Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Originally Posted by R.D. Silverman

Where is the bailout for those whose retirement savings/IRAs are being ruined by the wall street incompetents???? Can we mount a class-action lawsuit???

I have mixed feelings about this issue - on the one hand, you didn't hear most people complaining about their 401(k)s back in the heady bull-market days.

OTOH, the ever-looser nature of the federal rules on retirement accounts, coupled with the Greenspan [and now the Bernanke] Fed's keeping interest rates much too low for much too long had the effect of essentially turning us into a nation of house-flippers and stock-market speculators. Had the Fed kept rates at a more-reasonable 5-6% level, there would never have been the massive flight to riskier investments by investors in search of a decent yield on their savings. The standard IRA marketing pitch of "assuming an average return of [pick a number between 5 and 10%], $10000 invested today would be worth [pick some impressively large number] at retirement" only reinforced this trend.

[R.D. Silverman]

Originally Posted by ewmayer

I have mixed feelings about this issue - on the one hand, you didn't hear most people complaining about their 401(k)s back in the heady bull-market days.

.

And you didn't hear wall street and the banks complaining as long as
home prices were rising.......

Whatever happened to the days when I was growing up when you
could get a steady 5% on ordinary passbook savings????

I don't need a Bull Market. I would be happy with just a steady 5%.

Personally speaking I would like to see a ban on ALL wall street
investments except for taking long positions -- no derivatives, no hedge
funds, no short selling, no commodities dealing, etc... These are all
contrived games to allow legalized gambling. Why is Internet poker illegal,
but gambling on Wall Street OK?

The difference between the two is just a word: Wall Street calls it
*investment*. To me, an investment is being part owner in a company
that creates goods or services. When the company you own
makes money, then you make money. The stock price of a profitable
company should not go down. In today's climate, however, a company's
stock price seems to have little to do with its long term viability and
profitability. And I think that sucks.

While I was working at RSA, one quarter the company's sales and profits
grew by 30%. Terrific, right??? Wrong. Pundits had predicted more,
so the company's stock dropped by 40%!!!!!

The Gordon Gecko "I create nothing" seems to be the Wall Street
creedo.

These people build nothing. They create nothing of value. They
simply make money off the buying and selling of others....

Let's get back to VALUE BASED investing.

[ewmayer]

Originally Posted by ewmayer

Tonight`s "Special Guest Bulltard" on PBS` Nightly Business Report was S&P Chief Market Pumper, erm, I mean "Strategist", Sam Stovall. He made a number of rosy predictions about how October has historically been a good month for the major indices, and that he expects the S&P500 to finish the year around 1250, i.e. roughly 10% above today`s close. He also suggested several equity categories he expects to lead the 4th-quarter recovery, including consumer discretionaries and technology companies.

Allow me to interject a noisy "WTF?" and make some slightly more bearish 4th-quarter predictions:

- Consumer discretionaries will suck, because consumer discretionary spending is falling off a cliff;

- Tech will suck, because exports will decline due to developing recessions in most of the rest of the world, and because tech leaders like Apple and Google are heavily dependent on consumer discretionary spending;

- Historical average behavior can be thrown right out the window when it comes to what`s going on currently;

- Major indices will have at least one halfway-decent rally, but will finish the year lower than currently: Dow < 10000, Nasdaq < 1800, S&P500 < 1000.

Did I say those indices would sink below the given levels by end of the year? Silly me ... I meant of course, "by end of next Monday". Sorry, I must have let my rampant optimism color my predictions.

[cheesehead]

Originally Posted by R.D. Silverman

Whatever happened to the days when I was growing up when you could get a steady 5% on ordinary passbook savings????

Deregulation -- Reagan Administration 1981-1989

Let's get back to VALUE BASED investing.

... that was taken away from us by f-values, f-based politicians?

[cheesehead]

http://www.cartoonbank.com/product_d...sortBy=popular

[ewmayer]

Stocks hit 5-year lows: Dow claws its way back - ends down 350 points, following 800-point deficit - after dropping below 10,000 for first time in 4 years.

Oil tumbles to 8-month low below $88: Global economic slowdown contributes to $6 decline in crude futures.

Poll: 60% say depression 'likely': CNN Poll finds 6 of 10 believe a depression is somewhat or very likely - seeing 25% unemployed and millions homeless and hungry.


