Harris & Ewing Sandwich vendor, Washington DC 1919
In essence, it’s really simple. We’ve seen over the last few days that the European Union is a federation of sovereign countries whose leadership has been found painfully – if not criminally – lacking in democratic principles, and several leaders of member states have been accomplices, on more than one occasion, in assaults on elected fellow leaders. That should say enough, and there is no doubt that down the line it will. It’s now a question of how do we get here from there, of how will Brussels be dismantled.
First, there was a passage from Tim Geithner’s new book. Then, there was a 3-part series ‘How The Euro Was Saved’ by Peter Spiegel for the Financial Times. Together, they deliver the following storyline: EU leaders refused to let Greece have a referendum on its bail-out, and toppled PM Papandreou to kill it. Then, afraid that Italian PM Berlusconi would make good on his threat to return to the lira if they stuck to their bail-out conditions, they toppled him. What this means to Europeans is that if they elect a government for their country, and it subsequently falls out of favor with Brussels, they can expect to see it overthrown, and likely have it replaced by a technocrat handpicked by the EU leadership (as happened in Greece and Italy). Ergo: Europe is not a democracy, and pretending otherwise is foolish. Democratic elections in member states are merely empty lip service exercises, because on important topics governments of member states have no say.
The EU leaders have been Brussels stalwarts for ages, and they’ll do anything they can to preserve their jobs and their status. Anything, in this case, includes overthrowing elected governments. The excuse for such behavior is that the EU and the euro MUST survive. The problem with that is that both only CAN survive if and when democratic rules are obeyed by all parties involved. Apparently, they are not. And that means it’s time to close the doors, and perhaps take legal action against those responsible for the coups in Athens and Rome. Don’t hold your breath for that to happen. And don’t think it won’t cause a bitter fight. The stalwarts are delusional and megalomaniacal enough to think that the end justifies the means, and that to hold together their idea of what Europe should be, which happens to be tied to their own cushy jobs and political power, they were right to execute the two coup d’états (three if you count Ukraine, but that’s another story).
The main candidates to be appointed head of the European Commission, a decision linked to next week’s European Parliament elections are Jean-Claude Juncker (center-right), a former Luxembourg PM, Martin Schulz (left), current chairman of the parliament, and Guy Verhofstadt (center), former Belgium PM. That’s basically all the flavors there are, and they all taste suspiciously equal. As I wrote yesterday, anyone who’s not happy with the direction Europe is taking – of more Europe, more Brussels all the time – has nowhere to go but fringe parties, mostly on the far right. Beppe Grillo’s Italian M5S movement is the only exception to that rule that I know of. Grillo wants an Italian referendum on EU and eurozone membership. Well, “they” don’t like referendums, as we know.
In a first debate late April between the 3 main candidates – they did throw in an obsolete Green “leader” for good measure -, when they were asked about the rise of Eurosceptic and extremist parties across Europe, Schulz said: “The tendency is European citizens not taking these elections seriously. If they don’t take this seriously we’re going to get more of these people in the parliament. For me as a German it is unacceptable that a nazi party would sit in the next parliament”. He then referenced ‘the ghost of Adolf Hitler’. If you follow the line of thinking here, it suggests that anyone skeptical of what happens in Brussels is automatically painted in a shade of fascism.
The three candidates represent the full spectrum of European politics: right, center, left. Those are your choices, the rest are suspect, if not outright nazi’s. Everyone you can vote for who can make an actual difference, or an actual decision for that matter, is pro-Brussels. And if you are not, you will have to vote for some fringe party, or stay home. But if you vote fringe, you’re labeled bordering-on-fascist. It’s eerily similar to Washington, where two parties, not even three, hold all the power and will continue to do so because they receive all the money.
It no longer matters, or means anything, that EU leaders or pro-EU leaders of member states will continue to claim that what goes on in Brussels is a democratic process, as they point to the elections. We now know those elections are but a curtain behind which anyone who doesn’t agree with the party line can count on being sacrificed for the greater good.
