Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Lots of news and news-behind-the-news today. I promise this will be my last post today ... "we have no liquidity issues" ... "the dog ate my homework" ...

Surprise, surprise, Fannie Mae gave back most of its ill-gotten shareprice gains of yesterday. Seen on the FNM message board, this pithy little exchange:

[thread starter]How does this thing stay afloat with such horrible financials?
Is it just me or is this a bankrupt company?

[reply #1]: because of special triple sided goverment toilet paper guaranty. [sic]

[reply #2]: Bernanke, Paulson and CEO of FNM all studied Mugabe's of Zimbabve economics where everybody is a milioner. [sic]
Plenty of toilet paper for every great Zimbabwean.

And here's the *real* reason behind the selloff in financials today ... no, it wasn't oil futures going up a percent or so to $123, and it wasn't the [completely unsurprising] news that HELOCked-out homeowners are hittin' their credit cards hard because they still have to buy $4 gas for their Chevy Tahoes which they can't trade in without taking a big hit...

SEC Finally Pulls Head out of Own Bunghole

Stocks in U.S. Fall on Concern SEC Disclosure Plan Will Hurt Broker Profits

May 7 (Bloomberg) -- U.S. stocks declined the most in a month, led by financial shares, after new securities rules spurred speculation investment banks will be forced to reveal additional losses.

Merrill Lynch & Co. and Lehman Brothers Holdings Inc. sent banks and brokerages to their biggest tumble since March after the Securities and Exchange Commission said it will require Wall Street firms to disclose capital and liquidity levels. ...

``The market is obviously worried about what will be disclosed,'' said Janna Sampson, co-chief investment officer at Lisle, Illinois-based Oakbrook Investments LLC, which oversees about $1.4 billion. ``From an investor's perspective, you want to know the firm you are invested in has a strong capital standing. Why these firms wouldn't disclose this data is a mystery.''

Oh, yeah, it's a *huge* mystery ... after all, we all know how upright and honest the banks and brokerages have been throughout this entire credit crisis.

Sounds like major pants-poopage in the world of Big Finance on this news - wonder what they're hiding? Maybe the fact that they've been using those billions in Fed-provided capital not to improve conditions in the lending markets and lower mortgage interest rates as intended, but rather to try to shore up their bottom line by playing the markets? Nah, that couldn't be it...

[cheesehead]

Originally Posted by ewmayer

Death of the SUV

From that quote, it appears that Professor Hoffer makes the mistake of presuming that consumer choice is, or should be, unemotional.

One generation seems to be the limit for how long the hard lessons last in this country.

There may be a biological reason for that :-)

[garo]

Originally Posted by cheesehead

From that quote, it appears that Professor Hoffer makes the mistake of presuming that consumer choice is, or should be, unemotional.

The consumer is emotional and unfortunately those emotions are exploited to the hilt by the government, corporations and media. The point about making irrational choices is that you have to live with the consequences.

There may be a biological reason for that :-)

True but then the same biological reason would have kept us all in the stone age.

[R.D. Silverman]

Originally Posted by ewmayer

there will be pain aplenty.

California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year, according to an April report by the National Conference of State Legislatures.

.

Once *nice* thing about the wonderful state of Taxachusetts (there are bad things as well) is that our state constitution DEMANDS a balanced
budget. We are not allowed to carry a deficit. Spending must match
income.

[xilman]

Originally Posted by ewmayer

On the silver-lining front, SUV sales are cratering:

Death of the SUV

We can only hope Professor Hoffer is correct - but similar things were said about gas-guzzling 60s-style U.S. cars in the mid-70s, in the wake of the Arab oil embargo. Yes, they went away for the better part of a decade, then they came back with a vengeance - worse than before, in fact. One generation seems to be the limit for how long the hard lessons last in this country.

Only 80 bucks to fill up a truck?

I filled up my small car (a Peugot 307 diesel) two days ago. A tank full cost me $125 at the current exchange rate. Fuel here is about $2.40 per litre, which is a whiff over $9 per US gallon.

Fully 2/3 of that price is tax of one form or another. A UK economist has observed that crude oil can reach $300 per barrel without it directly affecting the pump prices, assuming that the government are willing to forego billions in revenue.


Paul

[ewmayer]

Originally Posted by xilman

Only 80 bucks to fill up a truck?

I filled up my small car (a Peugot 307 diesel) two days ago. A tank full cost me $125 at the current exchange rate. Fuel here is about $2.40 per litre, which is a whiff over $9 per US gallon.

Very true - but just think, if a large fraction of U.S. drivers is already bitching at the $4 per gallon level and hitting their Ponzi-finance tool of last resort, the credit card, hard in order to buy gas, how much it's going to hurt when gas hits $5 ... and $6...

As Europe shows, the idea that low energy prices are necessary for a robust economy is a myth - but an economy built on such a myth can't change over to low-energy mode without significant short-term [perhaps even decadal] pain. Which is of course why oil prices should remain high in perpetuity, AFAIC. Couple that with a reasonable [i.e. much higher] tax rate on oil company profits, and you actually have the basis for a sustainable long-term energy policy, without even beginning to talk about green tech.