A Small Piece of Good News (FNM/FRE related):

Fannie, Freddie swaps may recover 92-94 pct area

NEW YORK, Oct 6 (Reuters) - Sellers of protection on mortgage finance majors Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) (FNM.P: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) (FRE.P: Quote, Profile, Research, Stock Buzz) will likely be repaid 92 to 94 percent of the insurance they sold, based on the initial results of an auction on Monday to determine the value of the contracts.

Initial indications are that swaps on the senior debt of Fannie Mae and Freddie Mac will recover 92.4 percent and 93.75 percent, respectively, and swaps on their subordinated debt will recover 92.65 percent and 93.8 percent, respectively, according to Creditex, one of the administrators of the auction.

The net open interest on all of the contracts was to buy the debt, indicating the final price may be higher than the initial results.

Disclosure: Currently long FNM, having bought some around last Friday`s close. Woke up this morning to find myself with a 20% haircut [at which point I promptly bought more], but on the plus side, I`m feeling very patriotic.


Dollar hits 14-month high vs Euro, plummets against yen

NEW YORK (CNNMoney.com) -- The dollar continued to rally against European currencies Monday but plummeted more than 4% to hit a 6-month low against the Japanese yen, as the credit crisis spreads around the globe.

The dollar fell a substantial 4.6% against the Japanese currency to ¥100.44 from ¥105.32 Friday. Earlier Monday, the dollar fell as low as ¥100.23, the first time the greenback traded that low since Mar. 31.

"The yen typically outperforms other currencies during periods of extreme risk aversion," said Reid.

Concern about tightening credit markets have affected currency values worldwide.

The euro traded at $1.3474, down 2.2% from $1.3772 Friday. Earlier Monday, the euro hit $1.3471, the lowest level the currency has seen since Aug. 20, 2007.

The British pound bought $1.7379, down 1.8% from $1.7690. At one point Monday, the U.K. currency sank as low as $1.7335, the lowest point the pound has seen since March 13, 2006.

With traditionally strong currencies in free fall, European governments are stepping up their efforts to restore confidence in large financial institutions in order to deal with the tight credit market.

My Comment: The rise of the yen also signals the end of the decades-long "carry trade", in which large investors would borrow huge sums in Yen at the rock-bottom interest rates set by the central bank of Japan in the wake of the bursting of their real estate bubble, then convert the yen to other currencies and invest in higher-yielding vehicles [typically government bonds] elsewhere, and pocket the difference.

[ewmayer]

AP | U.S. consumer borrowing falls for the first time since January 1998

Note that this was *before* Black September. While not good for the short run state of the economy, finally a sign that consumers are starting to do the single most important thing needed for a long-term sustainable economy, namely deleverage themselves. [Not willingly, mind you, but we’ll take “kicking and screaming” over “not at all”].

[ewmayer]

Fed, ECB, BOE Cut Rates in Unprecedented Response to Combat Credit Freeze: The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

Mish Shedlock's take on the global rate-slashing echoes my "trying to cure the patient with more of what made the patient sick is doomed to fail" sentiment:

The world is heading for a global recession and a sure bet is that it will be blamed on a subprime crisis in the US. The reality is the greatest liquidity experiment in history is now crashing to earth.

The root cause of this crisis is fractional reserve lending, and micromanagement of interest rates by the Fed in particular and Central Banks in general. The Fed started the party by slashing interest rates to 1%, but Central Banks everywhere drank the same punch to varying degrees.

The Greenspan Fed lowering interest rates to 1% fueled the initial boom, but like an addict on heroin, the same dose a second time will not have the same effect. The Fed, the ECB, etc. could have slashed rates to 0% today and it would not have mattered one bit.

The reason is simple: There is no reason for banks to go on a lending spree with consumers tossing in the towel, unemployment rising, and rampant overcapacity everywhere one looks with the exception of the energy sector.

Consumers are tapped out, not just in the US, but in nearly every country on the planet. We had our party, and a fine party it was. However, the party is over and the bill is now past due. The price is a global recession. That price must be paid no matter what Central Banks do.

Pending Home Resales in U.S. Increase 7.4% as Foreclosures Reduce Prices: More Americans unexpectedly signed contracts in August to purchase previously owned homes as mounting foreclosures pushed down prices.


U.S. Stocks `Halfway Through' Downturn After 36% Drop, ISI's De Graaf Says: U.S. stocks are only ``halfway through'' a decline that sent the Standard & Poor's Index down 36 percent in the past year, said Jeffrey de Graaf, a top-ranked market analyst.


