ZT: Echoes of the Depression -- 1929 and all that -cosmoyx(My way) @埃德蒙顿华人论坛:埃德蒙顿枫下论坛 The Rolia Forum of Edmonton

ZT: Echoes of the Depression -- 1929 and all that -cosmoyx(My way); 2008-10-5 {6087} (#980@52)
本文发表在 rolia.net 枫下论坛Echoes of the Depression
1929 and all that

Oct 2nd 2008
From The Economist print edition

How today’s financial crisis resembles the one that happened three-quarters of a century ago, and how it does not

EASY credit, some say, was one problem. It was amplified by newfangled, flighty financial techniques, notably buying assets with borrowed money and watching leverage work its arithmetical magic. And underneath it all was a breezy, unthinking optimism, that prices could only ever go up. This was a perfect recipe for a runaway boom—and for a ruinous bust.

Substitute “houses” for “assets” in the paragraph above, and you might be reading a rough description of the blowing-up and bursting of America’s property bubble. Insert “shares”, and you might be back in the late 1920s. Whereas the fancy financial ideas of the 2000s comprised securitisation, credit-default swaps, collateralised-debt obligations and all their weird cousins, the innovation of choice before the crash of 1929 was the investment trust, a company whose purpose was to speculate in other companies’ shares, using the wonders of leverage to multiply the returns (and, in the end, the losses).

In strange territory almost any map will do, no matter how incomplete or out of date. In trying to pick a way through today’s financial crisis, there are plenty to pore over. Among them is one drawn in Sweden in the early 1990s, another from Japan in the same decade and an American one from a few years before that. By far the scariest, though, is that sketched in the years beginning in 1929. Frequent reference is made to it (see chart).

But the map of the Depression provides only an incomplete guide to how the American economy got to where it is now. The parallels between the speculative mania that ended in October 1929 and the housing bubble are seductive but misleading. Today’s banking and credit-market crisis, and all the damage it may do to the real economy, can be traced to the property boom and subprime bust. In fact, although scholars still rake over the causes of the Depression, few think the 1929 crash contributed much. An economic slowdown was already under way before the stockmarket collapsed. And although loose monetary policy helped pump up the recent property bubble, there is much more debate about its contribution to the 1920s boom.

Where study of the Depression is more helpful, though, is in steering clear of deeper trouble. In the early 1930s deficit finance was a heresy: in 1931, as bank runs were wrecking America’s financial system, President Hoover wanted to balance the federal budget, which in those pre-New Deal days was small beer anyway. (He failed.) Monetary policy was also too tight—the main reason, argued Milton Friedman and Anna Schwartz in a brick of a book 45 years ago, why downturn became Depression.

It is no bad thing, then, that as an academic Ben Bernanke studied the Depression in earnest—looking in particular at how an impaired banking system had made the slump longer and deeper. At a conference in 2002, to honour Friedman on his 90th birthday, the chairman of the Federal Reserve (then a governor) addressed him and his co-author. “Regarding the Great Depression,” Mr Bernanke said. “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”

A less obvious lesson is that early in the Depression it was not clear how bad things were going to get—or, given the paucity of economic data, even how bad they were. A year after the crash, many Americans thought that they were in the midst of a usual, if painful, downturn—not as bad, surely, as 1921, when the economy contracted by a quarter in a single year. Indeed, rural areas, home to 44% of Americans in 1930, had long been in bad shape: farming had been in a slump since the early 1920s.

But worse was to come. A wave of bank failures broke late in 1930. Another lot followed in 1931: a run on Creditanstalt, an Austrian bank, set off a chain of events that took Britain off the gold standard and raised fears that America might follow. Foreigners and domestic depositors alike demanded gold from American banks. Nor was that the last downward turn. Compare then and now: a year after the credit crisis began last August, America’s economy seemed to be standing up well. Today it looks much less secure.

The map’s political features also bear examination. Gaps are dangerous—especially between presidencies. Between Franklin Roosevelt’s first election victory in November 1932 and his inauguration in March 1933 America’s economy spiralled even further down. In February another rash of bank failures broke out. The crisis ended—and the bottom of the slump was reached—only with a federal bank holiday, declared by Roosevelt within days of taking office. Hank Paulson, treasury secretary in 2008, thinks the financial system cannot wait until 2009 for a rescue plan.

The Depression also acts as a warning of the pitfalls of congressional politics. The Bush administration found out all about those this week. There were echoes, perhaps, of 1930. That year yielded the Smoot-Hawley tariff act, the product of a special session of Congress called by Hoover to address the economic troubles. The tariff helped give the world economy a downward shove. A thousand economists wrote to oppose it. (Hoover disliked it too, but chose not to veto it.)

Is 2008 a repeat of 1929 or 1930? Look not at the road ahead but the immediate surroundings, and the question seems absurd. America’s economy may be just entering recession; between 1929 and 1933 it shrank by more than a quarter. Some economists fear that unemployment, now a touch over 6%, might reach 10%; in 1933 it was about 25%, and many of those in work were on short time and short pay. Americans are not banging at the doors of banks demanding their money, nor queuing around the block for soup and bread. America is not yet a land of Hoovervilles—or Bushvilles—inhabited by those turfed out of jobs and homes. Nor should it be allowed to become one.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Rethinking Lehman Brothers -- The price of failure -cosmoyx(My way); 2008-10-5 {4662} (#981@52)
本文发表在 rolia.net 枫下论坛Rethinking Lehman Brothers
The price of failure

Oct 2nd 2008 | NEW YORK
From The Economist print edition

The government must privately rue its hard line towards Lehman

CONFRONTED by blaze after blaze in recent weeks, America’s financial firemen have rushed to douse the flames—with one exception. Unable to persuade any rival to take on a battered Lehman Brothers, the government was left with a hard choice: spray the investment bank with public money or let it burn. In choosing destruction, the government has provided a painful lesson in the dangers of doing the right thing at the wrong time.

