Bailout Rap....brrrap!

John Thain - This is not 2006

Now I normally get anrgy about stuff, but John Thain has really pissed me off.

Who is this John Thain fella? Well, he's not Danish, he's the former (that God for that!) head of Merrill Lynch.

Why has he got under my skin? Well, his company, Merrill Lynch, LOST $15bn in 2008. It had been bought - essentially saved from bankruptcy - by Bank Of America. Bank of America then needed government to cover the losses that Merrill had made. Just before the deal went through in January, John Thain decided to give Merrill employees a $4bn bonus a month earlier than normal. A $4bn bonus for losing $15bn! And where did this bonus money come from, well the US taxpayer.

So to recap he used taxpayers money to pay some very well off bankers a bonus after they had lost loads of money and helped bring the world economy into recession....Wow! if he really is that stupid I could be a CEO in my sleep.

Thankfully he is now being investigated for this crime, and a supoena has been issued by the New York Attorney General.

Here is the internal memo that he sent recently regarding his actions, also note how comments have been banned as everyone was slagging him off.

2008 - The Year of the Rat (Banker)

2008....wow, what a year, the whole world has been turned upside down, the US has gone all socialist, my generation experienced something called negative growth, saving has become the new spending, Gordon became a superhero, economics became sexy, Keynesian economics apparently works, America elected a black president. So here we go, there is a lot to get through:

Nationalisation of Northern Rock: On 17th February the UK government finally bit the bullet and nationalised Northern Rock. This was the first time a bank had been nationalised since the 1970s and it was an indicator of things to come.

Bear Stearns rescued: Bear Stearns was one of the largest investment banks in the world and it had been founded in 1923. The news that it was about to collapse came on 15th March (I remember it well, as I quit my job that day!), and over the weekend JP Morgan bought it with the help of a loan from the Federal Reserve Bank of New York. It collapsed as it had got its fingers too deep into the subprime mortgage pie.

UK house prices fall: House prices dropped this year, the average house dropped 15.9% and about 10% in London. They have dropped as firstly they were too expensive. Secondly people no longer expect house prices to keep on going up, surprisingly what goes up must come down. Thirdly because of the lack of credit available fewer lenders are giving out mortgages (Northern Rock, Bradford & Bingley etc.) those that are, are requiring larger deposits. The forth reason, which be more prominent next year it that people will lose their jobs, therefore will not be able to pay their mortgage, and will have sell their home, possibly at a loss (negative equity). This graph................ shows that house prices are nearly priced correctly, however as in 1990 they will go below this line for a period. AND we keep getting figures how this is the worst recession for 30 years, therefore house prices have much further to drop, especially in London. The only saviour for London's property market will be euro and dollar rich buyers, who will benefit from the weak pound.

Oil hits $146 then plummets: Oil hit a peak of $146 per barrel. The graph below illustrates the rise and fall.........
The rise had a considerable impact on inflation. Further it managed to change people's behaviour, people drove fewer miles and more efficiently, I know I did! It has also left a scar in minds of consumers, especially in the US where drivers are finally downsizing from SUVs to smaller cars, with the Mini selling well. This has harmed the US car manufactures, Ford, GM and Chrysler.
If the rise in oil prices was inflationary, the fall has been deflationary. Oil is currently below $40 per barrel. The reasons it fell: it was too expensive, the world economy is contracting so fewer trucks/ships taking fewer goods travel from A to B meaning a reduction in demand, and the speculators (mainly hedge funds) are out of the market again reducing demand, however supply has hardly fallen. All resulting in a lower oil price.

Oh no...Inflation...Actually HELP! Deflation: Inflation hit a record 5.2% in September and since then has fallen to 4.1%. Why has rate of inflation dropped so fast? Well as mentioned above, oil prices has dropped markedly. The price of petrol affects nearly every single product, the cheaper it is to transport a good the cheaper that good is. Food prices also dropped from a peak reducing the rise in inflation.
The fear of deflation has led to interest rates approaching 0%, making monetary policy impotent (interest rates can't drop below 0%) meaning that other policies are needed, such as quantitative easing (modern version of printing money, this article does the best job of explaining it). Deflation is a perceived problem for 2009, thus the action now. However this action comes with its risks, such as causing excessive inflation.

Lehman Bros collapses: BOOM! BANG! When Lehman collapsed I was in Italy, lying on beach with hardly another soul in sight. Several days later, totally unaware of what was happening in the world, I read the FT at Pisa airport I could believe my eyes. On September 14th Lehman collapsed and Merrill Lynch was taken over by Bank of America. The collapse of Lehman is often cited as the biggest policy mistake of the 2008, why? Because it crushed the myth that the investment banks were "too big to fail". This led to loss in confidence in other banks as it became apparent that no bank was too big to fail. Banks no longer trusted each other, so the LIBOR rate (the rate at which banks lend to each other) sky rocketed, and if the banks did not want to lend to each other why would they lend to you and me. The result was an exacerbation of the credit crunch. At this point in time we were facing a Financial Armageddon.
Later the Japanese bank Nomura and Barclays would cherry pick some bits of the business from the scrap heap.