This is not to say that the original idea behind the EU was all that bad, or that not one single decision made in Brussels has been beneficial, but things went wrong along the way, the leadership overstepped their mandate in ways that can’t tolerate daylight. Replacing them, which will be hard enough to begin with as they’ve become so entrenched in their revolving door positions, wouldn’t do much good either: there’s a climate that has allowed for their actions, in what Ambrose Evans-Pritchard calls a ‘monetary dictatorship’, that will still be there. Brussels has turned into Rome in its last days -and so has Washington-. Megalomania and moral corruption lead to moral bankruptcy which leads to overall bankruptcy. It took a long time, and a lot of blood, to dissolve Rome. It would be in every European’s interest if it didn’t take that long to sweep the streets of Brussels clean. But it won’t be achieved through elections. For that, you’d need a democracy.
Oh, and large parts of Europe have hardly any fossil fuels left – except for coal in some cases, but there seems to be a problem with that 😉 -. One year of oil and gas left for Italy and France, five for Britain. It’s just like the Romans running out of resources. Brussels might want to give that some thought while they’re busy scheming for power. Or are they already planning to topple Putin next? We should almost hope so. They’d be run out of Dodge impaled on baguettes and wieners. The EU is a nice idea that’s run completely out of hand and out of control, even more than the US, and that’s saying something.
The first member state to leave the eurozone wins. Guaranteed. And one WILL be the first, that’s guaranteed too. Be your own boss, things will be hard enough going forward no matter what you do. Why would anyone want the incessant threat of a coup in their country hanging over their heads, every time they choose leaders who don’t toe Europe’s ‘official’ line? Why bother? Brussels makes you richer, you say? Even if that were true, which is highly doubtful, look at the price you’re paying to feel richer.
In just over five years Britain will have run out of oil, coal and gas, researchers have warned. A report by the Global Sustainability Institute said shortages would increase dependency on Norway, Qatar and Russia. There should be a “Europe-wide drive” towards wind, tidal, solar and other sources of renewable power, the institute’s Prof Victor Anderson said. The government says complete energy independence is unnecessary, says BBC environment analyst Roger Harrabin. The report says Russia has more than 50 years of oil, more than 100 years of gas and more than 500 years of coal left, on current consumption. By contrast, Britain has just 5.2 years of oil, 4.5 years of coal and three years of its own gas remaining.
France fares even worse, according to the report, with less than year to go before it runs out of all three fossil fuels. Dr Aled Jones, director of the institute, which is based at Anglia Ruskin University, said “heavily indebted” countries were becoming increasingly vulnerable to rising energy prices. “The EU is becoming ever more reliant on our resource-rich neighbours such as Russia and Norway, and this trend will only continue unless decisive action is taken,” he added. The report painted a varied picture across Europe, with Bulgaria having 34 years of coal left. Germany, it was claimed, has 250 years of coal remaining but less than a year of oil. Professor Anderson said: “Coal, oil and gas resources in Europe are running down and we need alternatives. “The UK urgently needs to be part of a Europe-wide drive to expand renewable energy sources such as wave, wind, tidal, and solar power.”
France will run out of its natural gas, oil and coal supplies within the next year, according to experts. The Global Sustainability Institute at Anglia Ruskin University also found:
• Italy has less than a year of gas and coal, and only one year of oil.
• Some Eastern European members fare much better, with 73 years left of coal in Bulgaria and 34 years of coal in Poland.
• Germany has over 250 years left of coal but less than a year of oil and only two years of gas.
• Russia has over 50 years of oil, over 100 years of gas and over 500 years of coal, based on their current levels of internal consumption.
The revelations about EMU skulduggery are coming thick and fast. Tim Geithner recounts in his book Stress Test: Reflections on Financial Crises just how far the EU elites are willing to go to save the euro, even if it means toppling elected leaders and eviscerating Europe’s sovereign parliaments. The former US Treasury Secretary says that EU officials approached him in the white heat of the EMU crisis in November 2011 with a plan to overthrow Silvio Berlusconi, Italy’s elected leader. “They wanted us to refuse to back IMF loans to Italy as long as he refused to go,” he writes. Geithner told them this was unthinkable. The US could not misuse the machinery of the IMF to settle political disputes in this way. “We can’t have his blood on our hands”.