Massive UK Bank bail-out: The winners and losers: Interest rates have been cut by half a point and the Government has pledged billions of pounds in a bank bail-out but not every one is a winner


World markets return to selloff: Global rate cut sends stocks down sharply in foreign markets after having mostly recovered from some heavy losses earlier in the day.

NEW YORK (CNNMoney.com) -- Global markets turned sharply lower Wednesday, despite emergency action by global central banks that had initially calmed skittish investors.

Stock markets worldwide had briefly recovered after the United States, Canada, England, the European Union, Sweden and Switzerland announced coordinated interest-rate cuts at 7 a.m. ET.

But sentiment turned, and investors sent stocks falling way down to the low levels seen in the hours before the joint cut was issued.

...

Markets in Asia were already closed by the time the central banks moved. Investors in Japan suffered one of their worst days ever, with the Nikkei down more than 9%. Hong Kong's Hang Seng index plunged 8.2%, even as the Hong Kong Monetary Authority announced it would lower interest rates a full percentage point starting Thursday.

A Russian stock exchange was shut down after a huge decline at the open.

My Comment: The Russian stock exchange has been shut down more often than not of late - they should just get it over with, announce a blanket "no selling at a loss" rule. That would be a quintessentially Russian way to try to stem the bleeding - it is after all no accident that the word ukase [a synonym for decree] derives from the Russian.

World & Emerging Markets:

Mexican Peso Has Biggest Intraday Decline Since `Tequila Crisis' of 1994: Mexico's peso tumbled as much as 13.8 percent, its biggest intraday drop since a government devaluation in 1994, amid concern that a coordinated rate cut by central banks won't be enough to unfreeze global credit markets.


: [i]Brazil Taps Reserves to Prop Up Falling Currency for First Time Since 2003: Brazil's central bank sold U.S. dollars in the spot market for the first time in more than five years after the real tumbled as much as 10 percent, the most since the 1999 devaluation.


Russia, Indonesia Shut Exchanges as Rout Worsens; Brazilian Stocks Decline: Russia, Indonesia, Ukraine and Romania shut their stock exchanges and Brazilian stocks fell to the lowest in two years in the worst week for emerging markets in at least two decades on concern that a deepening credit crisis will halt global growth.


U.S. Business:

Nervous shoppers pull back: Wal-Mart and Costco's sales in September helped by consumers' shift to low-priced groceries. Clothing and department store sales slump as Americans cut back on everything else.


Alcoa earnings drop 52%: The aluminum producer suspends buyback program after missing third-quarter profit expectations.

PITTSBURGH (AP) -- Alcoa Inc., one of the world's largest aluminum producers, on Tuesday reported a 52% drop in third quarter profit and said it would conserve cash by suspending its stock buyback program and all non-critical capital projects.

Alcoa, the first component of the Dow Jones industrial average to report earnings, said results were hurt by sharply lower aluminum prices, weaker demand and a charge from curtailing production at a Texas smelter.

As a global economic slowdown crimps demand for virtually every commodity, aluminum prices have dropped 32% from an all-time high of high on July 11. They're now trading about $2,250 per metric ton, down from about $3,380 at their peak. Copper, lead, nickel and other metals have also tumbled sharply.

My Comment: I picked Alcoa because of its flagship status, but the phenomenon of plummeting demand for commodities is now global - see recent oil-price action.

[ewmayer]

Iceland Teeters on the Brink of Bankruptcy

REYKJAVIK, Iceland (AP) -- This volcanic island near the Arctic Circle is on the brink of becoming the first ''national bankruptcy'' of the global financial meltdown.

Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy -- from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world's highest per capita incomes. But now they are watching helplessly as their economy implodes -- their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

''Everything is closed. We couldn't sell our stock or take money from the bank,'' said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik.

The government had earlier announced it had nationalized the bank under emergency laws enacted to deal with the crisis.

''We have been forced to take decisive action to save the country,'' Prime Minister Geir H. Haarde said of those sweeping new powers that allow the government to take over companies, limit the authority of boards, and call shareholder meetings.

A full-blown collapse of Iceland's financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers -- including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley's.

Kaupthing, Iceland's largest bank and one of those whose share trading was suspended last week to stop a huge sell-off, has also invested in European retail groups.