In a sense, Lehman’s misfortune was not to have hit trouble earlier. After broking the sale of Bear Stearns, another Wall Street firm, and nationalising the country’s mortgage agencies, officials felt an example needed to be made so as to combat “moral hazard”, or the risk that banks will act recklessly if they know they will be bailed out when their bets sour. Hank Paulson, the treasury secretary, believed Lehman’s problems were sufficiently well advertised to have given derivatives markets time to prepare for the worst.

He was partly right: the credit-default swaps market has buckled but not broken. But Lehman’s bankruptcy shredded the last remnants of confidence in American International Group, an insurer, and crystallised fears over the stability of the remaining free-standing investment banks, Goldman Sachs and Morgan Stanley. Alarm over “counterparty” risk—the risk of a borrower or trading partner failing to cough up—turned into outright terror, paralysing money markets. “It was the mistake of a lifetime,” says one senior bank executive, echoing the view across Wall Street.

Lehman went bust with $613 billion of debt, of which $160 billion was unsecured bonds held by an array of investors around the world, including European pension funds and individuals in Asia who had taken comfort in Lehman’s high credit rating. The price of this paper quickly collapsed to 15 cents on the dollar or less, destroying overnight twice as much value as Lehman’s shareholders had seen evaporate over several months.
Illustration by David Simonds

These losses set off a spiral in money markets. Investors yanked $400 billion from money-market funds, a supposedly super-safe source of funding, when one fund that had loaded up on Lehman debt suffered losses. The run was halted by a government pledge to guarantee money funds’ par value, but it stripped money funds of all appetite for risk. Their flight into safe government and mortgage-agency paper has left banks and companies struggling to raise working capital.

Had officials foreseen this debacle, Lehman would surely have been propped up. One theory doing the rounds is that they seriously underestimated the money funds’ holdings of its debt. As they fretted over Lehman’s vast notional exposures in swaps, they may have taken their eye off the potential impact of its failure on more prosaic cash markets.

Taken aback, policymakers now seem unsure how much protection to offer creditors of other basket-cases. When Washington Mutual (WaMu), America’s largest savings-and-loan institution, was hurriedly sold to JPMorgan Chase on September 25th, its bondholders lost everything. This infuriated senior debtholders, who felt the seizure deprived them of the chance to recover some of their money through a public liquidation. Wachovia’s creditors were spared that fate in the bank’s equally rushed sale to Citigroup a few days later. There was some justification for this different treatment: Wachovia has much more short-term debt than WaMu, so wiping out its creditors would have caused a bigger shock. Still, to some, America’s bail-out policy looks haphazard.

The full costs of Lehman’s failure have yet to be determined, both in terms of the damage to credit markets and the losses inflicted on its creditors and trading partners. Its swap exposures are still being unwound. Recovery values on its bonds could be anything from pennies to more than 30 cents on the dollar. Dozens of hedge funds that used Lehman as a prime broker are fighting for the return of assets. The task is complicated by the fact that the firm used some of these as collateral for its own loans. Its bankruptcy is by far the messiest in American corporate history.

Throughout this crisis, Mr Paulson’s Treasury has stressed the importance for the long-term health of the financial system of letting sick financial institutions fail. In highly stressed markets, however, there are short-term costs. In Lehman’s case they are proving almost unbearably onerous.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Money markets --- Blocked pipes -cosmoyx(My way); 2008-10-5 {15558} (#982@52)
本文发表在 rolia.net 枫下论坛Money markets
Blocked pipes

Oct 2nd 2008 | LONDON AND NEW YORK
From The Economist print edition

When banks find it hard to borrow, so do the rest of us

Illustration by David Simonds

ANY good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink.

At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves.

Many banks have had to be rescued by rivals or the state. This week the Irish government felt compelled to guarantee the deposits and some other liabilities of the country’s six largest banks. Surviving banks have become ultra-cautious—“just taking things one day at a time,” says Matt King, a strategist at Citigroup.

The effect has been most dramatic in the overnight rate for borrowing dollars. Bank borrowing costs reached 6.88% on September 30th, more than three times the level of official American rates, while some were willing to pay a remarkable 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited a record €44 billion ($62 billion) with the ECB on September 30th even though they could have earned more than two extra percentage points by lending to other banks. It was the last day of the quarter and, for balance-sheet reasons, banks were particularly keen to have cash on hand. (Overnight rates fell back on October 1st, but one-month rates rose further, indicating that the crisis had not eased.)

In the absence of private-sector lenders to banks, central banks have become vital suppliers in the money markets. With the help of the ECB, the Bank of England and the Bank of Japan, the Federal Reserve agreed to lend a further $620 billion on September 29th (see article). That package, though of similar size to the Bush administration’s $700 billion bail-out plan, did not need congressional approval or attract public opposition.

But central banks can only do so much. In particular, they tend to lend for short periods and then only against collateral with a high credit rating. That still leaves banks with the problem of financing their more troubled assets, an issue the Bush administration’s plan was designed to solve.

The money markets’ difficulties began in July 2007, when two Bear Stearns hedge funds revealed the damage done to their portfolios by subprime mortgages. Since August of that year, central banks have been intervening to keep them functioning, with a series of schemes like America’s Term Auction Facility. But the collapse of Lehman Brothers, followed by the long series of rescues in Europe and America, seems to have brought the money markets close to breakdown. Even immediate passage of the Bush plan would not solve all their problems straight away, because it would take time to put the plan into place.

Why do these markets matter? First, the rates on loans paid by many consumers (adjustable-rate mortgages, for example) and companies are set with reference to the money markets. Higher rates for banks mean higher rates for everyone. Second, if the markets are blocked for more than a week some companies may find it hard to get any finance at any price. That could mean more bankruptcies and job losses. Third, more banks could go bust if the blockage continues, making investors even more risk-averse. The downward spiral would take another turn.

“We are at the juncture where more widespread and permanent support is required to restore confidence in the banking sector,” say analysts at the Royal Bank of Scotland (RBS). “Without it, the banks will be aggressively trying to contract their books and will be unable to provide credit to retail and corporate clients.”

So it is safe to say that, until the money markets behave more normally, the financial crisis will not be over. And until the financial crisis is over, the global economy may not recover.
Liquid dynamite

First, the problem. It is widely assumed that central banks set the level of interest rates in their domestic markets. But the rate they announce is the one at which they will lend to the banking system. When banks borrow from anyone else (including other banks), they pay more. Every day, this rate is calculated through a poll of participating banks and published as Libor (London interbank offered rate) or Euribor (Euro interbank offered rate).

