Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

AP: Bear Stearns Bailed Out by Fed, JPMorgan: Friday March 14, 11:34 am ET - Bear Stearns Cos., one of Wall Street's venerable investment banks, received a bailout Friday by the federal government and JPMorgan Chase & Co. in a surprise, last-ditch effort to save the 86-year old institution.

Note that even though Bear Stearns is not [yet] technically bankrupt, I consider "only being pulled back from imminent bankruptcy via emergency bailout from Uncle Sam and one of your rivals" to equate to "failure". Also, there are practical limits to the bailout capability of the US Government - as this counterpunch.org article pithiliy puts it: "Wonderful. So now the Fed is planning to expand its mandate and bail out investment banks, hedge funds, brokerage houses and probably every other brandy-swilling Harvard grad who got caught-short in the subprime mousetrap. Ain't the 'free market' great?".


Moron of the Week: ex-Nixon-speechwriter, ex-game-show-host, ex-Visine-eyedrop pitchman, current-syndicated-columnist Ben Stein. Let's all give him a big hand, people - preferably the back of the big hand, right across his pompous, bunk-spewing mouth:

CNN|Money: Ben Stein: What, him worry?: Not about a recession anyway. But he is plenty concerned about the fallout from the impending retirement of his `undisciplined` generation.

Q. Do you really think we`ll escape [a recession]?

A. Maybe not. Lenders` losses have been worse than I expected. The Federal Reserve has been unbelievably incompetent at righting the financial ship. It needs to assure lenders it has their back and will not let them fail. Eventually, I think, the Fed will get off its ass. And if it does, whatever slowdown we have will be brief.

Note: no "here`s what the Fed should do" advice - just a vague "get off its ass" gripe. C`mon Ben, by all means, do tell us what the Fed can do to deflate the massive housing-and-credit-bubble without having to, um, deflate the massive housing-and-credit-bubble, And completely nationalize the US mortgage industry [anathema to Der-free-market-über-Alles types like Stein], And somehow print trillions of dollars in bailout cash without fueling an inflationary spiral, and buy a pony for every 5th grader who wants one, and subsidize Strabucks beverage prices, and, and, and. Who`s got the magic wand?

Now Stein is a hardcore right-wing republican and talks like a classic Greenspanian "Ayn Rand school of macroeconomics unfettered-freemarketeer", so I`m guessing the next step in his spiel should be to blame the "liberal left-wing media" [much like countrywide Financial's Angelo Mozilo did] for creating the whole crisis by way of their gloom-and-doom reporting: Ah yes, here it comes:

Q. That makes you an optimist.

A. Things aren`t that bad. Short-sellers and the press are pumping fear into the national bloodstream. The unemployment rate is 5%. Only 3% of the labor force is unemployed for more than 5 weeks - 3%! Of all mortgages extant, more than 94% are current. The number of people in college is at a record. The number of millionaires is at a record. We`re a long way from poverty row. Let me put it this way: Do you see Buffett selling?

OK, let's proceed point-by-point here. Love how he takes the phony-baloney official unemployment numbers at face value. Next he uses the "over 90% of mortgages not in default!" cite-the-bigger-number trick to try to hide the fact that 6% of mortgages being in default or late is in fact a huge number, with the 2% of mortgages in outright default being nearly double of what it was a year ago, and the highest in the 36-year history of that statistic being recorded. "Number of people in college" also a very misleading statistic - maybe lots of people are extending their studies because they can`t find a decent job. [I`m not saying that`s necessarily the case, just pointing out that the raw numbers are meaningless.] The recent credit-bubble-implosion-caused tanking of the Muni Bond market also dragged down the market in student-loan-backed paper, so student loans just got a lot less affordable. Number of millionaires at a record? That may have been so last year before housing prices began their deflation and we had oodles of paper-housing-price millionaires, but the ranks of those are dropping by the day. Lastly, he invokes the mystical mantra that is Warren Buffett`s name, to imply that "me and Warren are on the same page here." Let`s examine that assertion, as well: The claim that Buffett isn`t selling is clearly false. Next, even though it`s true that Buffett is buying a lot more than he`s selling, it`s interesting to observe that even he is hedging his bets these days:

Berkshire is using long-term options contracts as a way of selling `catastrophe` insurance. In this case, however, the potential catastrophe isn`t a hurricane or a flood, it`s the possibility that stocks will wind up lower after 15 or 20 years.