This concurs with what we knew at the time about the backroom manoeuvres, and the action in the bond markets. It is a constitutional scandal of the first order. These officials decided for themselves that the sanctity of monetary union entitled them to overrule the parliamentary process, that means justify the end. It is the definition of a monetary dictatorship. Mr Berlusconi has demanded a parliamentary inquiry. “It’s a clear violation of democratic rules and an assault on the sovereignty of our country. The plot is an extremely serious news which confirms what I’ve been saying for a long time,” he said.
There has been a drip-drip of revelations. Italy’s former member on the ECB’s executive board, Lorenzo Bini-Smaghi, suggested in his book last summer that the decision to topple Berlusconi (and replace him with ex-EU commissioner Mario Monti) was taken after he started threatening a return to the Lira in meetings with EU leaders. I have always found the incident bizarre. Italy had previously been held up an example of virtue, one of the very few EMU states then near primary budget surplus. It was not in serious breach of deficit rules. It was in crisis in the Autumn of 2011 because the ECB had raised rates twice and triggered what was to become a deep double-dip recession. Yet the blame for this disastrous policy error was displaced on to Italy’s government.
Fresh details emerged this week in a terrific account of the crisis by Peter Spiegel in the Financial Times. The report recounts the hour-by-hour drama at the G20 Summit in Cannes as the euro came close to blowing up. It culminates in the incredible scene when President Barack Obama takes over the meeting and tells the Europeans what to do, causing Chancellor Angela Merkel to break down in tears: “Ich bringe mich nicht selbst um.” I won’t commit suicide. That particular spasm of the crisis – and there have been three episodes (May 2010, Nov 2011, and July 2012) when the eurozone would have splintered without drastic action – was set off by the shock decision of Greek premier Georges Papandreou to call a referendum on the austerity terms of his country’s bail-out. He thought a vote was needed to stop Greece spinning out of control, and to pre-empt a possible military coup (as he saw it). [..]
Parliamentary formalities were upheld in both Italy and Greece. The presidents appointed the new leaders in each of the two countries. Both Monti and Papademos are honourable and dedicated public servants. Yet these were clearly coups d’etat in spirit, if not in constitutional law.
Mario Draghi could end the search for an asset worth buying if he’d only turn to the euro area’s jointly issued crisis bonds. That’s the analysis of Guntram Wolff, director of the Bruegel institute in Brussels, who is a frequent contributor to closed-door meetings of euro-area finance ministers. He proposes that the European Central Bank president tap a 490-billion-euro ($669 billion) pool of debt issued by agencies that include the region’s two bailout funds. ECB officials faced with a stumbling economy and inflation stuck at less than half their goal have floated the idea of adding stimulus via asset purchases, akin to quantitative easing, only to be confronted with a shortage of suitable instruments.
The complexity presented by 18 government debt markets means Draghi is instead priming investors for more limited action such as interest-rate cuts for now. Debt issued by the bailout funds represents “the only ‘European sovereign bonds,’ if you wish; they’d be European assets which have European quality, and therefore would be of low risk,” Wolff said in an interview in Berlin yesterday. “My feeling is that the ECB is still very shy. The easy thing will be to lower the deposit rate. We all know the effect of this is not very big.” [..] Any measure is unlikely to resemble the QE programs deployed by the U.S. and U.K., where central banks have bought swathes of domestic public debt to boost prices, according to Wolff.
The ECB would have to deal with the politics and practicalities of intervening in so many different markets. “There’s no way you can avoid that,” Wolff said. “It’s always a political debate, and that’s why my sense is that they’ll probably shy away from government bonds because government bonds are even more political than others. Debt traded on secondary markets issued by the European Financial Stability Facility and the European Stability Mechanism, which since 2010 have lent cash to crisis states such as Greece, Ireland and Portugal, provide a simpler alternative, he said. The bonds are backed by guarantees from the euro-area governments.