Normally, these are only a fraction of a percentage point above the official interest rates. But that has changed dramatically in recent weeks (see chart 1). Take the cost of borrowing dollars. On October 1st banks had to pay 4.15% for three-month money, more than two percentage points above the fed funds target rate. In theory, three-month rates could be that high because markets are expecting a sharp rise in official rates. But that is hardly likely, given the depth of the crisis.

Instead, the width of the margin reflects investors’ worries about the banks, not least because so many have faltered so quickly. Three months is now a long time to trust in the health of a bank. In addition, banks are anxious to conserve their own cash, in case depositors make large withdrawals or their money gets tied up in the collapse of another bank, as with Lehman.

One way this risk aversion shows up is in the “Ted spread” (see chart 2), the gap between three-month dollar Libor and the Treasury-bill rate. After being as low as 20 basis points (a fifth of a percentage point) in early 2007, the spread is now 3.3 percentage points. In other words, the relative cost of raising money for banks has risen 16-fold in the past 18 months.

Indeed, some banks argue that Libor and Euribor understate the full extent of the increase in banks’ borrowing costs. According to John Grout of the (British) Association of Corporate Treasurers (ACT), banks have started to talk to companies about invoking the “market disruption” clause in loan contracts. This would allow them to replace the two benchmarks with the “real” cost of their funds, which they say would be higher. (Companies usually pay Libor or Euribor plus a margin that depends on the riskiness of their finances.) One company, Hon Hai of Taiwan, an electronics manufacturer, says its banks have already invoked the clause.

This affects only debt facilities that have already been set up. Mr Grout says that when companies are negotiating new loans with banks, they are being asked to accept rates based on Libor plus a quarter of a percentage point. Unsurprisingly, the ACT is unimpressed with this tactic, since Libor is calculated from data supplied by the banks themselves.

Companies do not have to borrow from banks; they can raise money from the markets by selling commercial paper, a type of short-term debt. For much of this year, that was an attractive option. The preference of investors for debt issued by non-financial companies made commercial paper a source of cheap finance.

But in recent weeks even this has become more difficult. The volume of commercial paper outstanding fell by $61 billion to $1.7 trillion in the week ending September 24th. And investors are unwilling to lend for long: AT&T, a big American telecoms company, said on September 30th that the previous week it had been unable to sell any commercial paper with a maturity longer than overnight. The volume of asset-backed commercial paper maturing in four days or less ballooned from $32 billion a day to $104 billion during September (see chart 3), while the amount maturing in 21 to 40 days fell by 63%.

Where there is doubt about a company’s finances, it inevitably has to pay a higher rate. Worries about GE, one of America’s most prestigious companies, pushed up the premium on its credit-default swaps and made raising short-term debt dearer. According to the Wall Street Journal, the rate on its commercial paper had gone up by two-fifths of a percentage point. That might not sound much, but GE has $90 billion of paper outstanding, so it faced an extra interest bill of $360m a year. On October 1st the company announced a $12 billion public share offering and a $3 billion injection from Warren Buffett, a leading investor.

Why has commercial paper lost its shine? The explanation seems to lie back in the authorities’ willingness to allow Lehman to collapse. That move, designed to warn the markets that the authorities took moral hazard seriously, has had some unintended consequences.
Fund of surprises

The most severe was the loss imposed on the Reserve Primary fund, a money-market fund. Such funds invest in short-term debt and offer investors higher rates than on bank deposits. But they also aim to repay their customers at par. Because it had bought Lehman debt, the Reserve Primary fund was forced to “break the buck” (that is, to repay less than 100 cents on the dollar), only the second such instance in the industry’s history. This caused a crisis of confidence in money-market funds. “Prime” funds, which offer slightly above-average rates in return for higher risk, have lost about $400 billion out of $1.3 trillion in the past few weeks, as investors have switched to funds based on government debt. In turn that has made other funds more cautious and led them to steer clear of bank loans and commercial paper.
Illustration by David Simonds

Buried among the many recent American regulatory initiatives was a scheme to insure money-market funds against failure. That scheme may have halted a stampede by retail investors out of the industry, but it has not restored the level of confidence of two months ago and new deposits do not qualify.

At the same time as they are struggling to raise money from outsiders, banks may face more claims on their capital. In the good times they promised to provide back-up loans to companies—which they thought would never be asked for. On some estimates, the value of these promises is $6 trillion. But with the commercial-paper market tightening and the economy deteriorating, more companies will be asking banks to keep their word.

Indeed, companies already seem concerned that banks will be unable to maintain promised loan facilities. So they are using those credit lines earlier than expected, in case they vanish. A prime example is Duke Energy, an American utility, which recently drew down $1 billion from a credit agreement. Chris Taggert of CreditSights, a research group, foresees a “funding blitzkrieg” by high-yield borrowers tapping their banks for cash if the mayhem does not abate.

“There’s a vicious-spiral element to the inability of companies to roll commercial paper,” says Ajay Rajadhyaksha, a fixed-income strategist at Barclays Capital. “Those that have back-up lines of credit with banks are increasingly drawing on them. This is hurting the banks, and making money-market funds even queasier about buying bank debt, and so on.”

CreditSights notes that it has become more common for companies to call on these loans amid “fears that bank lenders may not be able to honour commitments in the future.” Several of these companies, including General Motors, have cited the uncertain state of capital markets when asking for their money. Goodyear Tire & Rubber said it was drawing down its loans because some of its cash was locked up in, of all places, the Reserve Primary money-market fund.

Whatever the reason, the possibility of more calls from their corporate clients is another factor behind the banks’ desire to hold cash. That will mean any company without a back-up facility may struggle to raise new loans.

Luckily, most companies are not as exposed as they were when the dotcom bubble burst. Nevertheless, plenty of carmakers and retailers have mountains of debt or a strong need for cash. Then there are companies that underwent leveraged buy-outs. The private-equity groups that bought them may have been counting on refinancing their debts soon.

