Econ 2009

[ewmayer]

UK Spotlight: Revenge of the South Sea Bubble

South Sea Bubble Survivors Say Lloyds Banking Must Break Up Along With RBS: Henry Hoare made a 1.6 million- pound ($2.2 million) profit from the South Sea Bubble, a speculative bust that bankrupted thousands of English families in the 1720s.

His great-, great-, great-, great-, great-, great-grand- nephew boosted the deposits of his family’s bank by 20 percent in the past year to come through one of the worst financial crises since then, which is why people might want to listen to him.

“Keep it simple, stupid,” Alexander Hoare said in an interview in his drawing room on the first floor of C. Hoare & Co.’s 180-year-old office on London’s Fleet Street. “Get the depositors in, lend to people who can afford to borrow.”

That’s a lesson Royal Bank of Scotland Group Plc should have learned, said Hoare, 46, whose family-owned firm started in 1672 and now has about 10,000 customers. Prime Minister Gordon Brown should now dismantle the bank, which required 20 billion pounds of taxpayers’ money to avoid collapse, Hoare said.

“Break it up into all the component parts from which it was made and have them compete freely,” said Hoare, referring to his Fleet Street neighbors National Westminster Bank Plc and Coutts & Co. which are both owned by RBS. “The regional, smaller banks were much admired by their clients, they made money for their shareholders, they didn’t trouble the government.”

Lloyds Banking Group Plc, taken over by the government after its acquisition of Edinburgh-based HBOS Plc, should also be dismembered, Hoare said. The banks got into “all sorts of exotic alphabet soups they didn’t understand,” Hoare said.

‘Bad for Taxpayers’

“If you look for example at the crashing together of Lloyds, a good bank, with HBOS, it was bad for competition, it was bad for consumers, it was bad for shareholders, it was very bad for taxpayers,” Hoare said. HBOS lost 7.5 billion pounds in 2008, while Lloyds earned 819 million pounds.

RBS and Lloyds won’t be broken up soon because the government would receive “fire-sale prices,” said Neil Dwane, chief investment officer for Europe at Allianz Global Investors’ RCM unit in London.

Hoare said he’s now paying for the mistakes of others. His bank and other lenders are subscribing to a government plan to insure depositors after the failure of Bradford & Bingley Plc and Iceland’s Kaupthing Bank hf and Landsbanki Islands hf. Hoare said the government’s plans put too great a burden on taxpayers and penalize banks that avoided failure.

“There we were minding our own business for 300 years, and one day some Icelandic banks and Bradford & Bingley fail and we get landed with the bill,” Hoare, the bank’s chief executive officer, said. “The direction we’re heading is more and more depositor insurance, more and more regulation, more and more state ownership and these are the very things which did not make London great.”

South Sea Frenzy

Parliament passed the South Sea Act in 1720, which gave the South Sea Co. a monopoly on trade, including slavery, with South America in return for financing part of the national debt run up in the War of the Spanish Succession.

The shares jumped from 128 pounds in January to 1,050 pounds in July before they tumbled to 100 pounds in December, costing clergymen, country gentlemen and even scientist Isaac Newton their savings. Chancellor of the Exchequer John Aislabie was expelled from Parliament after an inquiry found he had accepted bribes, the Postmaster General took poison, and even King George I’s two mistresses were implicated.

Hoare acquired South Sea Co. stock as it rose and sold whenever it dropped. The bank made about 19,000 pounds, about 1.6 million pounds in today’s money, between February and September that year, according to the firm.

‘Chasing Fox Hounds’

In today’s crisis, Hoare has so far benefited, lifting deposits to about 1.8 billion pounds during the last 12 months. That’s mainly because it’s an “exclusive franchise” for the rich, said Simon Maughan, a financial analyst at MF Global Securities Ltd. The bank’s history has no relevance to the wider banking market, Maughan said in an e-mail.

Hoare accepts his bank serves a niche, and it has missed out on historic opportunities to expand. “We managed to miss the industrial revolution,” he said. “The balance sheet didn’t grow. They were all out on their horses chasing fox hounds,” he said of his forebears.