It was yet another near-catastrophe in Greece – which by mid-2012 had experienced street riots, soaring unemployment and austerity that had produced four years of Great Depression-style economic contraction – that would spark European leaders to act decisively. Since 2009, Greece’s economy had shrunk by 20%. At no time in the crisis was Europe’s single currency more at risk of blowing apart than the weeks either side of the Greek parliamentary election in June. Grexit planning took on new urgency when it appeared that the leftist Syriza party – led by anti-bailout insurgent Alexis Tsipras – was on the verge of winning. “That was the time when we really said: We’ve got to finalise our work,” said another person involved in Plan Z.
With most of the world’s economic leadership flying to Los Cabos, Mexico, for the annual Group of 20 summit the same weekend as the Greek vote, a small group of top EU officials stayed at their desks in case Plan Z had to be activated. They were led by Olli Rehn, EU economic commissioner, who cancelled his flight to Mexico to stay in Brussels. Mario Draghi, the European Central Bank chief, remained in Frankfurt and Jean-Claude Juncker, the Luxembourg prime minister who headed the eurogroup of finance ministers, was also on call.
Plan Z was never used. Mr Tsipras’s Syriza party finished second, allowing Greece’s mainstream parties to form an uneasy coalition that eventually agreed to stay the bailout course. But senior officials said the near-miss that summer, and the ensuing debate about Greek membership, helped focus minds in capitals across the eurozone – particularly Berlin, where fights over the advisability of Grexit raged for three more months, before Angela Merkel, the German chancellor, finally put an end to them.
Since the start of the crisis, ECB firefighting power had been politically constrained by Germany. Mr Monti’s idea of the ECB buying bonds of struggling countries had long been seen as the solution to the crisis among policy makers from Washington to Paris. If the ECB made such a commitment, especially if it were unlimited, no bond trader would dare challenge its bottomless pockets. Panicked sell-offs could end overnight, advocates argued. But many in Berlin saw such ECB action as improper. Buying eurozone bonds was, in essence, lending those governments money printed by the central bank, a practice known as “monetary financing”. That not only put off the day of reckoning for ministers tasked with balancing budgets, it could also spur inflation.
Mr Trichet had twice pulled the euro back from the brink – when he agreed to purchase Greek bonds at the outset of the crisis in May 2010 and when he expanded the bond-buying programme to Italy and Spain in the turbulent summer of 2011. But his plans were always described as limited. “It was a way for governments to buy time,” said Lorenzo Bini Smaghi, an ECB executive board member under Mr Trichet. “It was not something to save the euro.” When Mr Draghi took the ECB helm in November 2011, the bank resembled a foreign outpost in enemy territory. The German public, never enthusiastic about bailouts, were outright hostile towards Mr Trichet’s bond-buying.
His efforts, formally known as the security markets programme or SMP, had been challenged in the German constitutional court and survived. But they also led to the resignation of Axel Weber, the Bundesbank chief. Mr Trichet’s decision in August 2011 to expand SMP to Spain and Italy also led to the loss of a second German who, until then, had kept his objections private: Jürgen Stark. The lone German on the ECB executive board, Mr Stark had been uncomfortable with Mr Trichet’s approach but had refrained from public objections. “I was loyal maybe for too long to the ECB,” Mr Stark said. The day after the ECB board approved Italian and Spanish bond-buying, Mr Stark resigned. There was little doubt in Berlin who would be next in line: Jörg Asmussen, the shaven-headed economist who had been the finance ministry’s point man since the crisis began.
Ralph Acampora, who is often known as the godfather of technical analysis, tends to be bullish on stocks. But on Thursday, as the major averages all dropped more than 1%, he expressed a massively bearish view on U.S. equities. On “Futures Now,” Acampora predicted that the S&P 500 would drop “10, maybe 15% between now and maybe October,” but said it would be much worse for small caps, mid-caps and tech stocks. “If you ask me about the Russell and the Nasdaq Composite and the S&P MidCap, I think you’re talking about 20, 25%. And I call it a stealth bear market going on.” The charting guru, who is director of technical research at Altaira, says he’s reminded of the way markets were behaving 20 years ago. “The last time I saw anything like this was in 1994, when the Dow and the S&P were in a 10% trading range all year, and then under the surface they were just ripping them apart. I have a sick feeling that we might be doing that again,” he said.