The other thing I see is this: I see shares of Buffett`s holding company Berkshire Hathaway, down nearly 15% from their early-December highs. What`s Buffett been buying? Beaten-down financials - lots and lots of financials. Now, if you have nearly unlimited cash, you simply keep buying as the financials keep dropping, and despite a few outright going to 0, in the long run you`ll make money - quite possibly a whole lot of money. But in the short term, I also see that shares of a typical bearish short ETF fund which bets against the same financials is up over 20% in the same time frame. Maybe all those short sellers are not the fools Stein makes them out to be.

And lastly, Buffett himself is on record [March 3rd] as saying that the U.S. is "essentially in recession". So ya see, Ben, you and your ol-buddy-ol-pal Warren B really aren't on the same page here. A well-deserved Moron of the Week laurel for Mr. Stein here.

[ewmayer]

The Consumer Price Index (CPI) figures for February just released by the Labor Department look more than a little fishy - and the lead-in which mentions the Fed's ability to cut interest rates further provides all the motive one needs to see why the USGov might want to cook the books on this one:

Inflation under control - for now: February consumer prices maintain levels from previous month, but rising oil prices could make March troublesome.

Consumer prices held steady in February, with milder-than-expected inflation giving the Federal Reserve some leeway in its interest rate-cutting campaign.

But with energy prices soaring, March may not be so tame.

The Consumer Price Index, a key inflation reading, was unchanged last month, according to the Labor Department. That was lower than the 0.4% jump recorded in January and the rise of 0.3% a consensus of economists surveyed by Briefing.com had forecast.

Inflation was at its tamest since August, when month to month prices were also left unchanged.

The more closely watched core CPI, which strips out volatile food and energy prices, also showed prices maintained the levels from the previous month. Economists had expected a 0.2% rise in that measure after a 0.3% jump in January. February's core CPI month to month change was the lowest since November 2006.

Um, but I was under the impression that energy prices - for instance gasoline prices - had been rising all through February. Were all the news reports to that effect wrong? Apparently, yes or no, depending on which part of the following sentence you choose to believe:

The Department of Labor report showed average gasoline prices fell 2% last month, dragging down overall inflation. Prices at the pump averaged $3.03 a gallon at the beginning of the month and $3.18 at the end.

Like the man said, "What's wrong with this picture?"

[cheesehead]

Originally Posted by ewmayer

Um, but I was under the impression that energy prices - for instance gasoline prices - had been rising all through February.

IIRC gasoline prices generally were stable or fell slightly during most of February, then started rising steeply near end-of-month. I can't find daily figures right away (but see below), but the red 2007-2008 curve on the "U.S. Regular Gasoline Prices" graph at upper left of page http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp seems to show that, if I squint hard enough.

Were all the news reports to that effect wrong? Apparently, yes or no,

Can't tell without actually seeing which reports you saw/heard. There's some sloppy writing out there.

depending on which part of the following sentence you choose to believe:

You've quoted two sentences there, friend. :-)

Like the man said, "What's wrong with this picture?"

Just a little lapse in imagination, I think -- perhaps a "senior moment" (join the club!)? Maybe a bit too fixated on the idea of government book-cooking when you read those sentences?

It's quite possible for the average gasoline price over an entire month to be below both the national average price on the single first day of that month and that on the last day of the month. (Example for the reader: $3.03 on the 1st, $3.00 on each of the 2nd-27th days, $3.08 on the 28th, $3.18 on the 29th -- average for month is $3.01)

Edit: At http://www.aaafuelgaugereport.com/ as of 3/15/2008 3:04:48 AM the AAA listed a current average of $3.284 and a "Month Ago" average of $2.979. A month ago would have been February 15, so that is consistent with my recollection/graph-squinting.

Also, "... report showed average gasoline prices fell 2% last month" means, I suspect, that the February monthly average was 2% below the January monthly average, not that the Feb. 29 daily average was 2% below the Feb. 1 daily average.5/2008 3:04:48 AM

On 99 out of 100 days, you'd have gotten that right, Ernst, I'm sure.