A lack of access to capital is sure to make companies cautious. “Your ability to plan for investment is obviously affected,” says Randall Stephenson, chairman and chief executive of AT&T. In addition, higher finance costs will eat into profit growth, a fact that seems yet to be recognised in buoyant forecasts for 2009. “The equity market is going through the slow process of realisation that a large proportion of earnings growth over the last 25 years was due to the falling cost of money,” says Kit Juckes, an economist at RBS.
Polonius’s revenge

Consumers have been going on a greater debt binge than companies and the impact on them may be more immediate. In particular, they may face higher mortgage and credit-card rates. Some may be denied new credit altogether.

The last survey of senior loan officers by the Federal Reserve was back in July. Even then 65% of banks were tightening their lending standards on credit cards, up from 30% in April. Consumers had not felt the effects by then: credit-card lending rose by 4.75% in the year to July, although other types of credit barely grew at all.

Mortgage costs have also been rising for those with variable-rate loans. On September 30th, American adjustable-rate mortgage rates were 6.13%, according to Bloomberg, compared with 5.92% at the end of August and less than 5.5% in the spring. In Britain three leading lenders raised rates by half a percentage point in the week to September 26th. And Moneyfacts, an information group, says the number of buy-to-let mortgages (used by private landlords) has fallen 85% over the last year.

These effects might teach voters that punishing the banks for their follies is sometimes cutting off their noses to spite their faces. “At some point Main Street will realise it lies on the same road as Wall Street,” says Mr Juckes.

It is not too difficult to imagine bank failures leading to job losses, further falls in house prices, bad consumer debts and further bank losses. “We may already be at the point where corporate fear and conservatism are baked in: even if things start to improve for the banks, companies have seen how bad things can get, and that can prove lasting,” says Torsten Slok, an economist at Deutsche Bank. “So there is a risk they’ll continue to hoard cash and mistrust banks for quite some time.” That is the kind of spiral which the Bush administration’s plan was designed to avoid.

Relying solely on ad hoc rescues of individual banks would only make investors more nervous about the banks that remain. The financial plumbing would stay bunged up. Unless something is done to unblock it soon, there will not just be a nasty stink in the markets. There will also be an unholy mess in the wider economy.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Fair-value accounting becomes a political issue -cosmoyx(My way); 2008-10-5 {2893} (#983@52)
本文发表在 rolia.net 枫下论坛Accounting
Fair cop

Oct 2nd 2008
From The Economist print edition

Fair-value accounting becomes a political issue

IN FIRING their bazookas at the crisis, policymakers have blown holes in rules on everything from share trading to competition policy. It is therefore a miracle that fair-value accounting standards have not been hit too, in particular the requirement that banks “mark-to-market” most of their financial assets other than loans. These rules are deeply unpopular with many firms that have suffered losses and impaired capital positions. They would prefer to recognise losses in the traditional way—that is, slowly and when it suits them. More controversially, some argue the rules have created a vicious cycle of forced sales and falling prices.

Now, however, politicians have brought the accounting regime directly into their line of fire. In America the revised bail-out package being considered by Congress would give the Securities and Exchange Commission (SEC), the stockmarket regulator, the power to suspend fair-value rules. Perhaps to pre-empt this, on September 30th, the SEC and the body which it licenses to set the rules, the Financial Accounting Standards Board, issued new guidance on fair value. This appears to make it easier for firms to argue that the market for a given asset is “distressed”. In such circumstances they can put much less emphasis on market prices.

The situation is more complex in Europe and other territories governed by the International Accounting Standards Board (IASB). The SEC is answerable to Congress, but there is no easy legal mechanism by which to turn up the heat on IASB, which is a private body. That has not stopped politicians from trying; Nicolas Sarkozy, the French president, reportedly sent a proposal to the European Commission that recommends suspending fair value, which he argues leaves bank balance-sheets “at the whim of speculators”. The commission may be receptive—Sir David Tweedie, IASB’s chairman, says that it mandated the use of international standards in Europe “with great courage and in total ignorance of the effects of its decision”.

Is it the beginning of the end for fair value? That seems unlikely. Standards setters will resist anything beyond tinkering with the rules. They will be supported by institutional investors and accounting firms. And anyway it now seems unlikely that suspending fair value would make much difference. The credit crunch has moved on, in the words of one banker, “from a mark-to-market phase to a more traditional phase of credit losses”. The recent forced sale of Wachovia, America’s fourth-largest commercial lender, reflected concerns about its loans, which banks almost always carry using historic-cost rules, not fair value. If mark-to-market accounting really does react too fast to the market, politicians may have responded too late.更多精彩文章及讨论，请光临枫下论坛 rolia.net

With or without the bail-out bill, the Fed has its work cut out -cosmoyx(My way); 2008-10-5 {5767} (#984@52)
本文发表在 rolia.net 枫下论坛The Federal Reserve
Plan B

Oct 2nd 2008
From The Economist print edition

With or without the bail-out bill, the Fed has its work cut out

WITH strains intensifying in the money markets, the Federal Reserve still faces the burden of averting a serious recession. This was true whether or not America’s House of Representatives approved the proposed $700 billion mortgage-rescue bill to create the Troubled Asset Relief Programme (TARP).

As The Economist went to press, the House had not yet voted again on a bill, after its rebellion on September 29th. The bill would permit the treasury secretary to acquire mortgage-related assets either in auctions or direct purchases, and if they are short of capital, to put equity into weakened institutions. (Half the money would be available now; the other half subject to congressional approval). Participating firms would have to give the government some form of equity or debt interest and accept limits on executive pay. A five-member oversight board and an inspector-general would monitor the programme. To win approval in the Senate on October 1st, the bill was amended to increase the limits on federal deposit insurance (see article).

But even if the House approves it, the plan will not deal with the immediate economic threat, which is a collapse of confidence in the financial system. Money-market funds and banks are deeply suspicious about whom they can entrust their money to. That could stifle the supply of credit and cause more banks to fail.