Tick, Tick, Tick.
Chinese banks had the biggest quarterly increase in bad loans since 2005 as a slowdown in the world’s second-largest economy causes defaults to rise. Nonperforming loans rose by 54 billion yuan ($8.7 billion) in the three months through March to 646.1 billion yuan, the highest level since September 2008, according to data released by the China Banking Regulatory Commission yesterday. Bad loans accounted for 1.04% of total lending, up from 1% three months earlier. The 10th straight quarterly increase in defaults adds to concern banks’ profitability may slip as they build buffers to cover loan losses.
Policy makers have also been cracking down on financing to weaker borrowers to rein in total debt that has climbed to more than double the nation’s gross domestic product. “Asset quality is now the biggest overhang on the banking sector,” Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by phone. “The government’s reluctance to use stimulus and ease monetary policy has made it difficult for many borrowers to repay debt.” Concern that profitability will decline further dragged the Hong Kong shares of China’s five biggest banks down by an average 7.3% this year to yesterday, compared with the benchmark Hang Seng Index’s 2.5% drop. The lenders traded at an average 4.8 times estimated 2014 profit, close to the lowest valuations on record.
I smell an implosion.
Spanish, Italian, Greek and Portuguese stocks tumbled on Thursday, after euro zone growth data disappointed and uncertainty lingered about the prospect of the European Central Bank announcing monetary stimulus soon. Preliminary data for Greece showed that economic activity contracted in the first three months of the year, down 1.1% on the same quarter a year before. The Cypriot economy contracted by a massive 4.1% over the period, while the Italian economy shrunk 0.5%. Economic activity across the region disappointed with the exception of Germany, which saw expansion double. The 18-country bloc saw economic growth of 0.2% in the first quarter, compared with fourth quarter 2013. This missed analyst expectations of 0.4% growth. In the fourth quarter last year GDP also grew by 0.2%, data from Eurostat showed.
After the data was released, the Greek benchmark stock index closed down around 4.6%. Portuguese and Italian stocks closed unofficially down 2.8% and 3.7% respectively. “It is not surprising, and disappointing GDP will continue for the next two years if we do not facilitate the life of the business community,” Secretary-General of Eurochambres Arnaldo Abruzzini told CNBC. “It is true that certain members states are seeing a rebound on a GDP basis, but this is minimal. Many businesses – particularly those that have been hit hard by the crisis – are still struggling. In Italy, Greece, Spain, the rate of businesses that close down still outweighs those that are being created,” he said.
What do you mean, that’s not funny?
Portugal exits its international bailout program tomorrow, regaining the economic sovereignty the nation lost after the European debt crisis erupted while facing enduring challenges to its finances. The Iberian country’s 214 billion euros ($293 billion) of debt is the third highest in the euro region as a percentage of gross domestic product. The economy is about 4% smaller than in 2010, a year before the government had to ask for an international rescue. Borrowing costs based on 10-year bond yields are almost twice those of France and all three major ratings companies consider the country non-investment grade.
“There will now be two or three decades of lean times for the state, which will have to purge that debt burden,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 87 million euros in assets including Portuguese government debt. “The debt burden is sustainable, but it’s heavy.” Portugal decided to mimic Ireland in exiting the bailout without the safety of a precautionary credit line after last month auctioning bonds for the first time since requesting the 78 billion-euro rescue package. While the country has emerged from its longest recession in at least 25 years, Prime Minister Pedro Passos Coelho’s government must trim spending this year and next to meet deficit targets.
Protectionism! They might as well leave the EU.
The French government has issued a decree allowing it to block any foreign takeovers of French companies in”strategic” industries, throwing up a potential roadblock to General Electric’s planned $16.9 billion bid for Alstom’s energy assets. The decree published in the official state gazette onThursday, and seen by Reuters, will give the state much-increased powers to block foreign takeovers in the energy, water, transport, telecoms and health sectors. Any such acquisition will now need the approval of the Economy Minister, the decree published in France’s Official Journal said.