[ewmayer]

In the wake of Bear Stearns' just-announced forced-sale to JP Morgan for pennies on the dollar, we have a retroactive "Unwittingly funniest true headline of the week" [UFTHOTW] award:

Thornburg Mortgage Raised To Peer Perform by Bear Stearns


Despite reassuring words from Bloomberg, it looks like Lehman, a.k.a. "The king of the Alt-A's" and the fourth-largest U.S. securities firm, may be the next highly leveraged bank/brokerage house of cards to collapse - stock down over 40% today, behavior ominously similar to that of Bear Stearns [which was #5 in terms of size] late last week: CEO says "balance sheet excellent!" but refuses to 'fess up about true subprime exposure, investors begin to withdraw money, providing a real-world test of the firm's balance sheet, within days the collapse comes. Except for the fact that nearly of it is happening electronically rather by way of masses of people spilling out into the street from the firm's headquarters, these are nothing less than good old-fashion runs on the banks we're seeing here. Even giants like Citigroup and Merrill Lynch looking very fragile these days.

=================

Edit/Addendum: Interestingly, the fire-sale-price JP Morgan agreed to pay for BSC - around a quarter-billion, give or take - is far less than the amount BSC paid its top execs and traders in *bonuses* this past January. As to why BSC would prefer being sold to JPM for next to nothing to simply declaring bankruptcy, this Blloomberg piece offers an interesting interesting possible twist on the matter:

[Quoting High-Finance guru Jim Rogers]: You know the reason they did it this way was because, if Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago. If he let them go into bankruptcy, they all would have had to send back their bonuses.

[cheesehead]

Originally Posted by ewmayer

Interestingly, the fire-sale-price JP Morgan agreed to pay for BSC - around a quarter-billion, give or take - is far less than the amount BSC paid its top execs and traders in *bonuses* this past January. As to why BSC would prefer being sold to JPM for next to nothing to simply declaring bankruptcy, this Blloomberg piece offers an interesting interesting possible twist on the matter:

So, you're saying that WSJ's December 19, 2007 reported expectation of bonus-forgoal http://online.wsj.com/article/SB1198..._us_whats_news

By Kate Kelly

Word Count: 918 | Companies Featured in This Article: Bear Stearns, Goldman Sachs Group, Morgan Stanley, Merrill Lynch

In an acknowledgment of the most-difficult period in Bear Stearns Cos.' 84-year history, Chief Executive Officer James Cayne and other senior executives are expected to forgo bonuses for this year, people familiar with their plans say.

The expectation comes as Bear prepares to announce tomorrow its first quarterly loss ever, an outcome certain to curb pay for the firm's 15,500 employees. This is a turnabout for Bear, which over the years has used its generous, merit-driven compensation system to recruit job candidates it calls PSDs: those who are poor, smart, and have a deep desire to be rich.

didn't pan out after all?

Shoot -- I was just about to trust people familiar with someone's plans.

[R.D. Silverman]

Originally Posted by ewmayer

Interestingly, the fire-sale-price JP Morgan agreed to pay for BSC - around a quarter-billion, give or take - is far less than the amount BSC paid its top execs and traders in *bonuses* this past January. As to why BSC would prefer being sold to JPM for next to nothing to simply declaring bankruptcy, this Blloomberg piece offers an interesting interesting possible twist on the matter:

Yep.

We need some strong laws in this country limiting the bonuses and
other compensation paid to senior executives IN ALL COMPANIES.
I am not naiive enough to believe that it will ever happen.

We should have a general law along the lines of:

"No employeee of any publicly traded company may be paid more than
20x the median for that company in TOTAL compensation".

Total compensation means compensation from ALL sources: salary,
stock options, stock grants, the cost of a company provided limo ride
to work, etc. etc. etc.

These bonuses amount to theft. The theft is from the real owners of the
company: the stockholders. Senior executives act instead as if THEY are
the owners and can just award themselves ridiculous amounts of money
even as the company is losing billions.

There is something wrong with this. We need more stockholder lawsuits
AGAINST these sorts of bonuses.

BTW, how is it that these execs were allowed to keep their bonuses?
Even without bankruptcy, returning them should have been a condition
of the buy-out.

Senior executives are still only employees. They are not owners.

[masser]

Actually, in Bear Sterns case, the CEO was a major shareholder, 7% of the stock I believe... but your point is well taken.

[ewmayer]

Originally Posted by masser

Actually, in Bear Sterns case, the CEO was a major shareholder, 7% of the stock I believe...