Hoare & Co. is an unlimited liability partnership, which means the family’s personal wealth, including Alexander Hoare’s solar-panel-topped residence and 50-foot yacht, can be seized if the lender collapses. That gives clients confidence, Hoare said.

“Everything apart from the shirt on our back is at risk,” Hoare said. “It keeps you jolly nervous.”

My Comment: No wonder Newton turned to alchemy ... he needed a magical way to turn all the dross left over by his playing the SS bubble back into gold.


Friday Funnies - Courtesy of Time magazine, Madoff in Prison:

[Uncwilly]

Originally Posted by garo

Perhaps, perhaps. But then those of us that weren't holding or were shorting for the past year were laughing at the buy and hold crowd (does that include you?) on the way down.

In a 401k kinda way, yes. But then again, I took a loan on my account before the bottom of the bottom came. I should actually wind up making money on the loan.

Let's see, later 2006 sell real estate, buy gold.
Late Feb 2009, sell gold, buy stocks.
Mid 2010? sell stocks, buy real estate.
Lather, rinse, repeat.

[__HRB__]

Originally Posted by R.D. Silverman

The same group of economists who sat around and "fiddled while Rome
burned" have given Obama a failing grade (and Bernanke a passing grade!!)
for their handling of the economy. (according to WSJ)

Talk about Chutzpah!!!!!

The only occupations that I hold in lower regard than economists are
lawyers and politicians.....

sad. really sad....

The economists in the WSJ deserve a 'G' for failing to spot the trick question:

It's not the President's, the Fed's or anybody else' job to 'handle' the economy, especially when your only qualification is to have won a popularity contest, where the decision was made according to someones tan or whether one could do a choleric zombie's bimbo-escort, after being exposed to a full 30 second-dose of her weltanschauung.

Economists cannot stop 'Rome from burning by laying down their fiddles' and performing magic, in the same way physicists can't solve an energy shortage by doing magic with the 'law of conservation of energy'.

The really sad thing is that so many apparently intelligent people really believe that economists can perform magical zero-variance out-of-sample forecasting, as long as they have the same political ideology.

Even if economic theory can only explain 1% of the variation in the data, given the huge amounts of noise, outliers and small sample sizes, this difference is compounded over time, so following a policy that _has_ a consistent economic theory to support it, is strictly better than one that doesn't.

Originally Posted by Karl Popper

If you allow the end to justify the means, the only thing you will ever experience are the means, for the end will never come.

That's why _I_ think Obama deserves an F.

[garo]

Well I did not mean to gloat. I was just taking exception to the gloat directed against Xyzzy. Most informed commentators - i.e. those that saw this bear market way back in 2006 - think that we are near a low (hate that term bottom - CNBC just loves "bottom-picking" doesn't it) but not the ultimate low. We may go below 666 in the next month or so or we may not but we are likely to see a multi-month bear rally and when all the pundits are declaring that the bear market is over and the retail investor has been lulled into complacency, the next down-led will strike taking us to 450-500 on the S&P.

Those of you who missed the Jon Stewart vs. Jim Cramer show-off, here is the extended version: Jon Stewart and Jim Cramer: The Extended Daily Show Interview | Indecision Forever | Comedy Central

[cheesehead]

Originally Posted by AES

There's also the credit line contraction that's happening concurrently. I received a letter from Citi explaining that since x of my line of credit has never been used, the new maximum line of credit is y. I have never missed a payment on this account and the principle payoff occurs quarterly.

It's not a credit card account, but my guess is that lines of credit are shrinking everywhere.

Any thoughts on the repercussions this will carry?

More on this, with warnings:

"How to Blow Your Credit Limit -- Without Spending"

(DarJones reminds me that I forgot the link:

http://finance.yahoo.com/banking-bud...thout-Spending

Thank you, Fusion_power!)