The government had not previously given any hint it was considering such a measure, although Economy and Industry Minister Arnaud Montebourg has openly criticized the Alstom-GE proposal and instead advocated a European tie-up with Germany’s Siemens. The French engineering group has given itself until the end of the month to review its options. “With this decree, we’re armed to continue discussions and negotiations with the two companies that have expressed an interest,” a source close to Montebourg said. Cash-strapped Alstom, which builds France’s high-speed trains, was bailed out by the French government a decade ago and is seen by many in France as an embodiment of the country’s engineering prowess. “This decree will smooth the way for talks with GE and Siemens and allow our demands to get more of a hearing,” the source said. The veto will not necessarily be used, the source added, but is aimed at giving France a seat at the table.
If you can’t buy whole companies then buy bits and pieces of them. That’s the logic propelling private-equity firms this year as they gobble up divisions shed by their parent. These so-called carve-outs are giving private-equity firms something to buy and clean up, at a time when leveraged buyouts of entire companies have all but stopped, as U.S. stock indexes reach records. Through April, carve-out deals accounted for a quarter of all U.S. private-equity purchases this year, up from an average of 13% in the previous decade, according to data compiled by Bloomberg. LBOs — which can generate healthy returns with relatively less effort — are just 6% of all deals compared with an average of 50% over 10 years.
“In an environment where it’s difficult to pay a premium to buy publicly traded companies, divestitures are one of the most attractive deals for private equity,” said Chris Sullivan, head of the Americas financial sponsors group — which is charged with advising private-equity firms on deals — at Barclays Plc. These transactions jumped to $13.3 billion this year through April, from an average of $8.8 billion in the same period over the previous decade. That extends a trend from last year, when private-equity firms bought 180 corporate spinoffs, the most since 2002, according to data compiled by Bloomberg. Carlyle Group LP bought three business units, including Johnson & Johnson’s medical diagnostics business, accounting for almost all of its $9.8 billion total deal value so far this year, according to data compiled by Bloomberg.
I thought they all wanted it this way?!
Britain’s richest 1% have accumulated as much wealth as the poorest 55% of the population put together, according to the latest official analysis of who owns the nation’s £9.5tn of property, pensions and financial assets. In figures that also lay bare the extent of inequality across the north-south divide, the Office for National Statistics said household wealth in the south-east had been rising five times as fast as across the whole country. The average wealth of households in the southeast had surged to £309,000 at the end of 2012, up 30% since the first wealth report published by the ONS covering 2006-8 – while the average rise in England was only 6%. But wealth in the north-east had fallen, the only region where it did so, to an average of just under £143,000. In Scotland the figure was £165,500.
The data also shows that one in nine households have second homes or rental properties and one in 14 sport a personalised number plate on their car. Northern regions lost out after a dramatic rise in stock market values that was grabbed mostly by households in the south east, the ONS figures show. The situation is likely to have worsened following an 18% surge in house prices over the past year in the south-east and even higher at the top end of the market. A rush to save among richer households as the recession deepened boosted the nation’s total wealth and ensured Britain’s long-established financial inequality remained in place, with the top 10% laying claim to 44% of household wealth – while the poorest half of the country had only 9%.
Rachael Orr, Oxfam’s head of poverty in the UK said the figures were a “shocking chapter in a tale of two Britains”. The charity recently reported that five billionaire families controlled the same wealth as 20% of the population. “It is further evidence of increasing inequality at a time when five rich families have the same wealth as 12 million people,” she said. “We need our politicians to grasp the nettle and make the narrowing gap between the richest and poorest a top priority. It cannot be right that in Britain today a small elite are getting richer and richer while millions are struggling to make ends meet.”
Huh? Bubble? Where?
Loans to landlords are almost 70pc higher in value than a year ago, running at over £2bn per month. The growth in this form of lending outstrips the growth in most other mortgages, as the popularity of buy-to-let investment continues to gain hold. The Council of Mortgage Lenders’ March figures, published on Thursday, revealed a continuing recovery in lending across the whole housing market. First-time buyers continued to flock through lenders’ doors, with loans to that group 34pc higher than in March 2013. Loans to home-movers – those who are moving up the housing ladder – were 11pc higher.