None of which he actually paid anything more than a joke symbolic price for, I'll wager -- poor guy, his "free play money stock certificates" are now only worth a couple tens of millions of $, he has to fall back on the hundreds of millions in hard-earned bonus money he accumulated while at Bear. I think we need a special taxpayer-funded bailout just for him.

Edit: Today`s CNN/Money has a list of Bear's top shareholders and their estimated losses here. My heart really bleeds for poor fellows like this:

James "Jimmy" Cayne, Bear Stearns chairman of the board and former CEO
Estimated losses: $477.8 million

Cayne stepped down as Bear Stearns' CEO several months after it was revealed that he was playing bridge and allegedly smoking pot as two of the firm's hedge funds imploded last summer, touching off a crisis in confidence from which Bear Stearns never recovered. Cayne stayed on as the firm's non-executive chairman and is its second-largest shareholder.

Poor Jimmy - he`s probably crying hot salty tears all over the granite countertops of his Caymans mansion as I write this. Time to roll yahself a nice fat Islands-style spliff, mon, take a few tokes, it'll all feel better, mon.

The most interesting of the Big Bear Losers [to my mind] is Bill Miller, the until-recently-considered-legendary longtime manager of the Legg Mason Value Trust mutual fund - talk about a so-called expert who appears to have no clue as to the dynamics of a true Bear Market [pun fully intended]:

Miller's having a rough ride. One of the country's most celebrated money managers, he beat the market for 15 years straight before hitting a wall in 2006. He's since bet wrong on Countrywide, KB Home and now Bear Stearns. The flagship Legg Mason Value Trust was the bank's second largest mutual fund holder.

[ewmayer]

Juicy sucker's rally today on Lehman and Goldman's "We sucked really hard in Q1, but not as bad as y'all predicted" earnings news and the old "we maintain a strong liquidity position" BS. [Which usually translates to "Why, I personally had a half-dozen 'liquidity injections' courtesy of my bartender Phil just at lunch today in midtown Manhattan"]. Together with more helicopter money from Uncle Ben, of course. For those of us betting on the bear, should be some nice buying opportunities coming up real sonn. Meanwhile, the real news is, alas, still quite dire:

The New York Times' Paul Krugman asks: How close are we to a liquidity trap?

Japan's experience with this scenario in their wake of their massive real estate bubble is illustrative here - quoting Wikipedia:

In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.

Milton Friedman suggested that a monetary authority can escape a liquidity trap by bypassing financial intermediaries to give money directly to consumers or businesses. This is referred to as a money gift or as helicopter money (this latter phrase is meant to call forth the image of a central banker hovering in a helicopter, dropping suitcases full of money to individuals).

American economist Paul Krugman suggests that what was needed was a central bank commitment to steady positive monetary growth, which would encourage inflationary expectations and lower expected real interest rates, which would stimulate spending.

[Aside: The 2nd paragraph of the above quote explains why many folks are these days referring to Fed chairman Bernanke as "Helicopter Ben." Just in case you thought that maybe he took a helicopter to work every day. In fact, he only literally does that on Tuesdays, Thursdays, and days when there's a Fed committee meeting or free breakfast burritos in the break room.]

As usual, Mish Shedlock has a clear-eyed take on the matter:

Milton Friedman is wrong and Japan proved it. Japan's national debt went from nowhere to 150% of GDP and they are still battling the aftermath of deflation for 18 years or more...

Throwing money at the problem simply encourages more overcapacity, weakens the currency, and causes prices of necessities like oil to rise while not doing a thing for wages. If dropping money out of helicopters worked, Zimbabwe would be the greatest economic force on the planet.

His above posting also has a quote from none other tha Fed Governor Richard Fisher that supports my suspicions about official government consumer-price [CPI] figures being suspect-at-best, even in non-turbulent economic times, i.e. when there are no reasons for the issuers of the statistics to cook the books [quoting Fisher here]:

A good central banker knows how costly imperfect data can be for the economy. This is especially true of inflation data. In late 2002 and early 2003, for example, core PCE measurements were indicating inflation rates that were crossing below the 1 percent "lower boundary." At the time, the economy was expanding in fits and starts. Given the incidence of negative shocks during the prior two years, the Fed was worried about the economy's ability to withstand another one. Determined to get growth going in this potentially deflationary environment, the FOMC adopted an easy policy and promised to keep rates low. A couple of years later, however, after the inflation numbers had undergone a few revisions, we learned that inflation had actually been a half point higher than first thought.