The most obvious way for the Fed to help is to lower the federal funds rate target, which sets the cost of borrowing, from its level of 2%. Markets expect a half-point cut by year-end. Lower interest rates would boost confidence, and that effect would be multiplied if the Fed acted in concert with other central banks. But the money markets are so dysfunctional that the benefits of a lower fed funds rate might be lost on most borrowers. And the European Central Bank (ECB) may not go along while it is focused on the risk of inflation, says Julian Callow, of Barclays Capital.

So although a rate cut remains on the table, the Fed will continue for the moment to rely on the growing use of its balance-sheet to counter the credit crunch. It has created many lending programmes since August 2007 to help banks finance holdings of illiquid assets and so avoid fire sales. But its balance-sheet is running up against constraints.

When the Fed makes loans, it deposits the proceeds in the accounts it holds for its customers—the banks themselves. Until now it has not paid interest on those deposits, which means banks lend their excess reserves to other banks. All else being equal, that would push the fed funds rate below the Fed’s target, which is why it sterilises those excess reserves by selling some of the Treasuries in its portfolio.

So far, so conventional. At the end of July last year, the Fed had $760 billion of unencumbered Treasuries, or 87% of its assets. But the Fed’s lending commitments have soared: $29 billion to back the assets of Bear Stearns, a failed investment bank; $85 billion in support of American International Group, an insurer; eventually $300 billion in discount-window credit auctioned to banks; and a vast $620 billion “swap” line which foreign central banks use to lend dollars to their own banks. It has also pledged to swap $200 billion of its Treasuries with investment banks. By October 1st Wrightson ICAP, a money-market research firm, reckoned the Fed had just $158 billion of unencumbered Treasuries left (see chart).

The Treasury has helped the Fed out by issuing additional debt exclusively for its use. This helps soak up the excess reserves created by the Fed’s numerous loan programmes, which has caused its balance-sheet to balloon to $1.2 trillion. But the Treasury has congressional limits on how much debt it may issue. In search of a permanent way round the problem, the Fed has asked Congress to let it pay interest on bank reserves. It could then expand its balance-sheet indefinitely without driving the fed funds rate to zero; a bank will not lend out excess reserves at 0.25% if it can earn 1.75% at the Fed. The new bill would raise the debt ceiling and permit the Fed to pay interest on reserves immediately.

But even unlimited Fed liquidity may not fix the money markets. The Fed’s torrent of cash pushed the fed funds rate down to 1% this week, from a high of 6% in the wake of Lehman’s failure. But few borrowers benefited: some creditworthy firms paid 5% on overnight commercial paper this week and European banks paid 11% for overnight dollar funds from the ECB on September 30th. This partly reflects a temporary quarter-end scramble for funds. Burned on Lehman debt, many money-market mutual funds have also stopped buying commercial paper. Banks have picked up some of the slack, but many are reluctant to lend because their capital bases are already suffering from loan losses, and they are uneasy about the ability of many customers to roll over the paper. More lending by the Fed cannot create capital or trust; it is counting on the $700 billion bail-out plan for that.

If the plan fails to pass, the Fed could conceivably create one itself for mortgage assets, argues Michael Feroli, economist at JPMorgan Chase. The template is its September 19th announcement that it would finance banks’ purchases of asset-backed commercial paper from money-market funds. The Fed, not the banks, bears the risk of any default on the paper. The risk here would be political: the Fed would be taking upon itself to intervene in the markets. But perhaps that is just what Congress would prefer: all the benefits of a rescue plan without the voters’ retribution.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Deposit insurance -- A useful fiction -cosmoyx(My way); 2008-10-5 {3788} (#985@52)
本文发表在 rolia.net 枫下论坛Deposit insurance
A useful fiction

Oct 2nd 2008
From The Economist print edition
In deposit insurance we trust. Sort of

IN MAY The Economist failed to dispatch a correspondent to Tirana, Albania, to attend the opening function of the third International Deposit Insurance Week. That may have been a mistake. By this week interest in the technicalities of how to protect the cash the public keeps in bank accounts had reached the campaign trail in America. Both presidential candidates, keen to calm a rattled public, proposed lifting the ceiling on deposit insurance from $100,000 to $250,000. This, said Barack Obama, would “help restore public confidence in our financial system”. The change was included in the revised bail-out bill Congress is considering. Meanwhile Britain’s government said it would raise its scheme’s ceiling and other big countries in Europe could follow.

Political faith in deposit insurance is very widely held. Since America’s Federal Deposit Insurance Corporation (FDIC) was established in 1933, 98 other countries have embraced it, with Australia alone among big rich countries in offering depositors no explicit safety net if a bank fails. The ceilings vary by country (see chart), as do the funding mechanisms, with some schemes paid for by a levy on financial firms and others by governments. But almost all are justified on two grounds. First, an information asymmetry: Joe Sixpack is even worse than regulators at identifying which banks take foolish risks with depositors’ money. Second, if the public is convinced deposits are safe, systemically dangerous bank runs are less likely.

The traditional criticism of insurance is that it may indirectly encourage banks to take more risk. But today, in the midst of a systemic banking crisis, the concern is rather more life-and-death: whether the insurance actually works. For even if a trusted scheme exists, it may still be entirely rational for depositors to shift cash from failing banks.

This sometimes reflects poor design. With Britain’s Northern Rock, insured depositors faced months of red tape before getting their money back: better to withdraw it now. But the big problem is that even if the ceilings are set generously, lots of deposits fall outside the safety net. Britain’s new limit will still leave about two-fifths of cash on deposit uninsured. America’s proposed change would do no more than reduce the part of the deposit base that is unprotected from 38% to 27%. The idea of a quarter or more of a big bank's deposit base being wiped out is politically unthinkable. Indeed when Wachovia, America’s fourth-largest commercial bank by assets, was rescued this week, the FDIC created a structure that protected all deposits. It has done so with other banks, too.

One medium-term response would be to remove the ceilings so that all savers, from paupers to princes, were fully guaranteed. But this would push most industry-funded schemes into bankruptcy. Already the FDIC’s available funds, including untapped credit lines from the Treasury, are equivalent to just 1.5% of total commercial-bank deposits. Ultimately, if the public thinks multiple failures of big banks are likely, only the government can offer a credible guarantee.

That is just about manageable in big economies: commercial-bank deposits and other liabilities equate to about three-quarters of America’s GDP. But it is a potentially damaging burden for some small countries. Tiny Ireland, with its oversize banks, has just augmented its insurance scheme by giving a blanket government guarantee to bank deposits and liabilities. The gross commitment is equivalent to just over twice its GDP. Organisers of next year’s International Deposit Insurance Week should probably avoid Dublin.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Global banks -- On life support -cosmoyx(My way); 2008-10-5 {7819} (#986@52)
本文发表在 rolia.net 枫下论坛Global banks
On life support

Oct 2nd 2008
From The Economist print edition

Governments in America and Europe scramble to rescue a collapsing system

Illustration by S. Kambayashi

AFTER lurching robotically into their worst crisis in more than three-quarters of a century, the fundamental weakness of banks in America and Europe has now become horribly clear. With funding markets frozen and American plans to remove toxic assets from banks’ balance-sheets in limbo for much of this week, confidence in a raft of institutions evaporated. Between September 28th and 30th, governments on both sides of the Atlantic shored up or split up six banks threatened by failure. Other institutions remain on high alert.

Observers scratch their heads to think of any other industry that has been reshaped so quickly or so dramatically. In America, where the authorities have helped to shovel failing banks into the hands of bigger ones, the retail-banking landscape now has three towering figures. On September 25th JPMorgan Chase overtook Bank of America as the country’s largest deposit-taking institution by snapping up the assets and deposits, but not the other liabilities, of Washington Mutual (WaMu), a Seattle-based savings-and-loan bank that had been suffocated by bad mortgage loans.

Four days later Citigroup, its risks capped by a loss-protection agreement with the Federal Deposit Insurance Corporation (FDIC), strengthened its domestic deposit base by acquiring the banking operations of Wachovia. Further consolidation is likely. Jim Eckenrode, an analyst at Tower Group, a consultancy, reckons that a top tier of five banks (Wells Fargo and US Bancorp are two other contenders) may end up holding as much as half of America’s deposits.

In Europe the pace of consolidation has not been quite as rapid but the scale of government intervention is just as breathtaking. The continent has turned into a laboratory of bank bail-outs. One approach has been to inject equity into institutions and try to keep the show on the road. Fortis, a Belgo-Dutch bank overstretched by its role in acquiring ABN AMRO, is now part-owned by the Benelux governments. The Icelandic government has taken a 75% stake in Glitnir, a bank with outrageous reliance on gummed-up wholesale funding markets. The French, Belgian and Luxembourgeois authorities stumped up €6.4 billion ($9.3 billion) to bolster the capital base of Dexia, a public-sector lender that dabbled fatally in bond insurance.

Another approach has been to borrow from the American model, parcelling out the good bits of failing banks to solvent rivals and keeping the rest. The deposits and branches of Bradford & Bingley, a British mortgage lender that made Northern Rock look well managed, are now in the hands of Santander, a respected Spanish bank. Its mortgage book now rests with the luckless taxpayer. Germany’s Hypo Real Estate, a commercial-property lender which found that the tenor of its funding was becoming shorter as investors shied away from long-term lending, got help of a different sort—a €35 billion secured-credit facility from a consortium of unnamed German banks and the government.

The most sweeping intervention of all came from Ireland’s government, where concerns about spiking credit-default swap (CDS) spreads, falling share prices and jittery depositors led the finance minister to announce, on September 30th, a blanket guarantee on the deposits and almost all the debts of the country’s six biggest banks until September 2010. “The Irish move confirms that this is a systemic crisis in certain countries,” says Simon Adamson of CreditSights, a research firm. Investors and creditors of Irish banks liked the move, which recalled one of the actions taken by Sweden during its feted 1990s bail-out. The European Commission and other banks, worried about deposit flight to Ireland, are bound to be less enthused.
Safe as houses

All this activity had one immediate prize: not a single bank needed rescuing on October 1st. But for those with longer-term horizons, the future remains bleak, and in some ways, worse than before. There are two sources of pressure on the banks. To date government intervention has tended to focus on one or the other, but not both.

The first source of pressure is concern about solvency, and the ability of banks to withstand further losses. The unexpected rejection of the American bail-out plan on September 29th cast doubt on one obvious mechanism to remove the worst-performing assets from banks’ balance-sheets. But even if it is revived, as most expect, the cycle of losses will continue as the drumbeat of bad economic news intensifies. WaMu and Wachovia were undone not by mark-to-market losses, after all, but by the appalling quality of their loan books. It is the same story in many parts of Europe.

The second source of pressure is liquidity. Even the most solid-looking banks are having trouble raising long-term debt. As their debt matures, they are having to refinance with shorter-term debt, ratcheting up their costs and their vulnerability to a sudden withdrawal of credit. If banks have enough funding through deposits, problems in the wholesale markets should be navigable. But others are much weaker. Witness the continuing pressures on Morgan Stanley and Goldman Sachs, despite their conversion into bank holding companies. Mitsubishi UFJ, a Japanese bank, lost more than $500m on its $9 billion investment in Morgan Stanley on September 29th, the day the deal was inked.

The problem is that attempts to shore up liquidity do not necessarily address the capital shortfalls, and vice versa. Even Ireland’s lavish guarantee does not quell concerns about rising impairments on the Irish banks’ property portfolios. Glitnir’s capital ratio looks robust after the government’s investment, for example, but its CDS spreads still surged, indicating rising fears of a national crisis (see chart).

Worse still, the effect of most government interventions, necessary as they are, is to make it even harder for private investors to heal the system on their own. Shareholders are losing both money and reputations as bank failures multiply. TPG, a vaunted private-equity firm, was wiped out by the collapse of WaMu. Shareholders in Wachovia, Fortis and Bradford & Bingley had all recently dipped into their pockets to raise fruitless capital. The risk of sudden dilution by governments, or worse, hangs darkly over prospects for industry recapitalisation. Creditors have also become far more risk-averse in recent days, thanks to the bankruptcy of Lehman Brothers and the brutal treatment of WaMu’s senior creditors (see article). Hypo Real’s new credit line will presumably have shunted unsecured creditors down the queue too.

So far only the Irish solution has avoided this adverse effect, by indemnifying most creditors and allowing shareholders to reap the subsequent gains. Moral hazard, it seems, can go hang. So too can other governments, which are under pressure to match the Irish guarantee but may not be able to, either because their sovereign-debt rating is less strong or because the liabilities of their banks are too big.

There are other dangers in the rapid consolidation of the sector. A world of fewer, bigger banks promises even greater havoc if one was ever to fail (see article). The universal banks have remained largely above the fray in recent days, but on October 1st, UniCredit, a big Italian bank, announced plans to raise its capital ratio by spinning off property assets. If banks of this size and geographical scope were to get sucked into the mire, the consequences would be devastating. In the meantime, they have little choice but to present a steely exterior and carry on as if nothing were wrong.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Cross-border rescues in Europe -cosmoyx(My way); 2008-10-5 {3851} (#987@52)
本文发表在 rolia.net 枫下论坛Cross-border rescues in Europe
Waiting for the big one

Oct 2nd 2008
From The Economist print edition
A dangerous fault-line runs through European banking

IF A week is a long time in politics, in finance it can be an eternity. In just a few days some of Europe’s leaders changed their attitude from Schadenfreude over America’s banking woes to near-panic as banks teetered in Britain, Ireland, Germany, France, the Benelux and Iceland.

The fear that spread through the wholesale money markets after the bankruptcy of Lehman Brothers, and the crumpling of several of the European banks that relied on them for funding, may have caught some of the region’s politicians by surprise. But by mid-week bank supervisors across Europe (hardly a sanguine lot at the best of times) were heaving a collective sigh of relief. With remarkably little muddle, five banks in seven countries had been bailed out or culled.

That these rescues happened at all offers some comfort to those who fear for the stability of Europe’s banking system. Before this week many (regulators included) had worried that it would be impossible to rescue a cross-border bank at short notice. Although the region’s banks operate across the EU’s single market almost unfettered by national boundaries, their regulation is still tied to national governments. Supervisors in a country hosting the operations of a bank from another may have little idea of its health. Those in its home country, meanwhile, may have little interest in what happens abroad if it fails.

Besides supervision, there are conflicting legal (and insolvency) systems, an enduring reluctance of regulators to clip the wings of their national champions, and a recognition that taxpayers would probably balk at being asked to support depositors in another country. Those all seemed to make the chances of co-ordinating action to save European banks remote.

With Fortis, the first of Europe’s big cross-border banks to founder, the impossible was made to look easy. “I’m amazed they’ve pulled it off thus far,” says a former central banker. When confidence in the bank began to seep away, the governments of Belgium, the Netherlands and Luxembourg—the three countries in which it has its main businesses—clubbed together, partially nationalised the bank and shored up its balance sheet with a capital injection of €11.2 billion ($16.2 billion). Two days later Belgium and France (with a bit of help from Luxembourg) injected €6.4 billion into Dexia, another wobbler.
AFP Benelux v Frabelux

It may, however, be premature to celebrate these narrow escapes. There are potential pressure points right across European finance. National governments have mostly acted unabashedly in their own interests, especially Ireland’s. At the times when governments have acted together, as with Fortis, they have carved banks up into their national chunks and dealt with their own part.

And although Europe has come face to face with systemic risk, it has yet to find a system-wide solution. There are some improvements under way. The European Commission proposed on October 1st tightening the rules governing how much capital banks should hold and improving co-operation between different bank supervisors. Calls for the creation of a single European financial regulator that would watch over the continent’s biggest banks, and a pan-European bail-out fund to rescue them, are also growing louder—a group of prominent academics demanded both in an open letter to Europe’s leaders on the same day. But, so far, countries like France and Germany have been unable to agree on a pan-European rescue fund. A huge redesign of a region’s safety apparatus in the midst of a panic is a lot to ask for. But in this crisis, politicians are learning that to be effective, they have to be bold.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Ad nauseam -cosmoyx(My way); 2008-10-5 {2084} (#988@52)
本文发表在 rolia.net 枫下论坛Bank slogans
Ad nauseam

Oct 2nd 2008
From The Economist print edition
Because they’re worthless

WHILE financial firms were taking giant punts to give their profits some va-va-voom, their marketing departments were conjuring up phrases to convey the impression that banks and insurers, like diamonds, were forever. Now that the future’s not bright, it is obvious that some were probably the worst corporate slogans in the world. From American International Group, a collapsed insurer (“the strength to be there”), through to Lehman Brothers (“where vision gets built”) and IndyMac, a failed bank (“you can count on us”), boastful institutions snapped, crackled and popped under pressure.

The home of the whoppers is America, but the trend has been connecting people globally. In incredible India, ICICI, despite being the bank of a billion smiles, was led to deny rumours of a run. And pure, natural, unspoilt Iceland has bailed out its third-largest lender, Glitnir, which although fast, smart and thorough, faced a funding crisis.

Yet not all banks failed to do exactly what it said on the tin. Through their slogans, Benelux’s lenders gave an eerie premonition of the massive state rescues to come. Dexia warned that “the short term has no future,” and Fortis asked, “here today, where tomorrow?” Not since Enron invited the world to “ask why” has an interrogative slogan been as prescient.

And consider also the few, the proud, that chose just to do it and openly advertise their risks. Countrywide promoted itself as a “lender that actually finds ways to make loans”. (When debtors lost their passion to perform, it was bought for a reassuringly expensive price by Bank of America.) The mortgage agency Fannie Mae, now state-controlled, fully disclosed that “as the American dream grows, so do we,” making clear what would happen if the world lost its faith in America. And no one comes close to Washington Mutual, whose slogan (“Whoo hoo”) should have given investors a clear warning about its risk appetite. Hello Boys! Wasn’t it obvious?更多精彩文章及讨论，请光临枫下论坛 rolia.net

What the death of the investment bank means for Wall Street -cosmoyx(My way); 2008-10-5 {7102} (#989@52)
本文发表在 rolia.net 枫下论坛American finance
And then there were none

Sep 25th 2008 | NEW YORK
From The Economist print edition

What the death of the investment bank means for Wall Street

Illustration by S. Kambayashi

THE radical overhaul of the City of London in 1986 was dubbed the Big Bang. The brutal reshaping of Wall Street might be better described as the Big Implosion. The “bulge-bracket” brokerage model—the envy of moneymen everywhere before the crunch—has collapsed in on itself. Even more humiliating for the Green Berets of the markets, the new force in finance is the government.

The last remaining investment banks, Goldman Sachs and Morgan Stanley, sought safety by becoming bank holding companies after last week’s run on the industry, which sent Wall Street scrambling for loans from the central bank (see chart). After Lehman Brothers collapsed, the markets could no longer stomach their mix of illiquid assets and unstable wholesale liabilities. Both will now start gathering deposits, a more stable form of funding. Signing up strong partners should also help. Mitsubishi UFJ Financial Group (MUFG), a giant Japanese bank, will buy up to 20% of Morgan (see article). Goldman has gone one better, coaxing $5 billion from Warren Buffett (see article).

Mr Buffett, no idle flatterer, describes Goldman as “exceptional”. But some doubt that it will be able to adapt and thrive. As a bank, it faces more supervision from the Federal Reserve, tougher capital requirements and restrictions on investing. Universal banks, such as Citigroup and Bank of America, long dismissed as stodgy, argue that their vast balance sheets and wide range of businesses, from credit cards to capital markets, give them an edge in trying times. The head of one bank suggests that the golden years of risk-taking enjoyed by investment banks in 2003-06 were an “aberration”, fuelled by the global liquidity glut.

Private-equity firms and hedge funds spy opportunity, too. Blackstone’s Stephen Schwarzman is keen to take advantage of Wall Street’s disarray. Kohlberg Kravis Roberts, a rival, has ambitions to create a financial “ecosystem”. The buy-out barons got good news this week, when the Fed relaxed its rules on their ownership of banks. One of them, Christopher Flowers, bought a small lender in Missouri, which he may use to hoover up other troubled financial firms. Citadel, a hedge-fund group that is already an options marketmaker, is reportedly mulling a move into the advisory business. Hedge funds have stepped up their financing of mid-tier firms that cannot get loans from Wall Street.

These investors are also going after the “talent” in investment banks. Morale there is not high. One executive admits that becoming a bank “does little for our cachet”. Hedge funds will be particularly keen to get their hands on cutting-edge risk-takers, particularly the Goldman crowd who used to thrive on leverage.

Power may shift in two other directions: abroad and, to a lesser extent, to boutique investment banks. MUFG will be joined by others. After a brief wrangle in the bankruptcy courts, Britain’s Barclays has taken over Lehman’s American operations and quickly put its logo on the fallen firm’s headquarters. “Global financial power is becoming more diffuse,” says Andrew Schwedel of Bain & Company, a consultancy. Merger boutiques, such as Lazard and Greenhill, will emphasise their stability to pick up business. Their shares have done relatively well this year.

But all is not lost for the former investment banks. For one thing, they may not have to cut leverage by as much as feared. Though their overall leverage ratios are high, their risk-adjusted capital ratios under the Basel 2 rules are stronger than those of most commercial banks. They acknowledge, however, that they may have to raise these even higher for a while to assuage market concerns about hard-to-sell assets.

Brad Hintz of Sanford Bernstein, an asset manager and research firm, reckons regulatory shackles will cut Goldman’s return on equity by four percentage points over the cycle. The bank disputes this. Either way, even if it is forced to tone down its in-house proprietary trading it can make up for this by, for instance, launching more hedge funds. And it faces no immediate pressure to sell its large private-equity or commodities holdings. It will continue to co-invest in projects alongside clients, a key Goldman strategy.

Moreover, there are some advantages to becoming a bank. Goldman and Morgan should be able to amass deposits cheaply and easily, because dozens of regional lenders are expected to fail. Almost one-fifth have less capital than regulators consider a safe minimum. However, the new banks will be under scrutiny to ensure they do not put those deposits at great risk.

As sharp distressed-debt investors, they will also be looking to buy assets from the government’s giant loan-buying entity when it gets going. This is likely to be more helpful to them than to commercial banks, which have marked down their mortgage assets less and will not benefit as much when clearing prices are set.

Given the acute stress that remains in money markets, however, the accent for the time being is still on survival. Morgan Stanley’s debt with a maturity of four months was trading to yield as much as 37.5%. Maybe it should consider using credit cards instead.

Financial firms fear further fallout from the recent, potentially catastrophic run on money-market funds, after several of the supposedly ultra-safe vehicles saw their net asset values slip below the sacrosanct $1 level at which investors break even. Only when the government stepped in to guarantee that no more funds would “break the buck” did a semblance of calm return. But “prime” money funds, which are big buyers of corporate debt, are still pulling away from anything deemed risky. This is a big problem for banks, since some $1.3 trillion of their short-term debt is held by such funds, and they may have to turn to longer-term (and dearer) sources.
You might just miss us

Once markets stabilise, Wall Street will start to wonder if it is better or worse off without its stand-alone investment banks. Some think they were no more worth saving than Detroit, another once-iconic industry caught up in its own battle for a public rescue. Perhaps even less so: the securities Wall Street packaged were the financial equivalent of slick-looking cars with no brakes. But they may leave a hole. As broker-dealers, regulated more lightly by the Securities and Exchange Commission, they were free to put large dollops of capital to work, providing liquidity, making markets and assuming risk. As banks, they may find the Fed takes a more restrictive view.

It seems implausible that the investment bank will make a comeback, given the speed with which it has unravelled. Yet, 75 years after the legal separation of commercial and investment banking, America has made a full return to the one-stop-shop model practised by John Pierpont Morgan. Another black swan in 2083, and who knows?更多精彩文章及讨论，请光临枫下论坛 rolia.net

Thanks for all!! -buickregal(Motion); 2008-10-5 (#997@52)

Great articles. Thanks for sharing. -purelakewater(Lake); 2008-10-5 (#995@52)

@Edmonton

ZT: Echoes of the Depression -- 1929 and all that

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