The number of loans taken out as “remortgages”, where property owners stay put but switch their loan for a better rate, showed a modest 5pc year-on-year increase. But buy-to-let lending was the outlier in terms of growth. In March 16,200 loans were advanced, an increase in number on March 2013 of 56pc. The value of the loans, at £2.2bn, was up by 69pc on March 2013. By contrast first-time buyers took out 24,400 loans in the month, worth £3.4bn. Home-movers (ie, excluding those remortgaging), who borrowed to purchase another property in which to live, took out 50,500 loans worth £8bn. The figures showed that for every £5 lent to a home buyer or mover, £1 was lent to a property investor.
And he never will. Drag him before the Senate, put him under oath!
One of the most puzzling aspects of the financial crisis was the zig-zag-zig by the U.S. authorities, who saved Bear Stearns from bankruptcy, then let Lehman Brothers fall off the cliff only to rescue AIG a day later. After plowing through the first half of Tim Geithner’s book “Stress Test,” I’m none the wiser. Geithner, who was at the helm of the New York Federal Reserve during the meltdown and then became President Barack Obama’s Treasury secretary in its aftermath, has no time for “moral hazard fundamentalists” who object to bailouts for banks. “The truly moral thing to do during a raging financial inferno is to put it out,” he argues. So why didn’t he throw buckets of dollars on Lehman when it was blazing away?
After saying his book isn’t meant to cast him as the Cassandra of the financial crisis, Geithner tries to convince us that he was ahead of the curve from the moment he arrived at the Fed. “Even though the financial sector seemed healthy, I talked about the systemic risks in almost every speech I delivered as New York Fed President.” That talk failed to translate into action. In 2005, Geithner advisers Lee Sachs and Stanley Druckenmiller started bringing him graphs showing the U.S. credit boom, which the trio dubbed “Mount Fuji” charts. The alarms that should have sounded didn’t go off. In August 2006, he played truant from a conference to go fly fishing and his guide, a mortgage broker, told him “horror stories of sketchy loans to homeowners with sketchy credit.” Still the bells stayed silent.
A year later Countrywide, the largest mortgage lender in the U.S. with $500 billion of housing loans in 2006, got into trouble. In mid-August 2007, Bank of New York Mellon threatened to pull Countrywide’s funding unless the Fed indemnified it against potential losses. Geithner refused; instead, he strong-armed the bank into holding fire in exchange for Countrywide upgrading its collateral. Then the funding that kept Bear Stearns afloat disappeared almost overnight: “This felt much darker than the Countrywide scare, because Bear seemed more systemic, and the broader financial world was in a much more fragile place,” Geithner writes.
A riveting debate between “Black Swan” author Nassim Taleb and former Treasury secretary and White House adviser Larry Summers captivated the SALT hedge-fund conference in Las Vegas Thursday. Taleb, who recently authored a paper entitled “Skin in the Game,” argued that the aftermath of the financial crisis unfairly rewarded bad actors and that the system remains dangerous. Summers, who served as Treasury secretary under Bill Clinton and more recently as an adviser to Barack Obama, took exception and charged that Taleb was being unrealistic about the difficulties identifying the institutions that pose systemic risk. Summers told Taleb that he was for more capital, more liquidity, living wills for banks and procedures to wind them down. “What are you for?” he challenged.
“I’m for punishment,” Taleb replied. Taleb outlined a system in which everyone would know which systemically important banks would be bailed out, but would presumably see strict oversight of bonuses and operations afterward. Other institutions would be left to fail, he said. Summers countered that such a system was in place prior to the financial crisis. But when push came to shove, Bear Stearns, an investment bank that wasn’t envisioned as systemically important, was rescued. And then we all know what happened when Lehman Brothers failed. Summers said that building a system is sort of like saying you’ll never pay ransom to kidnappers. It sounds good in practice, but in reality sometimes even the Israelis pay ransom, he said. Taleb had the final word, saying the system should be designed so that you can’t get upside without being exposed to the downside.
US politics at its finest.