[jasonp]

Originally Posted by ewmayer

The most interesting of the Big Bear Losers [to my mind] is Bill Miller, the until-recently-considered-legendary longtime manager of the Legg Mason Value Trust mutual fund

A third of my retirement contributions are in this fund. It's one thing to read about phenomena like reversion to the mean, it's quite another to watch it happen in slow motion with your money. Ah well.

[ewmayer]

Lots of interesting history here - while one can understand the reasons why the Euros are loath to do anything that smacks of "bailing out reckless-spending Americans", there is a real danger of this turning into a cutting-off-the-nose-to-spite-the-face scenario:

Daily Telegraph | Europe idle as US battles meltdown

The US Federal Reserve has resorted to the nuclear option in its ever-more depleted arsenal, invoking a Depression-era clause to shoulder the risk of losses stemming from the collapse of Bear Stearns, and to lend money directly to broker dealers.

It is the first time since the Great Depression that the Fed has stepped in directly to absorb credit losses, crossing a line deemed unthinkable just months ago. The dramatic late-night move on Sunday required dredging up Article 13 (3) of the Federal Reserve Act, which allows the Fed to shower money on almost anybody it wishes by a vote of five governors in "unusual and exigent circumstances".
...
"These are massive, unprecedented actions," said Hank Calenti, from RBC Capital Markets. "Their gravity is likely to scare the markets to death, but the Fed is trying to inhibit a margin-meltdown."

Bernard Connolly, global strategist at Banque AIG, said invoking a 1930s-era emergency clause was a "very big deal".

"We have moved one step closer to the direct purchase of assets by the US authorities. I`m afraid this has horrible implications but it may be the only way to avoid a serious risk of Depression. This is a Greek Tragedy set in motion by Alan Greenspan a long time ago," he said.

The Fed`s hyperactive coups are in stark contrast to the wait-and-see policy of the European Central Bank, which has held rates steady at 4pc since the credit crunch began - despite a jump in the (market-driven) three-month Euribor rate used to price mortgages.

Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested yesterday that Europe had misjudged the severity of the crisis that now threatens to engulf the world economy. "Obviously the financial market crisis is now more serious and more global than a week ago," he said. "It will have significant implications for many countries. At this time, the priority for European governments should be containing the economic damage from the financial market crisis."

The hard-line policy of Europe`s key central banks has been a major factor in the dollar`s precipitous fall over recent weeks. The euro rocketed to an all-time high of $1.59 in Asian trading after the Fed`s latest move. It is being lifted by the ever-wider yield gap between the two sides of the Atlantic. The dollar slide has now reached the point of disorderly rout, causing an investor flight from US bonds and aggravating America`s banking crisis. There is a growing fear that these forces are now feeding on each other in a self-reinforcing spiral.

BNP Paribas said the ECB`s unwillingness to take pro-active measures to head off a severe slowdown was now contributing to the mood of global crisis. "As long as the Fed is on its own trying to calm money markets, the dollar will fall and this will work as a catalyst to spread weakness," it said.

Jean-Michel Six, chief Europe economist at Standard & Poor`s, said the Europeans were in no mood to rescue America. "There is monetary war going on. The ECB view is that Fed is a victim of its own mistakes and should pay for its past crimes. Frankly, they don`t see why they should be cutting rates when inflation (3.3pc) is accelerating," he said.

There are now echoes of October 1987 when the German Bundesbank (and therefore Europe) refused to ease monetary policy, even though the dollar was in freefall and Wall Street was fragile. The spat was the backdrop to the Black Monday crash.

...

Jacques Cailloux, Europe economist at the Royal Bank of Scotland, said the ECB was waiting too long to act. "They are betting that there is no big risk from the credit crunch, but it may be too late by the time they move. They need to signal a shift towards monetary easing," he said.

Others are blunter. AIG`s Mr Connolly said the ECB was making the sort of catastrophic error that led to the Depression. "The ECB represents the 1930s element in world central banking right now. It is adding to the atmosphere of panic in the foreign exchange markets and ensuring that the collapse of the credit bubble in southern Europe and Ireland will be even worse," he said.

Nice cartoon from the Washington Post's Tom Toles: