sadr, the radical Shia cleric.

Mr Biddle said another possibility was that Mr Maliki was taking the opportunity to crack down on political opponents ahead of provincial elections later this year. That would be the most dangerous scenario, he added, since it could jeopardise the ceasefires by the Madhi army loyal to Moqtada al-Sadr, the radical Shia cleric, and also by Sunni “local concerned citizens”.

Mr Maliki’s office on Friday said Basra residents had until April 8 to hand over heavy arms in return for cash bounties. The deadline is separate from an earlier ultimatum announced on Wednesday which gave gunmen 72 hours to surrender their weapons.

Iraq experts expressed concern that Mr Maliki had not co-ordinated the operation closely with the coalition, which some said could jeopardise its success. Mr Bush said he was unaware what trigged the timing of the offensive.

“I haven’t spoken to the prime minister since he’s made his decision, but I suspect that he would say, ”Look, the citizens down there just got sick and tired of this kind of behaviour,” said Mr Bush.

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China’s chronic undervaluation of its currency implies that the country should have a rate of inflation approximately proportional to its persistent current account surplus. China’s current account surplus has been exploding recently, which means that China is in the throes of an inflationary monetary trap. It also means that you can look at China’s forex reserves as an approximate indicator of what China’s real rate of domestic inflation is.

One of the methods by which China has kept its (stated) rate of inflation so low has been by a haphazard series of price controls, especially since last fall (justified by chronic “one-off events” — pork disease killing lots of pigs, a big snowstorm, etc). However, that system is breaking down.

March 28, 2008 | 1307 GMT

For the first time since Beijing imposed a temporary ban in January on all price increases for essential items, China’s National Development and Reform Commission has allowed a price rise application to slip through. In reality, this ban was more effective at calming social unrest ahead of March’s politically sensitive National People’s Congress than resolving China’s inflation problem at the root. Going forward, the government will have to look for other, more effective ways of curbing inflation — if none is found, a temporary ban will likely be reimposed.


China’s third-largest dairy producer, Bright Dairy & Food Co., said March 28 it plans to raise milk prices by 14 percent in some regions after having obtained approval from the National Development and Reform Commission (NDRC), Shanghai Securities News reported.

For the first time since January, when Beijing imposed a temporary ban on price hikes from all major producers of essential items such as milk, flour, rice, noodles and cooking oil — subject to central government approval — the NDRC has given a major producer permission to raise the price of an essential food item. […]

Currency manipulation is today’s favorite mode of capital allocation by authoritarian governments. One of the side effects of Bernanke’s war on the dollar has been to dramatically raise the cost of this policy, which pegs the national currency to the USD at an artificially low rate to boost exports, and misallocate capital to the export sector, at the expense of domestic purchasing power. A cheaper dollar drags down all currencies pegged thereto, which means that the purchasing power of phony-currency pegs’ citizenries erodes further, which causes more social instability and unrest.

The power of the 1989 Riot Which Shall Not Be Named was in the population’s rage at food price inflation … not the seductive appeal of the “goddess of democracy.”

A 14 percent price increase is going to hurt a lot of pocketbooks.

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King to consider special help for UK banks

By Chris Giles, Economics Editor

Published: March 26 2008 12:08 | Last updated: March 26 2008 12:23

Mervyn King indicated on Wednesday that the Bank of England was poised to take a revolutionary step and buy or swap illiquid assets on banks’ books for cash or liquid assets as way to find a “longer-term resolution” to the problems faced by British banks.

The Bank governor also indicated the Bank was more predisposed to cutting interest rates now than in February.

Commenting on the “fragility” that exists in the financial system, Mr King said there was an “overhang on banks’ balance sheets of assets in which markets have closed”

“These assets cannot now be sold or used to secure funding in the market – they are difficult to finance. That has created uncertainty about the strength of banks’ financial positions”.

In the short-term, he said the Bank would continue to lend against mortgage-backed securities and other asset-backed securities where markets are closed, but he added that such lending, while “a useful bridge to a longer-term solution” can “be only a temporary measure”.

He was not specific about the longer-term resolution, since he said “it is too soon to say where these discussions will lead”, but he indicated more radical moves were necessary because “it is unrealistic to assume that markets for many asset-backed securities are likely to re-open speedily or, when they do, to their previous levels of activity”.