Originally Posted by Kelli B. Grant

If you haven't had the credit limit cut on your credit card recently, count yourself lucky. Risk-averse card issuers are getting slash happy. And while many cardholders gripe that such cuts slice razor-close to their balance amounts, for an unfortunate few the cuts go far deeper: below what they currently owe.

Under different circumstances, David Chaplin-Loebell wouldn't have minded that American Express cut his unlimited credit line to just $5,000. Except that when AmEx reduced his line in October, he had an outstanding balance of $10,000. "I found out by having a business purchase declined," he says. Repeated calls to AmEx failed to yield an answer about why the cut was made. ...

Nasty as it may be, the practice of cutting credit lines below the balance is legal -- at least, for now, says Chi Chi Wu, a staff attorney for the National Consumer Law Center, a consumer advocacy group. Federal Reserve rules requiring lenders to give cardholders 45 days notice before reducing a credit line to the point that it would trigger penalties won't go into effect until July 2010. "[Until] then, there are no federal protections," says Wu.

Congress is also hoping to rein in unscrupulous credit-card practices. ...

. . .

The motivation among issuers to make such deep cuts that they plunge below a cardholder's balance amount isn't very clear. Usually, issuers cut credit lines to reduce outstanding liabilities -- they sometimes may even chase the balance on riskier accounts with further limit cuts as cardholders pay down debts, explains Bill Carcache, an analyst with investment bank Fox-Pitt Kelton. But cutting below the balance doesn't reduce an issuer's liability: The cardholder still owes the outstanding debt.

I can easily see motivation for that behavior:

Issuers want to reduce their future liability (after cardholder will have paid down the debt) now, rather than "chase the balance". If the cardholder makes only minimum payments, s/he may still have more of a balance in July 2010 than the issuer is comfortable with, so the issuer wants the limit down now before the new Fed rule takes effect. They've decided what they want the cardholder's limit to be in the future, and see no reason to delay imposing it since they can do so now without advance notice.

The extra over-limit fees are a bonus, and there's little fear about cardholders "taking their business elsewhere" under current circumstances. If a high-risk cardholder leaves ... good riddance, so just pay the balance and don't let the door hit you in the back on your way out. If the cardholder's a desirable low-risk customer ... well, s/he's not going to have an easy time opening an account elsewhere with terms as good as or better than s/he has now with the current issuer.

One possibility is that this is yet another attempt by card issuers to get consumers to close their accounts (while bringing in a little fee income in the short term), says Dennis Moroney, research director and senior analyst for consulting firm Tower Group. "I can't rationalize in my mind what other motivation there would be," he says.

. . .

HSBC ... has tightened its credit standards based on the economy. "As we have previously stated, in an effort to reduce credit risk and refine strategies for our card business, we have tightened credit standards, reduced or canceled higher risk credit lines, and closed a number of inactive accounts," ...

While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio -- the total amount of debt you owe in relation to the amount of credit available to you -- accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don't have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.

Even cuts that are close to the balance have the potential to devastate if they're not caught quickly. Luckily for Carol Gressett of Decatur, Miss., she noticed the reduction in her Discover-branded Sam's Club card limit just days after it happened. The limit was cut to within $100 of her $3,000 balance. The official letter notifying her of the reduction arrived three weeks later. "We could easily have gone over if I hadn't been paying attention," she says.

[Fusion_power]

There are signs the market is - at least for a time - going to level off. The big worry will be when things turn down again at some point within the next year.

Has anyone had a credit card limit slashed?

http://finance.yahoo.com/banking-bud...thout-Spending


On a more personal note, Nortel is now shedding quite a few more employees. They have cut one engineer from my group and another who is a close friend in the Field Engineering group. These are top notch people with excellent skills and proven ability to do the job. When you cut people like this, you are no longer cutting fat, you are cutting the people who make the company run.

DarJones

[schickel]

Originally Posted by Fusion_power

Has anyone had a credit card limit slashed?

http://finance.yahoo.com/banking-bud...thout-Spending

Not a limit cut, but six months ago I had a card with a $15k limit closed because "the account has not been used in several months and must not be needed any more".

Too bad.....last month I had to put my new HD TV on another card.

On a more personal note, Nortel is now shedding quite a few more employees. They have cut one engineer from my group and another who is a close friend in the Field Engineering group. These are top notch people with excellent skills and proven ability to do the job. When you cut people like this, you are no longer cutting fat, you are cutting the people who make the company run.

DarJones

Good thing the executive bonuses are probably based on total expenses slashed and not customer satisfaction, huh?

[ewmayer]

Bernanke: Recovery to begin next year: Federal Reserve chairman says stabilizing the banking system will be key to a full economic recovery.

"We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time," Bernanke said in a rare public interview airing on "60 Minutes," according to a transcript released by CBS.

When asked about the risks of a "new American depression," Bernanke responded, "I think we've averted that risk. I think we've gotten past that."

You mean, like you "averted" any kind of "subprime contagion last year?" We all see how spectacularly that succeeded. Middle of last year it was "Subprime problem is contained ... what recession?" End of last year it was "things are bad, but recovery in second half of 2009". Now it`s "Things are bad, but nothing that throwing a few trillion dollars of taxpayer-financed interest-free money at the banks won`t fix ... recovery in 2010." Nothing about any sustainable economic model requiring individuals and government at all levels to learn to live within their means and engage in productive economic activity rather than Ponzi economics, whether it be house-flipping, stock-jobbing or papering over ever-more-massive governmental current-account deficits. As Mish Shedlock likes to says, Bernanke may mean well but in terms of economic fundamentals he is a classic Keynesian clown. Hope you enjoyed your 15 minutes of fame last night on 60 minutes, Ben.


AIG Says $105 Billion of Bailout Funds Flowed to Goldman, SocGen, States: American International Group Inc., under pressure to reveal how it spent taxpayer funds since its September bailout, said $105 billion flowed to U.S. states and banks including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG.

Banks that bought credit-default swaps or traded securities with AIG got $22.4 billion in collateral, $27.1 billion in payments from a U.S. entity to retire the derivatives, and $43.7 billion tied to the securities-lending program, AIG said yesterday in a statement. States led by California and Virginia got $12.1 billion tied to guaranteed investment contracts.

“It puts a sour taste in the American taxpayer’s mouth, but you have to look at that in terms of the bigger picture,” said Donald Powell, chairman of the Federal Deposit Insurance Corp. from 2001 until 2005. “If you’re going to have any chance of recovery you probably have to stay with it.”

The disclosure may fuel a backlash over the insurer’s bailout, valued at about $160 billion as of March 2, which has already drawn expressions of anger and frustration from Congress, Treasury officials and Federal Reserve Chairman Ben S. Bernanke. AIG was lambasted yesterday for awarding $165 million in retention pay to employees of the unit that sold the swaps, deals that helped trigger the global credit crisis.

My Comment: So U.S. taxpayers have been bailing out not only domestic but also foreign banks, while the same cabal of criminal scammers who sold the CDSs are being rewarded (with yet more taxpayer money) in order to "keep them from taking their skills elsewhere." Un-fricking-believable.


BTW, The G20 summit this past week was a complete waste of oxygen ... I`m surprised the European participants, who so pride themselves for periodically setting mythical carbon emissions targets, didn't at least make a show of planting a few square miles of forest to offset the CO2 emissions from all that useless bureaucratic blathering.

[cheesehead]

Originally Posted by ewmayer

throwing a few trillion dollars of taxpayer-financed interest-free money at the banks won`t fix

AFAIK the treasury does charge interest on that money -- 5% annually.

requiring individuals < snip > to learn to live within their means and engage in productive economic activity rather than Ponzi economics, whether it be house-flipping, stock-jobbing

How do you propose requiring that?

[ewmayer]

Originally Posted by cheesehead

AFAIK the treasury does charge interest on that money -- 5% annually.