Thousands of Britons have accounts with Icesave, the online arm of Landsbanki that regulators said was likely to file for bankruptcy after it stopped permitting customers to withdraw money from their accounts Tuesday.

To try to wrest control of the spiraling situation, the government also loaned $680 million to Kaupthing to tide it over and said it was negotiating a $5.4 billion loan from Russia to shore up the nation's finances.

The speed of Iceland's downfall in the week since it announced it was nationalizing Glitnir bank, the country's third largest, caught many by surprise despite warnings that it was the ''canary in the coal mine'' of the global credit squeeze.

Famous for its cod fishing industry, geysers, moonscape and the Blue Lagoon, Iceland was the site of the Cold War showdown in which Bobby Fischer of the United States defeated Boris Spassky of the Soviet Union in 1972 for the world chess championship. Last year, Iceland won the U.N.'s ''best country to live in'' poll, with its residents deemed the most contented in the world.

No more.

Despite sunny skies Tuesday after three days of unseasonably cold weather, Reykjavik's mood remained grim -- cafes were half-empty, real estate agents sat idle, and retailers reported few sales.

''I'm really starting to get worried now. Everything is bad news. I don't know what's happening,'' said retiree Helga Jonsdottir as she headed to a supermarket.

Icelanders are also beginning to question how a relative few were able to generate the disproportionate wealth -- and associated debt -- that Haarde has warned puts the entire country at risk of bankruptcy.

Iceland's reinvention from the poor cousin in Europe to one of the region's wealthiest countries dates to the deregulation of the banking industry and the creation of the domestic stock market in the mid-1990s.

Those free market reforms turned Iceland from a conservative, inward-looking country to one of a new generation of internationally educated young businessmen and women who were determined to give Iceland a modern profile far beyond its fishing base.

Entrepreneurs become its greatest export, as banks and companies marched across Europe and their acquisition wallets were filled by a stock market boom and a well-funded pension system. Among the purchases were the iconic Hamley's toy store and the West Ham soccer team.

Back home, the average family's wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.

But the whole system was built on a shaky foundation of foreign debt.

The country's top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland's gross domestic product of $14 billion.

Those external liabilities mean the private sector has had great difficulty financing its debts, such as the more than $5.25 billion racked up by Kaupthing in five years to help fund British deals.

Iceland is unique ''because the sheer size of its financial sector puts it in a vulnerable situation, and its currency has always been seen as a high risk and high yield,'' said Venla Sipila, a senior economist at Global Insight in London.

The krona is suffering in part from a withdrawal by a falloff in what are called carry trades -- where investors borrow cheaply in a country with low rates, such as Japan, and invest in a country where returns, and often risks, are higher.

After watching the free-fall for several days, the Central Bank of Iceland stepped in Tuesday to fix the exchange rate of the currency at 175 -- a level equal to 131 krona against the euro.

Haarde said he believed the measures had renewed confidence in the system. He also was critical of the lack of an Europe-wide response to the crisis, saying Iceland had been forced to adopt an ''every-country-for-itself'' mentality.

He acknowledged that Iceland's financial reputation was likely to suffer from both the crisis and the response despite strong fundamentals such as the fishing industry and clean and renewable energy resources.

As regular Icelanders begin to blame the government and market regulators, Haarde said the banks had been ''victims of external circumstances.''

Richard Portes of the London Business School agreed, noting the banks were well-capitalized and had not bought any of the toxic debt that has brought down banks elsewhere.

''I believe it is absolutely wrong to say these banks were reckless,'' said. ''Quite the contrary. They were hugely unlucky.''

My Comment:: I highlighted what I consider to be the single-most-crucial sentence of the above article. Sad to see this happening to Iceland - spent several weeks there in the summer of 1995 - lovely place, wonderful people.

[Uncwilly]

Re: Iceland

Maybe Canada or Denmark can pick up some land.

[xilman]

Originally Posted by ewmayer

Iceland Teeters on the Brink of Bankruptcy

My Comment:: I highlighted what I consider to be the single-most-crucial sentence of the above article. Sad to see this happening to Iceland - spent several weeks there in the summer of 1995 - lovely place, wonderful people.

Yesterday some of the least diplomatic language I've ever heard came from government ministers acting in their official capacity.

Originally Posted by Alistair Darling, Chancellor of the Exchequer

The Icelandic government, believe it or not, have told me yesterday they have no intention of honoring their obligations here,”

Paul