Mr King’s comments before the Treasury Committee come a week after shares in HBOS, the owner of the Halifax building society and the country’s largest mortgage lender, fell nearly 20 per cent on rumours it had sought emergency funding from the Bank of England.

The Bank of England was forced to deny the rumours and the FSA has launched a criminal investigation into the distribution of the claims. But the share price response shocked senior banking executives and regulators and led to a plea for help for the industry.

The Financial Times reported last week that discussions in central banks around the world include the purchase of mortgage-backed securities or swapping illiquid assets for UK government bonds, a move similar in effect to outright purchase.

But Mr King stressed there were two principles he would insist upon if the Bank was to take illiquid assets off commercial banks’ books to improve their financial positions.

“First,” he said, “the risk of losses on their lending should remain with banks’ shareholders”. This implies the Bank would only accept assets at well below face value, or would insist on banks’ indemnifying taxpayers for the credit risk they would adopt if they took hold of the assets.

“Second,” he added, “a longer-term solution must focus on the overhang of assets and not subsidise issues of new assets”. Mr King is keen not to allow another frenzy of lending and it implies the Bank would not be willing to take any new mortgage-backed securities on its books.

The second condition would be difficult to achieve in full, since improving banks’ finances would improve their ability to lend compared with the extremely strained current conditions. Any action could be perceived as a subsidy, but the Bank governor‘s words indicated he would not be willing to assist banks with new lending.

The governor made it clear that the problems for banks were not confined to the UK. “There is concern in all financial markets around the world that fragility remains today,” he said.

Mr King made it clear that he wanted to separate the financial crisis from monetary policy and said that the two interest rate cuts so far had offset tighter conditions in mortgage markets, so monetary conditions were broadly unchanged.

Asked whether current market conditions made the Monetary Policy Committee more predisposed to a cut in interest rates, he replied: ”Yes”.

Willem Buiter’s recommendations (published in the FT, which King has apparently copied word for word) are not a good idea. You can’t separate monetary policy from a systemic financial crisis, because monetary policy defines the system. The whole point is to transfer risk of loss to the BoE — if risk of loss to future earnings remains on the banks’ balance sheets, why bother with the transaction at all?

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Economies have lots of forms of leverage besides the borrowing of money by hedge funds through prime brokerages.

For example, a national deficit is also a form of leverage. Thus, lower-than-long run average taxation is a form of leverage. Inflation, being a tax, is a form of leverage.

Another form of gearing would be weakness in workers’ bargaining power (strength of unions).

Market idiots reel from one retrenchment of leverage to the next. Every week is a different once-in-100-years crisis, for them. So they lose half of their investors’ money, and bullsh** their investors with “26-sigma”s for long enough to lose 90 percent of the remaining 50 percent, before they are finally held accountable.

Those of us who need to survive, and who do not wish to destroy our credibility with the investors who have placed so much trust in us, need to understand the most realistic distributions of outcomes over the next eighteen months which most threaten our ROI.

Hedge funds are not the only victims of bank failures. Other segments of society are also deleveraging.

Unions are one presidential election away from getting “card check” passed, which would change the face of labor organization in the United Sates. Currently unionized businesses (airlines, car manufacturers) are underpriced in this respect relative to industries that currently are holding unions at bay (Wal-mart for example).

As for taxes …

I think Barack Obama is the prohibitive frontrunner for the Democratic nomination; you can already see this Wright thing ebbing away, notwithstanding the best efforts of the Clinton-Republican unholy alliance.

So let’s say we get to July, and Obama is still the prohibitive frontrunner. Ahmadinejad is re-running the script which sold so well in 1979, and took down Jimmy Carter, against the outgoing Bush Administration. So Obama would also be the presidential frontrunner, surfing a new wave of anger over Iraq.

At that point, the market would be forced to price in a capital-gains tax hike to at least 20 percent (if not 28), as well as an income-tax hike — and thus dividend taxation — back to 39.6 percent, as well as the potential raising of income tax beyond 40 percent if Obama implements Austan Goolsbee’s recommendation to lift the Social Security cap, currently at around $96,000, as well as higher unionization rates (= lower ROI).

This will add to all the headwinds the market already faces … August would be a good time for all these concerns to crescendo.

