Friday, April 11, 2008

Notes on the effects of the subprime crisis (Jan to April, 2008)

The ongoing subprime crisis and its financial, economic and other effects are IMO a good on-going case study (test) for the financial, economic, social, policy, regulatory and political systemics in the US and around the world. This page monitors them with a view to gaining a better understanding on these systemics and the "bugs".

NOTE: I may be an MBA and I may also have education in decision sciences and work experience in Public Affairs, but I am neither an Economist or a Financial Analyst, so please do not use my thoughts or notes as a basis for any investment/financial decisions. At best, as food for YOUR thinking on what is going on in the world and how it affects you. I am not an expert in anything, all I do is think (while my main task these days is to care for an elderly relative). So read my thoughts with the proper caution.

Friday, April 11, 2008
* The writedowns have reached 245 billion USD. What will be the final figure and when will all such accounting be done?
* The wider effects and their volume is another thing. One measure is the 945 billion USD of the IMF prediction. But of course, the "full economic" effects, of all kinds, all probably impossible to predict and will take much time for them to be realised. The exact figure is probably neither predictable or tangible, it is too complicated and big a calculation for amy human or human made tool to make, I think.
* As the Chairman of the Fed pointed out to the audience at Richmond on Thursday evening, the Great Depression lasted more than one decade and the financial world was much simpler then: banks. The way I understood the analysis, the "system" is much more pluralistic today, a "world" of various types of financial operations. Back then, authorities let the banks "fail" and the GDP shrank up to 33%!
* As per comparisons with the Japanese banking crisis, banks were allowed to "cover" the issues for many years, the losses were not written down ie there was not tranparency and thus the crisis turned into a malaise that plagued the banking system of that country for a long, long time. In the current case, tranparency is much, much, better, the system is accounting for the losses, taking them, and thus while the effect is more of "cold shower" (my words), this approach "works" much better.
The "Oil Rush"
Brent crude oil and US light crude oil have both hit a record high numerous times in recent months.
This week: Brent reached USD, 109.98 during trading on Thursday, fell a little, then hit 109.17 on Friday before closing the week at USD 108.75 a barrel.
US light crude reached a new all time (note: in USD) of 112.21 on Wednesday and finished Friday and the week at USD 110.14.
On "cold showers"
The so called in the pop economics jargon "cold shower" approach, in anything, does have some collateral damages of its own. Eg in the case of the ultra sudden move of the Soviet bloc countries from communism to "state/system X" (one is free to call what the next, post-communism phase was), one could call what happened in many of those countries, a "Far West". So while the subprime crisis and the sudden fall of communism are in no way comparable, IMO, the concept of cold showers, which is popular with some economists and gurus, is not that "fit for real humans", IMHO (in my humble, albeit capitalist, opinion). Like Democracy, Capitalism is IMO the best available system, compared to all others, but that does make it a perfect one or one without "victims" aka "human damage/cost". And Capitalism 2008 version does have its "bugs" that do seem to require not only patches but maybe a new version/release as well. But who is going to design one and which of many designs will become "the standard".

Thursday, April 10, 2008
UK interest rates have been cut to 5% from 5.25

Wednesday, April 9, 2008
* The International Monetary Fund said on Tuesday, during the presentation of the spring Global Financial Stability Report (it is bi-annual, Autumn and Spring) that turmoil in credit markets could now spread to other mortgage and corporate debt markets with losses possibly being USD 945 million and with risks of spillovers to emerging economies.
* The 945 million USD losses fogure of the IMF prediction includes not only direct losses from subprime but the total writedowns on banks' balance sheets plus writedowns on other asset classes in the US due indirectly to subprime. So that does not mean that of the 230 billion USD of writedown to-date will not actually be 4 times by the end of the crisis. Assuming they would, would mean that only about 25% of the writedowns/losses has been reported and would cause much concern. But this is not the case. Yet the IMF recommended tranparancy, prompt reporting of losses and writedowns when they occur and infusion of capital.
* The so called sovereign wealth funds have already provided capital infusions to many institutions but that capital infusion is not enough.
* As far as I recall, the potential non-economic influence of these sovereign wealth funds has been a concern in recent month in the US, at Davos and in the EU, inter alia. The IMF and others have proposed a "code of conduct" development, to apease concerns of non-economic influences by sovereign wealth funds (that are funds that are tied to political/government/state forces in such countries as China, Singapore, etc.
* A thought: For funds' infusion to balance sheets: A philosophical and ideological and "strategic" dilemma: National/public funding or (foreign) "sovereign wealth funds" funding?

Tuesday, April 8, 2008
1 trillion dollars?

The IMF estimates that the worldwide credit crunch could cost banks and others nearly $1 trillion in losses. My comment: Ouch!! Major ouch!
Deja vu a la 1991 or 1973?From a so called "technical analysis" of stocks/shares perspective, some analysts say that the current situation is similar to 1991, others to 1973! Analyse this! Or rather, philosophise on this!

Monday, April 7, 2008:
* The financial industry has "booked" more than $230 billion in writedowns and losses
* Banks and brokers are under pressure from both rating agencies and debt holders to reduce their debt and reduce their so called "leverage" overall. The best way to be credible in Wall Street these days is to raise capital, even if this extra equity dilutes shareholder value for the existing shareholders, or to demonstrate that the financial institution has sufficient available cash.
Note: Is this a great opportunity for sovereign wealth funds and other cash rich "players" around the world?
* Does the credit crunch require government intervention at a “global” level?
Is there a rationale for more “support” to be offered, in addition to the banking sector, to the securities market and the housing sector?
Are we moving from the policy concept of the central banks just providing access to extra cash, to to a concept of intervening on odd occasions and now thinking of formal overall intervention in the markets?
* Which (oddly?) reminds me of a few excerpts from RFK's speech at the City Club of Cleveland, in Cleveland, Ohio on April 5, 1968, 40 years ago, ".....too often we excuse those who are willing to build their own lives on the shattered dreams of others...... Some look for scapegoats, others look for conspiracies, but this much is clear: violence breeds violence, repression brings retaliation, and only a cleansing of our whole society can remove this sickness from our soul.
For there is another kind of violence, slower but just as deadly destructive as the shot or the bomb in the night. This is the violence of institutions; indifference and inaction and slow decay. This is the violence that afflicts the poor, that poisons relations between men because their skin has different colors...". What do the above have to do with the subprime affair? Nothing directly, but undirectly, maybe. And the socio-economic dynamics in the US and the world nowadays. And those who build their own lives on the shattered dreams of others. And those who look for scapegoats (eg the immigrants) for the economic hardships of the era, or the fans of all sorts of political and socio-economic conspirancy theories, and the "violence" of institutions. Quite philosophical, and metaphorical, I know.

Sunday, April 6, 2008/Real estate and access to capital and effects on monetary policy
According to the International Monetary Fund ("Managing Housing Sector Boom-Bust Cycles" survey), the United States, Denmark, the Netherlands, Australia, and Sweden appear to have the most "developed" mortgage markets, which allow households greater access to housing-related financing, whereas households in continental Europe tend to have more limited access to such financing. The survey suggests that "paying attention to house price developments does not require changing the existing monetary policy approaches. Rather, these approaches should be interpreted in a more flexible manner ....". In other words, as I understand the above, house price trends must be taken more into account by central banks when they set interest rates! In other words, when the Fed was raising its interest rates from 1.0%, it should have also considered its effects on housing, at least the way I understand it (reminder: I am neither an Economist or a Finance expert).

Sunday, April 6, 2008/US homeowners with negative equity in their homes
They are 9 million, according to the US Treasury Secretary, but that does not mean that they will face foreclosure etc.

Saturday, April 5, 2008/IMF
1) The IMF this week estimates a 25% probability of global recession this year!
2) Excerpt from the Press Communique of the "Progressive Governancet" conference in London today, hosted by UK PM Gordon Brown:
"...In this era of unprecedented economic and financial integration financial market events are increasingly global. The recent turbulence in global financial markets, for example, was triggered by problems in the US subprime mortgage market. In this transformed global economic and financial system problems can spread rapidly to affect the whole of the world, national
problems can quickly become global, and contagion can move as swiftly as the fastest communications. International financial institutions have a pivotal role to play in this transformed global environment.
Surveillance will be more than ever the IMF’s main vehicle to provide an effective and timely oversight of the global economy and financial markets.
Greater integration of the work on real and financial sectors is essential to understand the transmission channels with the view to provide clear guidance to countries' policy makers. Furthermore, working with the Financial Stability Forum, regulators and supervisors in all countries, the IMF can contribute to developing an effective early warning system on financial risks to the global economy.
A key lesson from previous crises is that healthy economies can benefit from the assurance of support against contagion. To this end, the IMF should continue to look at its financial support instruments with the view to ensure that they remain adequate to meet

Friday, April 4, 2008/US stocks - unemployment data effect
US stock indices rose after the 80,000 March job losses accouncement today! Although the number did exceed expectations (50 to 60,000)!

Friday, April 4, 2008/Effect on Finance jobs
5,000 Wall Street jobs were lost in March, 11,0o0 in February. But it may be the tip of the iceberg!

Friday, April 4, 2008/The Soros POV
George Soros has called the current crisis the worst one since the Great Depression and thinks that after a temorary easing, the situation will get much worse!!!!

Friday, April 4, 2008/EU "risks"
1. The EU's Internal Market Commissioner has said this weak that the EU is not prepared to deal the following potential case study: An ailing pan-EU bank or a bank with activities in many EU member states.
2. Three German banks have now had to take significant losses due to the US subprime! One of them was even aided by the government to stay solvent! Why is that?

Friday, April 4, 2008/European real estate/mortgage risks
The International Monetary Fund thinks that countries where real estate markets are sophisticated and mortgages use the house as the collateral, such as the UK and Ireland many face real estate crises!

Thursday, April 3, 2008/Senate Banking Committee hearing on the Fed's involvement in the Bear Stearns affair
The panel consisted of Ben Bernanke, chairman of the Federal Reserve Bank, Christopher Cox, chairman of the Securities and Exchange Commission, Robert Steel, Treasury under-Secretary and Timothy F. Geithner, president of the Federal Reserve Bank of New York.
Senator Robert Menendez (D, New Jersey) stressed that he has warned last year of a mortgage foreclosures "tsunami" and that the Fed had underplayed his concerns.
A big part of the discussion focused on the need for the Fed intervention in the BSt affair.
T. Geithner: “We judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy”
Many senators asked what the chances are that the USD 29bn BSt "securities" that the Fed now holds will be "paid" by the taxpayer.
Another issues was the timing of the temporary "discount window" that was opened for Wall St. firms on Monday (note: Fed said $35-40 bn have been loaned so far to "Wall" firms) after the BSE affair and whether this company could have used that facility to avoid bankruptcy had it been opened the week before (instead of the Fed intervention). The reps of the Treasury and the regulatory agencies doubted it would have, but difficult to speak on retrospect.

The President/CEOs of JPMChase and Bear Stearns also testified at the Banking Committee. There "testimonials" were most interesting. 1-2 key excerpts of Bear's Pres/CEO's points mentioned in today's Video Log of mine.

Thursday, April 3, 2008/Derivatives
Is there a "derivatives" problem, in that there is no per se market for derivatives but there value/price is estimated via models?

Wed., April 2, 2008/UK mortgages
The short term fixed rate period of more than a million mortgage borrowers will expire this year and the interest rate will switch to variable.
So they are starting to shop around for better terms from other lenders, as well as their existing lender. But many lenders in the UK are not currently accepting applications from new clients

Wednesday, April 2, 2008/Oil dynamics
4th consecutive trading day of decrease in crude oil price

Wednesday, April 2, 2008/Ben Bernanke's testimony on Capitol Hill, Notes
The Fed chairman argued that the Fed did not "bail out" Bear Stearns, because its shareholders took very heavy losses. The Fed averted the systemic problems that would occur if it went bankrupt.
Senator John Sununu (Republican, New Hampshire) countered claims by other member that nothing is being done to help homeowners by mentioning the government's/state support to 2 key mortgage retailers, inter alia.

Wednesday, April 2, 2008/Key subprime related data
Mortgage delinquencies, Q4/2007, as a % of total mortgage loans: 5.8%
Subprime foreclosures as a % of total subprime loans: 18%!

Wednesday, April 2, 2008/European financial affairs
The EU Commission to examine the nationalisation of Northern Rock (UK) for its compatibility with EU law
Danish banks launched complaint re the Northern Rock case claiming distortion of competition in the EU market
Iceland's government claims that certain hedge funds play a key role in its current banking/financial crisis

Tuesday, April 1, 2008/Writedowns due to subprime
A major Swiss bank has just announced that its writedowns due to subprime have doubled, to $ 37.4 bn!!!! The first half was written down in 2007! The fact that many non-US banks and other non-US institutions were heavily exposed to subprime backed investments is simply amazing! A well known German bank has already written down (or off) assets equivalent to $7.1bn!

Top global writedowns due to subprime, so far: Swiss Bank $37.4bn, US investment bank $22bn, US commercial bank $21.1bn, UK/Hong-Kong bank $17.2bn, US investment bank $9.4bn , German bank $7.1bn, US bank $5.3bn, US investment bank $3.2bn, US investment bank $3.2bn

Tuesday, April 1, 2008/US Stocks in Q1 (Jan.-March) 2008
Most major indices are down this quarter (ie have lost ground during Q1).
On Monday, the Dow Industrial Average was up, reversing a downward streak tht lasted 4 or 5 days.

Tuesday, April 1, 2008/Hedge Funds
March 2008 was the worst month for hedge funds in the last 9 some years!

Monday, March 31, 2008/My notes on the Henry Poulson proposals/blueprint

Henry Poulson is the current Treasury Secretary.
His proposals are based on work that started in early 2007. not due to recent crisis. The initial objective was to de-regulate or simplify financial and related authorities due partly to allegations that the current multi-authority system discourages companies to be listed in the US (and investment in the US?)
Commentators have stressed that the current regulatory framework was founded more than 70 years ago and there are 70 years of "patchwork", thus a need for an overhaul.
Will the end result be less or more regulation?
The potential for such a plan, that is prelim, by a member of a Republican cabinet, and will need Capitol Hill vote and adoption (Democratic majority), in a Presidential election year, when in bill form, are slim to none. Commentators have stressed that legislation on the whole/core of the blueprint may take 2-8 years, that is after much, much discussion.
One of the near term proposals: To extend Fed supervision to all financial and related mechanisms
The issue of "mortgage origination" (at state level now) to be addressed as a priority, with a bill even, maybe, this summer.
Insurance regulation to pass from state to federal level
Medium term proposal: Oversight of the payments and settlements systems in important. Some stressed that that is where the "core" of the system lies. The blueprint talks of a federal charter and oversight by the Federal Reserve.

Monday, March 31, 2008/Effects of subprime and credit crisis/UK:
A Confederation of British Industry survey says that more than 10,000 jobs may be lost in the UK financial sector (banks, building societies and insurance companies etc) in the next three months!

Saturday, March 29, 2008/The LIBOR
Although the central interest rate in the US in now 2.25%, the interest rate that banks use to lend each other short term is still quite high, almost as high as when the central interest rate was at 5-5.5%! Why? It seems that it reflects a perception of expected high risk between banks!!!

Saturday, March 29, 2008/Markets
On Friday, Asian, European and US shares were either up or stable or down!! Does it really matter? Of course it does, for investors, but not for the interdisciplinary analysis and "philosophical" purposes of "ndpthinking". Neither for the purposes of understanding the global effects of the US subprime crisis. Extra-ordinary occurances only wil be noted in this dossier!

Thursday, March 27, 2008/Policy response differences/USA, UK, EU
In the US, the policy response to the subprime induced crisis has been a combination of radical lowering, by the Fed, of interest rates, as well as, by the Fed, of introduction of more liquidity onto the credit system to avoid a credit breakdown.

In the UK and even more so in the EU (Eurozone15), the policy measures have been focused on central banks offering loans to banks to ease the credit crunch.
What justifies this difference?
Well, in the US, the problem is a real estate problem as well. Elsewhere, there was no subprime loans and thus a core crisis, the effects are "imported" via the purchase of subprime backed investment tools from the US and the global nature of the financial system.
Thus does to some extent "justify" the difference in policy responses. In the US one has to include the tax rebates to be offered to consumers by the government, to boost consumer confidence and consumption (since the US is quite a "consumption driven" economy).

Thursday, March 27, 2008/24/24:
I am so glad I am not a financial markets' analyst. When would I sleep. On working days, at least one major stock market is open at any one of the 24 hours in a day! What happens in Asia today Thursday is to a large degree affected by what happened on Wednesday trading in the US as well as financial and other US economic news, then the European markets open, then again the US ones. Round and round they go!
The Japanese economy is said to be in recession (but that is not as a result of the US subprimes)

Thursday, March 27, 2008/Markets
Asian shares fell after 5 days of gains, as financial shares slipped due to concerns re bank earnings, but gains in commodities helped ease the fall.
European shares rose
US stocks fell

Wednesday, March 26, 2008/Markets
Most Asian share markets rose on Wednesday
European shares (including London) fell on Wednesday.
U.S. stocks dropped on Wednesday. Shares of financials lost ground amid renewed concerns that bank profits could take much longer than expected to recover from the housing crisis.
Concerns that the US economy is already in recession were revised due to higher oil prices and also due to data showing a decrease in factory orders for U.S. manufactured goods .
While expectations for Q1 profits for S&P 500s overall are generally negative compared to last year's, the expectations for Q1 profits of the non-financials in the S&P 500 are positive.

Wednesday, March 26, 2008/effects of subprime crisis
The Bank of England Governor Mervyn King, speaking to a Westminster (UK parliament) committee, said that the (US and global) credit crunch as a result of the subprime had entered "a new phase".

Tuesday, March 25, 2008/Markets
Asia: Asian shares jumped due mainly to JPM's raising of its bid for BSC and to the unexpected ris in U.S. home sales
USA: After problems in early trading fueled by a report that showed U.S. consumer confidence sank to a five-year low in March and data that that showed further deterioration in housing,
U.S. stocks finally gained on Tuesday because a bounce in commodity prices raised the prices of shares of miningand other resource companies as well as precious metals.

Monday, March 24, 2008/Markets
Many European markets closed due to Easter.
In Asia, Shanghai's main stock index was down 4.5% due to fears that an oversupply of shares of big Chinese firms that are planning to issue new shares plus of a large amount of previously not traded shares that have recently become eligible to be traded freely due to reforms by the Chinese government could affect/exceed demand. Japan's Nikkei 225 index ended the day down 0.02% at 12,480 points.
In the US, the Dow Jones industrial average was up 187.32 points, or 1.52%, to 12,548.64. The Standard & Poor's 500 Index was up 20.37 points, or 1.53% to 1,349.88. The Nasdaq Composite Index went up 68.64 points, or 3.04%, to close at 2,326.75. Drivers of the dynamic were the news of the $10 offer for BS, the news of a surprising increase in sales of pre-owned homes in February, etc.

Monday, March 24, 2008/Real estate
According to the National Association of Realtors (USA), whereas the median US home price fell 8.2% from a year ago to $195,900 in February, the biggest fall since records began in 1968 (!), sales of existing homes rose 2.9% in February to an annual rate of 5.03 million units. So supply up, price down, thus demand up! Supply and Demand!
But does that mean that the US housing market is beginning to stabilise?

Monday, March 24, 2008/The bid
JPMC has raised its offer for BS from $2 to $10 a share.

Friday, March 21, 2008/Fed's lending to Wall St.
In addition to taking on $30 billion of Bear Stearns' most illiquid mortgage-backed securities, the Fed said on Thursday that it lent about $12.9 billion to Bear Stearns in the past week through a special credit facility it arranged with J.P. Morgan Chase. Other Wall Street broker-dealers borrowed nearly $29 billion from the Fed in the week to Wednesday.

Thursday, March 20, 2008/Financial Markets' reactions
The Hang Seng in Hong Kong was down 3.5% at 21,108.2.
Shares in Shanghai closed up 1.1%.
Hong Kong and Australia shares fell following falls in the US on Wednesday, due to concerns about the potential repercussions of a US slowdown. Mining (including gold) and oil shares were hard hit as fears grew about a possible reduction in the demand for raw materials.
In Singapore trading, gold fell more than 2% to $920.30 an ounce, while US crude oil fell by $1.43 to $101.11 a barrel.
Japan's stock markets were closed for a public holiday.
London's FTSE 100 closed 0.9% lower, Frankfurt's Dax lost 0.7% and the Cac 40 in Paris fell 0.5%.
USD rebounds: The sharp drop in oil, gold and other commodity prices helped boost the dollar against the Euro, the Yen etc, as investors switched money back into the US currency.
Led by financial shares the Dow Jones Industrial Average rose 261.7 points or 2.2% to 12,361.3 on Thursday. It had risen 420 on Tuesday and fallen 293 points on Wednesday.

Wednesday, March 19, 2008: Stock market state, one day after the interest cut by the Fed
The Dow Jones closed down 2.4% or 294.8 points at 12,097.9 while the Nasdaq fell 2.6% to 2,210.1.
London's FTSE 100 index was down 1%, Frankfurt's Dax was down 0.3% and in Paris the Cac 40 was down 0.5%.
But bank shares were higher, lifted by better-than-expected results from investment bank Morgan Stanley.
Worries about the outlook for the US economy led to a fall in the price of crude oil by more than $6 a barrel, leading to 2 oil companies stock losing 4-5%

Tuesday, March 18, 2008: New interest rate cut
So now the key interest rate, set by the Fed, is 2.25%, after a .75 (75 basis points) cut today! Some expected a 100 basis points cut. Is this measure going to help alleviate the problems high interest rates caused in the mortgage, the credit, thet money markets in general? Is it going to make banks more willing to lend each other overnight? Is is at least going to boost the real economy, get US businesses going on the export markets now that the US Dollar is also low and thus their products and services price competitive?
The recent interventions of the Fed, not seen since for many years, eg the offering of loans to non-commercial banks (first time since the Great Depression), are they going to offer liquidity (cash) to financial institutions in case they need it to face urgent cashflow needs. The US investment bank that was sold over the weekend to another, with the active intervention of the Fed and the government, had seen its cash reserves depleted in a very short time when edgy investors/clients came looking for the money back. In the UK, the government had to intervene and "nationalise" a commercial bank that could not meet the "money back" demands of its depositors, when they also became edgy over rumours or speculations of problems.
To be continued .... "Living and Dying in a Finance dominated World"

Tuesday, March 18, 2008/Other effects
Hillary Clinton and Barack Obama have now endorsed the legislative proposal floored last week by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D-Mass.) that would allow the Federal Housing Administration to guarantee new mortgages for lenders who are willing to help homeowners who are facing foreclosure.

US subprime crisis and global banking exposure to subprime loans:
How did "we" come to this? (March 17, 2008)
Who decided and gave people who poor credit history, no jobs, etc, to get mortgage loans?
And why? Was it because there were no credit worthy mortgage buyers left and people had jobs and commissions to earn to keep going?
Who allowed this to happen?
Who allowed investment and other banks and other institutions to buy those loans via re-packaged "tools"?
Of all the analysts, monitorers, policy makers, etc, both persons and agencies, in the US and globally, how come no one or almost no one said "wait a minute, what is going on here" and was this person or organisation heard?

Monday, March 17, 2008/"Agony and mistrustful Monday"
1. A major US invetsment bank hit by concerns over its exposure to Alter A mortgage loans (one level above subprime) is being bought today, Monday, at a 90% (!!) discount by another, along with a aid provided by the Federal Reserve.
2. The US investment bank's troubles were aggrevated last Thursday, when investors fled to withdraw their funds (note: this is an investment, not a retail bank).
3. The main sources of mistrust in the actual exposure of banks in failed morgage loans are the banks, in their unwillingness to provide each other short term loans, so the Fed and the Bank of England have intervened to lower that lending rate.
4. The stock market indices are being hit, with certain banks in the US, Europe and Asia registering double digit % losses in their stock prices. Who really knows which banks are more/over exposed to US mortgage investements? Until the dust clears, agony and mistrust will exust (analogous to the mistrust in the balance sheets of US corporate giants after the Emron affair).
5. The US dollar lost more value on Monday.
6. Investors in USD or stocks are turning to commodities, primarily gold and crude oil (a buying "orgy" someone commented), and since demand is higher and their value is measured in US Dollars, their prices hike! Also to short term bonds. Cascade: This of course has a general effect in the energy inputs to all business and households around the world!
7. Many expect the Federal Reserve to further cut US interest rates this weak in an effort to boost the real economy and ease presssure on loan holders with variable interest rate obligations.
8. Some are starting to draw analogies with the Big Crush of almost 80 years ago, but that does seem a tad exaggerated. For one thing, the authorities are these days more sophisticated in dealing with crisis and the system is not "pure" capitalistic or free market, thus interventions are allowed and they do play a role in easing over-fear or panic. Some sources do panic, such as financiers themselves, but that is maybe because their jobs, earnings and stock options are at stake. But also, how hedged were some investors? And the main public affairs issue is: Why did some institutions and investors over-invest in subprime and other risky real estate based tools? What happened to loans to good old old/real economy borrowers: businesses?
9. Capitalism is not faulty, but the systemics of the "system" may have some bugs or even "viruses" that should have been detected before they hit the system. They key in my non expert opinion is a move back to the basics, back to the fundamentals and more tranparency. There will certaninly be a debate on the need for more regulation.
10. The US president has already tried to ease fears. He did say, Monday, that the situation is challenging. I would say that these events show that what is needed is either more regulation or much less regulation. And that all this shows that for many years now the real economy is unstable and suffocating. Partly due to over-regulation inspite of the perception that we live in free market and global times.
Additional effects:
Shareholders of the major US investment bank may sue the bank and its executives and officers for securities fraud, arguing that they failed to disclose the company's true financial health.

On the nature of the mortgage problem
The problem with investments in mortgage loan based instruments held by banks and other institutions seems to be, from what I understand by watching the news and analysis today, Monday March 17, 2008, that there is no valuation system to adjust their value when things go wrong, thus those who hold them have to write them down to zero value!!! Interesting detail!

Monday, March 17, 2008/UK initiative for addressing the crisis

Gordon Brown said over the weekend that Britain's Chancellor Alistair Darling was writing to members of the International Monetary Fund, G7 member countries and the Financial Stability Forum to call for agreements on international action on transparency and disclosure, better risk-management and action on credit rating agencies.

Reminder: Public Affairs - Regulatory and Economic combo?
"With the combination of the right regulatory response and the right economic response, I am confident that we will get through these difficulties and will continue to see growth."A. Darling, UK Chancellor of The Exchequer (Minister of Finance in Euro-terms), Jan. 28, 2008

Plus (3.17.08): The Bank of England has made an extra 5bn Pounds available to UK banks to borrow, part of moves to ease credit fears.

Sunday, March 16, 2008: Rush to Gold
USD 1,007.10 an ounce! Gold continues its rise in the last 2 months and reached a new record high on Friday as investors rush to it away from the weakening US Dollar to find a refuge for "value" in markets that are also very nervous regarding the state financial institutions, compounded by the news that a major US investment bank has had to seek emergency funding.

Sunday, March 16, 2008: Dynamics/What causes the on-going "credit crunch"?
The credit crunch was caused because banks have become less willing to lend to each other after suffering large losses on investments linked to the subprime mortgage loans in the US housing market.
Thoughts: How did banks and other investors around the world wind up so "heavily" invested in such a risky instrument? Were other types, more fundamentally "sound" investments not available?
What has happened to the "real economy" in the last few years? Is there an entrepreneurial "deficit" in the US and around the world? Have globalisation, over-competition, red tape or other systemic factors stiffled the apetite for entrepreneurship in the US, Europe and other places? Who starts a new business today anywhere and why/why not?

March 13, 2008/My comment on the situation, in view of recent events
I think that the Financial World, much like the www world in the late 1990s, has lost touch with the real economy and business. Not only in the US, in most of the world. And the financial markets have become a runaway train no one can real understand, it is too complex but it affect our lives. Scary! IMO we need more good old entrepreneurship. People with business dreams! To satisfy a consumers'/people's need in a new way with a new product or service.
"We want the kind of capitalism that promotes entrepreneurship not speculation"
Nicolas Sarkozy, President of France, at the meeting of the leaders of the UK, France, Germany and Italian and the President of European Commission on Jan. 29, 2008 to discuss the global market turmoil.

Wed., March 12, 2008/Jitters re the US measures to address the effects of subprime to banks and housing!

Scepticism about whether the Federal Reserve's plans to provide liquidity to the banking system will work (see March 7, below) was one factor weakening the dollar and bringing it to a record ow of USD 1.5552 per Euro as well as (reportedy) pushing investors to hedge by buying oil and thus further increasing the world price of oil! What a messy situation, post-subprime bubble bursting!
Reportedly, analysts are concerned that the US Federal Reserbe's move only addresses short-term liquidity issues, but doesn't address underlying credit concerns and the US housing crisis!

Tues., March 11, 2008/Tackling subprime's effects on banks
The US Federal Reserve, the European Central Bank and central banks in the UK, Canada and Switzerland have launched yet another co-ordinated action to calm the credit markets. The injection of more than $200bn is aimed at easing the credit crunch and its impact on the wider economy. The news led to a surge in US stocks of more than 3% (their biggest one-day gain in five years!!!)

Fri., March 7, 2008/USA:
The US Federal Reserve (the US central bank) is making 200 billions of USD available to banks in an auction hoping to ease credit-crunch concerns.

Friday, March 7, 2008/USA:
Mortgage Bankers Association's data shows the failing loans rate was led by an increasing number of sub-prime borrowers unable to make payments in the fourth quarter of 2007.
A record 0.83% of loans entered the foreclosure process and the delinquency rate, of missed payments, was 5.82%.

Tues., March 4, 2008/USA - house market
The Chairman of the US Federal Reserve, Ben Bernanke, told a meeting of US banker that although lenders have scaled up their efforts to avoid "unnecessary" foreclosures, more can, and should, be done! Lenders should consider offering borrowers lower interest rates or extending their loan period to help them stay in their homes wherever possible, he said.
1.5 million US homeowners will see their fixed-rate period in their loans expire in 2008, imposing stress on many households due to the high variable rate cost to them! The average monthly payment for homeowners coming off these special deals is expected to rise by more than 10% to $1500!
He said there has been a 50% rise in foreclosures in 2007, to 1.5 million, and this is expected to worsen as mortgage repayments rise.
As per the wider economic effects he said:
"At the national level, the rise in expected foreclosures could add significantly to the inventory of vacant unsold homes - already at more than 2 million units at the end of 2007 - putting further pressure on house prices and housing construction,"
Mr Bernanke said solutions should be "prudent", and should take care not to reward irresponsible borrowers. "We want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalised." Note: How does this separation work???
To provide more incentives for lenders to do so, Mr Bernanke emphasised the financial cost to the banks of foreclosing in terms of taxes and legal fees as well as the detrimental impact on the value of the properties.
Note: How consistent is that?
What a mess the US situation is, and how come "nobody" foresaw this when interest rates were rising fast in recent years in the US?

Tues., March 4, 2008/Europe - housing market
According to a survey by the Royal Institution of Chartered Surveyors (Rics):
House price growth across Europe slowed sharply in the second half of 2007,
Rising interest rates (see eg Euro) rather than the credit crunch was the main reason for the trend
Predicts a further downturn in markets across Europe in 2008
More data:
House price inflation fell in the UK, the Netherlands and Sweden in the second half of 2007.
The UK is in better position than most European housing markets for prices to stabilise.
European housing markets not affected by US subprime like factors
Poland recorded the highest rate of house price increases in 2007, but sales of newly-built apartments in Warsaw fell later in the year.
7% fall in house prices in Ireland in 2007, the highest. 20% of the houses that were put up for sale in Ireland in January 2007 that were still on the market 10 months later!
200% reported real house price rises in the Baltic States in 2000-2006, slowdown in 2007, especially in Estonia and Latvia.
40% fall in permits for building new homes in Germany in 2007
House price rises accelerated in 2007 in Cyprus, possibly due to joining the euro in 2008 and the influx of foreign investors.