Of course Bush & Co's "solution" for the problem they did everything in their power to help create? Drill the crap out of America's relatively modest remaining oil reserves. Not the tiniest word from the neocons about "reducing demand". God, whatever happens to the U.S. RotConomy in the coming year, it will be such a massive relief to finally be rid of this moronic buffoon and his blinkered cohorts.

Amusing [albeit in a rather sad way] snippet from a recent local Channel 2 n00z piece about gas prices in the SF Bay Area topping $4 per gallon for the first time - accompanying the basic news was the obligatory shove-a-mic-into-the-face-of-the-person-on-the-street interview. The lady they chose to interview lives in San Francisco, and was standing next to her gargantuan SUV, having just filled up to the tune of nearly $100, and whining about "what's a person like me supposed to do? I have no choice ... I have to drive...". I shit you not - as if someone had put a loaded gun to her head and forced her to buy the Battleship-Bismarck-on-wheels. The camera also panned back at one point - she was of course, driving solo, and apparently not hauling any appreciable amounts pf cargo. This is the kind of "poor consumer" McCain and Hillary proposed the gas tax holiday for.

[KriZp]

Originally Posted by ewmayer

Which is of course why oil prices should remain high in perpetuity, AFAIC. Couple that with a reasonable [i.e. much higher] tax rate on oil company profits, and you actually have the basis for a sustainable long-term energy policy, without even beginning to talk about green tech.

The curse of having once been the biggest oil exporter in the world, then turning into the biggest (by far) importer in the world.. People got used to cheap fuel, and change is next to impossible. But regarding tax, it would be better to tax it at the pump, that way you won't put your own oil industry at such a disadvantage compared to Total, Royal Dutch Shell, StatoilHydro, Saudi Aramco, Petróleos de Venezuela, Petróleos Mexicanos and all the other companies that export oil to the USA. In fact, by taxing at the pump you are in effect taxing the foreign oil companies as well as the domestic ones.

P.S. I've been following this "blog" since the beginning, much interesting commentary and good links. Thanks!

[ewmayer]

AIG posts huge loss, needs to raise $12.5B in capital - but the good news is, they're raising their dividend, woo, woo! [Which means they need to raise even more capital, i.e. robbing Peter to pay Paul]

May 8 (Bloomberg) -- American International Group Inc., the world's largest insurer by assets, said it will raise $12.5 billion after posting back-to-back quarterly losses for the first time as a publicly traded company.

AIG had a first-quarter net loss of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58, a year earlier, the New York-based company said today in a statement. The company wrote down the value of contracts to protect fixed-income investors by $9.11 billion.

``The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations,'' Chief Executive Officer Martin Sullivan said in the statement.

But, but ... Hank Paulson just said yesterday that the worst of the credit crisis was behind us ... Hank couldn't be wrong, after all he used to run Goldman Sachs ... which means he's not only fabulously good-looking, but also smart. I think AIG may have just made a simply +- sign error here.


Bloomberg | Bernanke-Geithner `Rogue Operation' Spurs Further Bailout Calls

May 2 (Bloomberg) -- A month after the Federal Reserve rescued Bear Stearns Cos. from bankruptcy, Chairman Ben S. Bernanke got an S.O.S. from Congress.

There is ``a potential crisis in the student-loan market'' requiring ``similar bold action,'' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.

Student loans are just the start. Former Fed officials and other Fed-watchers say that Bernanke's actions in saving Bear Stearns will expose the central bank to continuing pressure to use its $889 billion balance sheet to prop up companies or entire industries deemed important by politicians

But remember: As the pupils of Greenspanian Macro-Bubbleomics remind us, this is *not* an example of moral hazard - it just looks like one. [Not that there is any such thing to "look like" to begin with, mind you ... it's a myth, just like the nonexistent "recession" the USGov has been furiously trying to avert, despite the fact that it's not really happening.]


Greenspan's Long-Lost 1977 PhD thesis Focused on Housing Boom and Bust:

Greenspan even wrote: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes."

Hmm ... looks like Al only invented the homeprice Perpetuum Mobile after years of further toil. These things don't just happen overnight, you know.

[xilman]

Originally Posted by ewmayer

Very true - but just think, if a large fraction of U.S. drivers is already bitching at the $4 per gallon level and hitting their Ponzi-finance tool of last resort, the credit card, hard in order to buy gas, how much it's going to hurt when gas hits $5 ... and $6...

People bitch. Get used to it. You're bitching about economic policy yourself, just from a different perspective.

People over here complained when pump prices hit the equivalent of $4 per gallon, which was not so long ago.

I'm no different from anyone else. I complain about the size of the tax take on fuel and booze in the UK compared with the US and the Mediterranean countries in Europe respectively.


Paul

[fivemack]

Petrol hit £2/gallon in the UK in the late eighties, which seems reasonably long ago to me; so it's gone up by a factor 2.5 in twenty years, 5% a year.

[xilman]

Originally Posted by fivemack

Petrol hit £2/gallon in the UK in the late eighties, which seems reasonably long ago to me; so it's gone up by a factor 2.5 in twenty years, 5% a year.

£2 per gallon corresponds to £1.665 per US gallon. 4$ per US gallon is 52.8p per litre (£2.40 per gallon) at the current exchange rate.

When fuel was last at 53p/l the dollar was worth rather more than 50.5p as it is now.


Paul