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The FT indicates that little Iceland, which in 2006 had a current account deficit of 26 percent of GDP (“only” 16 percent in 2007) has gotten mauled by the credit contraction. Considering that Iceland’s economic profile — low taxes, low regulation, small finance-centric economy, massive current-account deficit — is so similar to Eastern Europe (particularly the Baltics), perhaps it will serve as a useful leading indicator for those countries.

Concern for Iceland grows after rate rise

By David Ibison in Stockholm

Published: March 25 2008 09:59 | Last updated: March 25 2008 19:08

Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15 per cent in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis.

The bank said “deteriorating financial conditions in global markets” had contributed to the emergency move. Confidence in the krona, Iceland’s currency, has been shattered this year because of perceived economic imbalances in the economy and fears the banking sector is in danger of collapse. The krona has weakened by 22 per cent against the euro so far this year.

The rapid weakening of the currency prompted the central bank to adopt unusually blunt language on Tuesday, warning if the decline was not reversed Iceland faced “spiralling increases in prices, wages and the price of foreign exchange”.

“Only time will tell if this works,” Ingimundur Fridriksson, governor of the central bank, told the FT. “We are a small open economy and we are obviously affected by moves in the international economy.”

Tuesday’s move saw the krona gain as much as 6.3 per cent against the dollar, while the country’s benchmark index of the 15-most traded stocks had its biggest gain in more than 15 years, rising 6.2 per cent.

The bank last raised rates in November 2007 and said then it would leave them unchanged until the middle of this year, but was prepared to take extraordinary action if the krona depreciated severely. Inflation was 6.8 per cent in February and has outpaced the central bank’s target of 2.5 per cent since 2004.

“It will be necessary to continue to pursue a very tight monetary policy in order to bring inflation and inflation expectations under control, and increase confidence in the krona,’’ the central bank said. Thor Herbertsson, co-author of an influential report in 2006 on Iceland’s economy with Fredric Mishkin, a member of the US Federal Reserve board, said Iceland could be thrust into crisis as a result of the global economic situation. “Let’s say Iceland is not in more danger than some Wall Street banks,” he said.

But at the same time as international investor confidence in Iceland has fallen sharply, policymakers and economists have tried to reassure markets by drawing attention to the country’s economic fundamentals and the underlying strength of the banks.

Richard Portes, president of the Centre for Economic Policy Research, and the author of a respected report on Iceland’s economy last year, has urged investors to pay more attention to the data.

He points out overheating is being tackled, with economic growth slowing, hitting 2.9 per cent in 2007 and zero this year.

He adds that Iceland’s current account deficit – the source of many of the concerns about the economy – has narrowed from 26 per cent of GDP in 2006 to 16 per cent in 2007.

He has also made clear that Iceland’s banks are sound by international standards, with deposit ratios in line with international norms, high capital adequacy ratios by European standards and credible funding profiles.

Finnur Oddsson, managing director of the Icelandic Chamber of Commerce, said: “The global turmoil is certainly hurting the financial sector, but the danger of things toppling over here is greatly exaggerated.”

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… is down 26 30 33 37 percent in pre-market trading …

Merrill: -16%

Morgan Stanley: -12%

Goldman, UBS and Wachovia: -9%

Citigroup: -5%

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$1,030 …

The Fed will chop 75-100 basis points tomorrow, on top of the $30 billion they just printed to backstop JPM’s “rescue” of Bear Stearns.

The Fed has already implemented yet another round of smoke-and-mirrors “liquidity facilities” which amount to a deeper interest rate cut, without so much as admitting it.

March 16 (Bloomberg) — The Federal Reserve, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities.

In an announcement before the start of trading on the Tokyo Stock Exchange, the Fed lowered its so-called discount rate by a quarter of a percentage point to 3.25 percent. The central bank also approved the financing of JPMorgan Chase & Co.’s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear’s assets.

Fed Chairman Ben S. Bernanke is stepping up efforts to keep strains in financial markets from spiraling into a full-blown meltdown. Last week the central bank agreed to emergency loans to a non-bank, Bear Stearns, for the first time since the 1960s. Fed officials also announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities.

“The Fed needed to act decisively, and I believe it has,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “It is a crisis of confidence that these measures are trying to” alleviate, he said.

The dollar tumbled to a 12-year low against the yen after the announcement and Treasury notes rallied in Asian trading. The Nikkei 225 Stock Average lost 3.1 percent at 9:35 a.m. in Tokyo.

From tomorrow, primary dealers will be able to borrow at the rate under a new lending facility, to be in place for at least six months, the Fed said. The Fed will accept a “broad range” of investment-grade collateral.

Bernanke Offers Assurances

“These steps will provide financial institutions with greater assurance of access to funds,” Bernanke said during a conference call with reporters after the announcement.

Treasury Secretary Henry Paulson in a statement said “I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets.”

Investors expect the Fed to lower its benchmark rate by as much as a full percentage point, to 2 percent, when policy makers meet March 18. That would exceed the 0.75-point emergency reduction on Jan. 22, which is the largest Since the overnight interbank lending rate became the main tool of monetary policy about two decades ago.

“Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion. “The problem is there’s so much concern about credit quality that now there are solvency issues, and it’s something the Fed has a more difficult time dealing with.”

Inflation is running somewhere between 4 and 8 percent, and more Fed cuts are on the way. Dollar-holding is for the financially suicidal …

I am grateful to have joined the last, greatest leg of the metals supercycle. Gold will finish out this cycle at well over $2,500 an ounce … especially once the euro falls from its unsustainably lofty peak. But, that’s for later.

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Oil: $110

Gold: $1020

JPY-USD: Y97.3

USD-EUR: $1.58

Inflation: Who knows? But MZM is running at 16 percent, year-on-year.


Red: Value of USD

Blue: Money zero maturity, the aggregate of cash, short-term bonds, CDs, and other very liquid cash instruments in the system, aka MZM; %chng from year ago

Green: Commercial lending, %chng from year ago

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JPMorgan Buys Bear Stearns for $2 a Share After Clients Flee
By Yalman Onaran

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $2 a share after a run on the company ended 85 years of independence for Wall Street’s fifth- largest securities firm and prompted a bailout by the Federal Reserve.

The central bank will fund as much as $30 billion of Bear Stearns’s “less-liquid assets,” the two companies said in a statement today. The deal values New York-based Bear Stearns, with 14,000 employees, about $270 million, far less than the $4 billion market value on March 14. The stock had fallen 80 percent in the past 12 months.

JPMorgan Chief Executive Officer Jamie Dimon had the upper hand in negotiations after coming to the smaller firm’s rescue last week with a cash infusion engineered by the Federal Reserve Bank of New York. Bear Stearns’s CEO, Alan Schwartz, faced the prospect of bankruptcy as clients pulled $17 billion in two days last week and creditors stopped renewing loans.

“JPMorgan Chase stands behind Bear Stearns,” Dimon said in the statement. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

Bear Stearns’s sale to JPMorgan caps an eight-month slide in the company’s fortunes that began last July with the collapse of two of its hedge funds. Those failures sparked a wider market concern that called into doubt the value of any asset linked to the mortgage market, Bear Stearns’s biggest business.

Without a resolution this weekend, the situation would probably have continued to deteriorate when markets resumed trading tomorrow, according to analysts and investors including Cambiar Investors LLC’s Brian Barish.

Fed Rescue

The Fed’s rescue attempt last week failed to avert a crisis of confidence among Bear Stearns’s customers and shareholders, who drove the stock down a record 47 percent after the cash infusion was announced.

Bear Stearns’s profit exceeded $2 billion in 2006, yet JPMorgan’s deal values that company at about one quarter the value of just the securities firm’s headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per-square-foot that comparable office space in the city is currently fetching.

Bear Stearns’s prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts have said.

Frozen Market

The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm’s income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.

“As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,” said William Fitzpatrick, who helps manage $1.6 billion at Optique Capital Management, including JPMorgan shares. “That’s the crown jewel, and that would fit into JPMorgan’s business extremely well.”

Dimon’s New York-based firm has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Streets biggest banks and securities firms.

JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the biggest U.S. bank.

Crisis of Confidence

“It’ll be perceived as a positive for the markets,” said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “It puts a floor under all the financials. The longer-term thesis is that the Fed won’t let good companies fail based on lack of liquidity and a crisis of confidence.”

Treasury Secretary Henry Paulson defended the Fed’s bailout today, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns’s future this weekend, without elaborating.

“There’s always a decision to be made to say what’s best for the stability of the marketplace, the orderliness of the marketplace,” Paulson said. “I think we made the right decision.”