Sun., March 2, 2008/Finance/"Sovereign wealth funds"
SWFs (government-controlled investment funds) were one of the hottest topics at the World Economic Forum in Davos a few weeks ago. Does the nature of their ownership make thm less "lucrative" or less safe foregn investors, in that they could, in theory, become "tools" of non-economic ie political influence by those foreign governments? The issue is a hot topic in the EU and in the US these days.

Sat., March 1, 2008/EU - Competition Law - State Aids

The European Commission has begun an investigation into whether government assistance to two German banks to prevent them going bankrupt, offering further loans to the banks, constitutes illegal state aid. "Otherwise it is hard for European citizens to understand why they have to suffer from the economic downturn, while taxpayers' money is poured into once profitable banks that took excessive risks and might now avoid paying for their risky strategies," said Competition Commissioner Neelie Kroes.

Mon., Feb. 26, 2008/US - repossessions and foreclosure risks are way up in January
There was a 90% increase in the number of houses being repossessed by banks in January 2008 compared to January 2007.
Plus, 233,001 US homes received at least one notice about overdue mortgage payments , compared to 148,425 in January 2007, ie 57% up!
Meanwhile, house prices fell 1.3% in the last three months of 2007, compared with the previous three months and 0.3% compared with the same 3 months of 2006.

Sat., Feb. 16, 2008/USA:
"Project Lifeline, is a Bush administration's initiative, announced this week, to help US homeowners facing foreclosure. Privided by six of the US's largest financial institutions (that account for half of the country's mortgages), the program allows qualified homeowners to suspend foreclosure proceedings for 30 days while providing them with rewriting and refinancing assistance. The lending institutions say they will contact homeowners who are 90 days or more overdue on mortgage payments and work with them on ways to make their mortgages more affordable, thus viable.In the meantime, the biggest mortgage lender in the US, has reported a 41% fall in home loans in January 2008 compared to January 2007 and foreclosures have reached a record high.

January 30, 2008
The value of financial transparency
The leaders of the UK, France, Germany and Italian and the President of European Commission met on Jan. 29 to discuss the recent global market turmoil.

called on financial institutions to improve transparency in all their activities.
called for the prompt and full disclosure of the write-offs due to subprime by financial institutions
called on the IMF and other bodies to monitor risks better.
warned that if the finance industry did not address their concerns, they would consider imposing regulatory measures

US: Whatever happened to foresight?
The recent decision of the US Federal Reserve Bank to cut rates by a drastic 0.75% to 3.50% and pressure for more cuts to help keep the US economy out of recession mode begs, IMO, the following question:
When the Fed was gradually raising the rates from 1.0% in the middle of 2004 to 5.0% in late 2005 and to 5.5% from early 2006 until some time in 2007, how come it did not anticipate the effect it had on borrowers of all kinds and particularly to subprime lending? Even if the level of "penetration" of subprime lending into the US financial sector and the US economy (as well as the global financial sector and the world economy) was hard to fully anticipate, still, my question is, how come it seems to have been so unaccounted for or underestimated?
January 29, 2008

Jan. 29, 2008/ Eroding Trust
The leaders of the UK, France, Germany and Italian and the President of European Commission met on Jan. 29, 2008 to discuss the recent global market turmoil.
A. Merkel said that the lack of openness about the activities of some financial institutions had eroded trust and could led to a rise in protectionism.
"We need to have more transparency on the valuation of these new, very complex financial instruments"
Angela Merkel

Public Affairs - Regulatory and Economic combo?
Ministers of Finance from G8 nations meet in Japan in February.
"With the combination of the right regulatory response and the right economic response, I am confident that we will get through these difficulties and will continue to see growth."
A. Darling, UK Chancellor of The Exchequer (Minister of Finance in Euro-terms), Jan. 28, 2008

Monday, Jan. 28, 2008/USA
The number of new homes sold in 2007 dropped 26.4%, to 774,000, which beats the previous record drop of 23.1% set in 1980. New home sales in December fell 40.7% (!) compared to December 2006. The median price of a new home in 2007 was USD 246,900. Whereas prices are said to drop, that is almost the same level as in 2006, only 0.2 up%. What will happen with unsold new homes and the sale of potential repossessions and their impact on consumer confidence, consumer spending and a potential contraction of the Economy?

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