"interest free" was a bit of an exaggeration on my part, but you're thinking only of the direct bailout monies and forgetting all the government subsidies (via guarantees and the alphabet soup of Fed/Treasury discount lending facilities) which amount to "making money available to banks at below-market rates, courtesy of the U.S. taxpayer". Toda's WSJ has a timely bit about just this in their Heard On the Street segment:

WJS | Ratings Can Spark Triple Trouble

The curse of the triple-A credit rating could be creeping back.

The top-notch rating played a key role in stoking the excesses of the credit bubble. Without it, firms such as American International Group wouldn't have been able to write the sort of business that ended up blowing big holes in their balance sheets.

Triple-A also enabled the construction of billions of dollars of structured securities that have since turned toxic.

Investors have been looking past ratings and focusing more on fundamentals. The prices of credit default swaps have signaled for months some downgrades of triple-A companies. And last week, Fitch Ratings downgraded Berkshire Hathaway from triple-A, while Standard & Poor's did the same for General Electric.

But even in these more cautious times, the triple-A rating has the potential to distort key markets and lead to problems in the future.

Take the growing amount of bank debt issued with a government guarantee, which is typically triple-A-rated. The guarantee was made available last year as financial firms found it harder to find buyers for their debt. Since November, banks have issued more than $200 billion, according to SNL Financial.

J.P. Morgan Chase, Bank of America and GE Capital have each sold more than $30 billion of guaranteed debt. And this debt is dirt cheap. Morgan Stanley, which is rated single-A and has issued nearly $25 billion under the program, sold a guaranteed bond last week with an interest rate of just 2.25%.

The money is so cheap it could lead some banks again to make bets and loans that later turn out to be inappropriate. And the low yields could start to lull investors into believing bank balance sheets are in better shape than they really are. After all, Fitch said in its Berkshire opinion that no financial firm holding company deserves a triple-A rating due to economic and market stresses.

Although the triple-A rating is tarnished, the government still sees its usefulness. The Federal Reserve's Term Asset-Backed Securities Loan Facility, scheduled to be launched this week, lends to investors so that they can lever up purchases of triple-A-rated asset-backed bonds.

Again, dysfunction could arise. In this market, most investor demand is for triple-A bonds. That means low yields, which in turn means investors want leverage to magnify them. Such leverage, if taken too far, can destabilize markets. Even so lenders, in this case the government, will provide it because the bonds are rated triple-A.

Even U.S. Treasurys, the ultimate triple-A where panicked investors have sought sanctuary, might yet pose a risk. Sustained fiscal deficits could eventually put the rating in question. With Treasury yields at super-low levels, that would shock investors. But for years, markets never contemplated a Berkshire downgrade.

How do you propose requiring that?

It isn't possible in any kind of a "free market" economy to *require* productive economic activity, but we (that is, the government) could certainly stop rewarding and encouraging its opposite.

One Year Ago...

Bear Stearns went kablooey, but (in the following months) Messrs Bernanke and Paulson reassured us that "the subprime crisis is contained" and that "the banking system is sound". Al Franken's "Lying Liars..." book title comes to mind. The latest bullshit buzzword from Bernanke et al - I lost count of how many times he used it in last night's 60 Minutes interview - is "confidence". As though that is all our wonderfully sound economy is lacking in order to come roaring back. Excuse me, but "confidence" is like "self-esteem" - neither means a goddamned thing if there's no genuine basis for it. Simply invoking mystical trappings of "America is the greatest country on earth" and "we will come out of this crisis faster and stronger and leaner and meaner and wiser and even better-looking than before and blahblahblah" as if merely saying them made them true is more than mere knee-jerk patriotic claptrap, it's dangerous self-delusion. Talk is cheap.

[garo]

1. I take exception to the constant maligning of Keynes. Read some of his work. It is is being horribly mis-characterized by Mish. Among other things, Keynes called for a smaller government in good times and bigger in bad times.

2. BRK losing AAA is a joke, If there is any company in the US that deserves a AAA it is BRK. It is supremely ironic that BRK and GE lose AAA on the same day.