Great Depression

Bear Stearns, founded in 1923, survived the Great Depression and first sold shares to the public in 1985. Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James “Jimmy” Cayne, 74, who remains non-executive chairman of the firm.

Cayne stepped down after reporting an $854 million fourth- quarter loss, the first in the company’s history. He was at a bridge tournament in Detroit last week as the firm faced speculation about its cash position. Cayne came under fire last July for playing golf and bridge while the hedge funds collapsed.

On a conference call with analysts and investors after the bailout announcement on March 14, Schwartz said the company’s book value was “fundamentally” unchanged. Clients continued to withdraw funds, he said. The book value was about $80 a share at the end of November.

When Bear Stearns invited potential buyers for detailed presentations by department chiefs yesterday, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.

14,000 Employees

Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn’t send representatives. Hundreds of Bear Stearns employees went to work yesterday to help with the sale process and the presentations.

Bear Stearns employs 14,000 people worldwide, according to its Web site, and has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo.

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn’t planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, has put in more than $1 billion into the firm since September, paying as much as $150 for a share.

JPMorgan’s participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of “100 Years on Wall Street.”

The bank has also profited from others’ crises. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.

The only way this could have happened so quickly was if the Fed guaranteed to backstop any and all losses on the deal JPMC might have incurred in the future. JPMC has apparently assumed all of BSC’s derivatives positions, and there was no way they could have carefully evaluated even a significant majority of those in the space of four days. That would have required confirming the liquidity of the counterparties to the vast majority of the trades, etc, etc …

So Bear was overvalued by 1400% as of Friday’s close …

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With a hat tip to the redoubtable Mish Shedlock, let’s look at BSC’s balance sheet, viewable here.



$13.4 trillion of derivatives positions.

And the market is supposed to figure out to what extent this behemoth has not been marked to market — in 26 days?

When I first heard the scale of the leverage of BSC’s Dublin subsidiary (“a billion levered up to a trillion” ie 1000-1) I thought I was hearing some exaggeration for dramatic effect. But BSC’s market capitalization is now $4 billion, and that is supposed to support over $13 trillion in gross derivatives positions. That’s technically ~3500-1 leverage.

The permabull reflex would be to argue that BSC’s net exposure is a minuscule fraction of $13.4 trillion, and that most of the swaps, etc. cancel each other out. But who knows? Who knows what other off-balance-sheet vehicles Bear has?

More importantly, are there enough trees in the United States to print the amount of money required to do these bailouts? (Now I understand the permabears’ rationale for going long timber.. ha … ha..)

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March 15, 2008 1631 GMT
Russian security forces foiled a sniper’s March 2 attempt to assassinate President Vladimir Putin, Reuters reported March 15, citing Moscow tabloid Tvoi Den. An unnamed source told Tvoi Den a sniper was arrested before Putin entered the Kremlin gates to attend a concert next to the Red Square. The Kremlin declined to comment on the report, and a security source quoted by Itar-Tass denied the report.

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LONDON: Financial market traders across London have been told by their firms to stop dealing with Bear Stearns, while dealers in New York scaled back their transactions with the ailing investment bank, sources in several dealing rooms said on Friday.

At least six major institutions in London — including Commerzbank , Royal Bank of Scotland and JPMorgan — had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, told Reuters.

Credit Suisse had also stopped trading with Bear Stearns , a London-based equities broker said.

None of the institutions named by the traders would comment on the subject when contacted by Reuters.

A London-based government bond trader said banks had been withdrawing from transactions with Bear Stearns since Thursday. …

I am “hearing” that Lehman — which dropped 14 percent today — is currently “extremely” stable in cash terms, although I have no idea how any one person, even a very highly-placed one, could be sure of any major banking institution’s financial status. All the major financial institutions have sprawling off-balance-sheet vehicles, some of which are only known by certain parts of the respective banks.

As far as BSC is concerned, the regulators seem completely out to lunch. Apparently, BSC has a colossal subsidiary, or off-balance-sheet vehicle, or something, domiciled in Dublin, which has a leverage multiple in the hundreds. And it’s cooked. I believe that the regulators/ Fed have once again been fed woefully incomplete information on the true state of Bear’s finances.

My guess is that Lehman is the counterparty in some disproportionate number of the derivatives tied to BSC’s Dublin vehicle, which are now worthless because their counterparty, Bear, won’t be able to pay up.

In gold we trust …

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