Iceland melted away in the Atlantic: The hedge fund that was Iceland succumbed to the mountain of debt that its banks owed. At the end of the second quarter 2008, Iceland's external debt was about EUR50billion. Compare this with Iceland's 2007 GDP of EUR8.5 billion. That's how big that mountain of debt, and the reason it crumbled was that the cost of refinancing the debt had gone up ( reason = credit crunch). This caused depositors to panic resulting in a run on the bank (everyone wanted their money out of the banks).

Bail me out blud! Bailouts: here, there, and everywhere. The lesson from 2008 is if you are going to screw up make its done on a massive scale.


I have to admit that I plagerised outrageously :) (from the telegraph's review of 2008...cant find the link now)
More to come...next time regarding the shift in ideology.
Weekly babe coming soon..... :D

Carpe Diem

Hello, and Merry Christmas! I trust you were all good boys and girls and that Santa has been good to you..... I decided that I believe in Santa, all these Christmas films have convinced me of his existence. So this will be my last post of 2008 (I will do a review of 2008 in early 2009), and lot has happened since my last post, so let's get going:

• BROWN SAVED THE WORLD! Priceless.
  
• We had the world's largest ever fraud discovered this past week. It is believed that the total fraud by Bernard Madoff (appropriately pronounced Made-0ff) was $50bn. It was a classic Ponzi scheme; a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. For example Ferdi gives me £100 to invest, then Mo likes the idea and thinks I will do well so he gives me another £100, I use some of Mo's £100 to pay Ferdi a dividend/interest/"profit", then Calum wants to get in on the action, so he gives me £200, I then use Calum's money to give both Ferdi and Mo some money.....and so on. Everything goes swimmingly until a few people start asking for their money back, and that's what happened with Madoff. Here are a few facts that the impotent US regulator, the SEC, missed: first, this graph, can you tell what's wrong with it? It's flat, there is no volatility! Second, the the firm that audited Madoff's company had three employees, one was a secretary, one a 78 year old and a 47 year old accountant. And finally, he could never explain to anyone how he earnt his money.
  
• The main fallout from the Madoff scandal will hit other hedge funds, as people lose trust in hedge funds and want their money back, so-called "redemptions". This will mean that the hedge funds will have to sell their assets in order to give investors their money back, so expect shares to fall again in the new year. The main selling point of hedge funds was their claim to be able to make money in any market, absolute returns. This claim has been demolished this year, with many funds losing over 20% of the value of their assets. Thus I expect the hedge fund industry to contract considerably as they have lost they lustre and they will find life tough when they become regulated.
• The retailer Zavvi (formerly Virgin Megastores) has gone into administration, this is the fallout from Woolworths going bust as one of Zavvi's main suppliers, EUK, was owned by Woolworths and Zavvi could not get any new stock for the important Christmas period. I think that their business model is dead, I personally buy all my DVDs and games from Amazon or another online retailer, as it is cheaper and easier. I recently had a stroll through M&S and the shop was empty but full of rubbish clothes, so I expect M&S to hit an iceberg soon, along with BHS, another rubbish shop. Remember pensioners are their main customers, and they will be the most affected by the falling interest rates, as they relied on their savings to top up their pensions.
  
• The Fed has cut interest rate from 1% to 0.25%, America has arrived at ZIRP (Zero Interest Rate Policy) and just like Japan did in the 1990's. This means that conventional monetary policy is now useless, as interest rates cannot go any lower.
• Credit Suisse is employing an interesting employee compensation scheme, it is paying its top executives a bonus but not in cash or shares but in illiquid mortgage securities, the toxic stuff that those very employees bought but is actually worth nothing now! A very cunning plan, Baldrick would be proud.
• According to the US Commerce Department, the US recession began in December 2007. That means it's already the longest downturn since the 16-month recession of 1981-82. That downturn and another 16-month slump in 1973-75 are tied as the longest recessions since WWII. I expect that at the very earliest we will see the light at the end of 2009, ergo this shall be the longest recession this side of WWII.
• Finally, here is a map of Britain with all the job losses plotted. Notice how many are in London, and especially in the City.
  

Every post will come with this 4 bad bears graph, click to enlarge, courtesy of this website.

To finish off I will say some quick words on 2009. If you keep your job in 2009, you will have a great year. Prices in the shops will be lower, there will be some fantastic bargains and great investment opportunities. In a recession cash is king. You will be relatively richer, your status will rise relative to others and you will attract a greater quality of mate (not a friend but a member of the opposite sex) and this fantastic article attests you will thus be happier.....life is about surviving in order to be able to reproduce! On that note Merry Christmas and a Happy New Year.

Jail Bait

Hello there, hope you are all getting into the festive spirit. I personally can't wait for the Mighty Ducks and Home Alone to hit our TV screens, some escapism is in order. I've been trying my best to avoid financial news this week, all this doom and gloom is getting a bit repetitive! So my attention switched towards politics, and Mugabe-esque arrest of Damian Green and the subsequent debate in the House of Commons on the handling of the issue. Thankfully, former Latymerian and Chairman of the Home Affairs Select Committee, Keith Vaz has stepped in and is investigating. The whole issue reflects badly on Zanu Labour, who have continually eroded the civil liberties of our country, undermined Parliament, and squashed free debate.

Anyway back to economics, and the implications of the Pre-Budget Report are still bothering me. The government aims to deal with the economic problems, by borrowing EVEN more money. Everybody knows this is a terrible idea, one that has never worked. Let's leave this problem for now, as it is one that will not be changing for a while! And let's turn our attentions to the USA:

• 530,000 jobs where lost in November. This is considerably more than forecasters predicted (they will be too optimistic at the start of this recession, and when things slowly start to get batter they will be too pessimistic) and October's job losses were revised up by 80,000. Since September a total of 1 million Americans have lost their jobs. And none of these figures include the potential job losses that will occur if General Motors or Ford fail. This chart shows the percentage of people employed, and illustrates how things are going awry in America (the grey areas indicate when the economy is in recession):
  

• Obama is the Messiah....no seriously the whole world, especially Wall Street is looking/hoping that he will save the world economy, and drag it out of the abyss that we are quickly tumbling into. He has promised a "stimulus package" worth $500bn, that will create/keep 2.5million Americans in their jobs. Now if this doesn't work then we are in big doo doo.
• Over here in the UK, we are buying less in shops, with sales in November down 0.4% compared to last year. That may not sound like big news, but this is the first time ever, in the history of this survey, that retail sales have dropped for consecutive months....and this is just the beginning. The abysmal situation facing retailers is best illustrated by M&S launching yet more promotions after it held its second "one day sale".
• I forgot to mention that the Bank of England cut interest rates from 3% to 2%, the lost level since 1951. I expect interest rates will be 0% sometime in the Spring of 2009. The usual calls for the banks to pass on the full rate cut, to keep on lending..... This whole episode has become rather hypocritical. The banks were attacked for lending too much, now they are attacked for lending too little, who would want to be a banker?
  
• If you are angry at the banks for lending too little, put yourself in their shoes. Imagine you have £100million that you can lend; now the economic environment does not look good for 2009, this will mean that people will lose their jobs, and therefore have trouble paying back the money you lent them (so don't lend to them, or if you do, charge them a higher interest rate to cover the risk of them losing their jobs). This is exactly what the banks are doing, it is perfectly rational, and remember banks are not charities. However, if EVERY bank does this, then this will just make the situation worse, and their predictions will become a self-fulfilling prophecy (if no-one lends, no-one can invest in new ideas/businesses, therefore less economic growth, therefore more people lose jobs and so on..).
• You may reasonably reply, "well the government, therefore the people, own the banks, and they should listen to us and give us what we need", unfortunately that is the way to run a profitable bank....personally I need at least £2million! :)
  
• Finally China....some truly worrying news is emerging from there. China's export FELL in November, China's exports grow at over 20% per month, they do not fall. If this is true (it may not be, but the main picture is that exports are at the very lest growing at a considerably slower rate than before) then China is heading for a big slowdown and it needs to implement a fiscal stimulus (China can afford it, as it has huge foreign currency reserves, nearly $2000bn). China needs to grow at around 8% in order to continue the rural to urban migration, and the rapid creation of new jobs. If it does not grow this fast, there will be an increase in social unrest, and I would not be surprised if calls for democratic change grow louder, a revolution could be on the cards.
• Finally this graph shows that we have a long way to go (click on it to make it larger):
  

So any good news??? YES!! The death of consumer culture, or consumerism! Society had become so celebrity focused, so brand conscious, so vulgar....the recession, and future austere times will ensure that this hollow way of life will be buried for if not at least a good while then hopefully forever. It was best epitomised by stuff like this. We can now come together as a society through these tough times, allowing us to have a more meaningful existence. And remember!

"Recreational Dancer"

This weeks headlines:

1. Pre-Budget Report
   
2. CitiGroup (the worlds largest bank) bailout, $300bn
3. Another bailout, this time $600bn
4. Obama names his economic team, and Wall Street likes them
5. We own RBS, 58% of it to be precise, ergo RBS employees are civil servants
6. Bonuses will be down around 70%-100% for bankers
7. Woolworth's has gone into administration
   
8. The Bank Of Essex will be founded soon
   

1. The Pre-Budget Report (PBR)
As I mentioned before the government will try to stimulate demand by cutting taxes and this is what they have done:

• VAT cut by 2.5% for a year
• Introduced a top rate of tax of 45% on those earning over£150,000 per year
• Increase National Insurance by 1% from 2011
• save £5bn in efficiency gains.

However the main news is the projected borrowing figures. In 2009-10 alone, the government predicts that it will borrow £118bn, and only £15bn of this debt is from the fiscal stimulus. The government debt will rise from 40% of GDP at the start of the crisis to over 57%. Do you remember Gordon talking about prudence, about the end of boom and bust? Well, we had a massive boom, and now here comes that bust.

To make matters worse, all these figures are based upon the very optimistic assumption that economy will start to pick up again in the summer of 2009 and that by 2010 we will grow by 1.25% and that in 2011 by 2%. Very few forecasters are this optimistic, even the Bank Of England is more pessimistic.

Now if the government is wrong about the growth figures then borrowing will be even larger. Plus he expects growth to return to "trend", which means the average growth rate which is around 2.5%. However economic growth in the UK has been based upon the financial services industry and housing, the two sectors that are being most affected. Oh and he expects to return to a balanced budget in 2015/16, so not after the London Olympics, but after the Olympics in Chicago/Paris/or somewhere else. The government has gambled, only time will tell if it has paid off.


2. US government saved Citigroup from collapse by providing the beleaguered bank with $20bn in additional capital and arranging $306bn in credit guarantees, meaning that any losses over $29bn will be "shared" with the US government. With the US government taking 90% of those losses, not really sharing is it?

Citi is highly leveraged, meaning it has loads of debt and very few assets. For example, if I bought a £100,000 house with a £10,000, I have a leverage ratio of 10 (100,000/10,000 = 10). Citi's ratio is 56! That is like buying a £56,000 house with a £1,000 deposit. Now if house prices drop 10%, I lose my £1,000 and another £4,600. This is exactly why the banks have got into so much trouble, their assets are falling in value, and because they borrowed so much they end up losing money, hence the government has had to jump in, pump money into the banks to save them.


3. I was tempted to say this last bailout, but lets go with the latest bailout was to save the GSE (Government Sponsored Enterprises) with $100bn. They hand out mortgages to people who usually can not get mortgages. However it is important to note that these guys pulled out of the sub-prime market, recognising that it was too risky. The other $500bn will be used to buy MBS (Mortgage Backed Securities), and the toxic waste that helped to bring down the financial system.

Here is some bailout maths, all adjusted for inflation, to put the current crisis in perspective:

Marshall Plan: Cost: $115.3 billion
Louisiana Purchase: Cost: $217 billion
Race to the Moon: Cost: $237 billion
S&L Crisis: Cost: Cost: $256 billion
Korean War: Cost: Cost: $454 billion
The New Deal: Cost: Cost: $500 billion (Est)
Invasion of Iraq: Cost: $597 billion
Vietnam War: Cost: $698 billion
NASA: Cost: Cost: $851.2 billion

Total: $3.92 trillion ($3,920bn)
Oh and WWII cost $3,600bn

The current crisis is expected to cost $8,500,000,000,000 or $8,500bn or eight thousand five hundred BILLION DOLLARS!!! Even Dr. Evil couldn't imagine such a large number.


5. The effects of government ownership have already been felt, today the boss of RBS Stephen Hester announced that they will give their NatWest and RBS mortgage customers "6 month moratorium to right themselves before we begin repossession proceedings". The normal period of grace is 3 months, so this extra 3 months will be helpful.


Finally, I have been debating in my head "how bad it will be?" or more precisely "how deep and how long" (sexual innuendos on a post card please). One scenario is "This time it will be different", meaning we're all screwed, and there's is not much we can do about it other than getting into the crash position, and hope the pilot crashes the plane into a pillow factory. The second scenario is "creative destruction" which will pull us out of this doldrums, and as a beautiful girl (who was somehow as interested as I am in the economy, loser!) said "out of the ashes, a Phoenix will rise!"

To save or not to save?

This programme on BBC2 last night addresses one of my major concerns regarding the US and UK economies, the amount of debt. Not just government debt, but personal debt as well. It's an hour long, and worth your time. You have until Monday 1st Dec to watch it as the BBC iPlayer is gay.