The latest noises out of both Fannie and Freddie are for increasing intrusion into housing, which is a sharp departure from where this was all heading (and where it should). The previous GSE administration (Ed DeMarco left in January, replaced by Mel Watts) had left the impression of winding down the troubled firms that have been in conservatorship since the week before Lehman failed. Now Watts has made the statement that Fannie and Freddie are actively seeking a new entrance (really a return) to GSE favored status. As part of winding down these government hybrids (in name), the plan was to reduce the ceiling on individual mortgage loans, thereby requiring more and more private participation in mortgages. Under Watts, that has apparently been scrapped.
Instead, it looks like Fannie and Freddie are seeking to reduce the credit standards for loan put-backs – legal instruments put in place after the collapse where it was “noticed” that banks “sold” all manner of junk loans to the GSE’s. The put-back clauses basically require any loan that begins toward NPL is mandatorily repurchased by the originator, indemnifying the GSE’s (and thus taxpayers) from more imprudent losses (really the breakdown of actual intermediation). That has led, rightfully, to a dramatic tightening of lending standards since banks do not want put-back risk after sale.
The theory that Watts seems to be courting, and which Santelli is rightfully upset about, is that reducing put-back standards amounts to the same type of behavior as we saw during the big housing bubble. In reality, it is an attempt to inject more leverage into housing. I don’t think the timing is coincidental here, particularly as even FOMC members and Janet Yellen herself have gone soft on housing interpretations lately. It has become pretty clear that the mini-bubble of Bernanke’s QE3 is being burst with his taper gift to the new regime. What better way to try to mitigate the damage (decimation) in mortgages than stirring up GSE favoritism.
But of course.
Yesterday we mocked China for being desperate enough to push its tumbling housing market (which directly and indirectly accounts for some 80% of Chinese GDP per SocGen estimates) no matter the cost, that at least 20 developers were offering the kinds of mortgages that resulted in the first credit bubble crack up boom and collapse, namely “Zero money down.” Little did we know that the US, never one to lag in the financial innovation department had once again one-upped China, by bringing back from the dead the company that according to Housing Wire was “once a poster child for pre-crash subprime lending” – Ditech Mortgage Corp. Don’t remember ditech? Then you certainly were not in the housing market during the peak bubble years last time around: ditech, which hasn’t been in the news in nearly five years, will also be developing co-branded and joint-ventures with financial institutions that want to offer mortgages.
Supposedly, ditech is one of the better-known brands thanks to its heavy consumer advertising in the first half of the 2000s – remember the “Lost another loan to ditech!” ads? But best of all, ditech was known as a leader in subprime. The bulk of the mortgages were interest-only, low-documentation subprimes, and ditech was a pioneer in offering 125% loans allowing the borrower to borrow more than the sale price. So just how does Ditech plan on making its grand (re)entrance? With a bang, of course: “Ditech Mortgage Corp. is launching a new three-pronged approach to staking out territory with direct consumer lending, retail lending and correspondent lending with their 600-plus institutional partners. (In all nonformal references, the company goes with a lower-case spelling.)
How is it not a religion if all the Lord created can be expressed in dollar terms?
Climate change will be a significant factor in sovereign credit ratings and is already putting them under downward pressure, Standard & Poor’s Ratings Services (S&P) warned on Thursday. In a new report, S&P argued that climate change – and particularly global warming – will hit countries’ economic growth rates, their external performance and public finances. “Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness, in most cases negatively,” it said in the report. Recent bouts of extreme weather – from Typhoon Haiyan in the Phillipines to heavy flooding across the United Kingdom — have drawn attention to the financial and economic effects of climate change.
They have also highlighted the growing cost of natural disasters. According to reinsurer Munich Re, overall losses in East Asia, for instance, used to be below $10 billion per year, but over the past decade have regularly topped $20 billion – and peaked at over $50 billion. But despite this surge in extreme weather events, S&P has not, to date, revised the rating of a sovereign as a result. “However, assuming that extreme weather events are on the rise in terms of frequency and destruction, how this trend could feed through to our ratings on sovereign states bears consideration,” it said in the report.
According to S&P, poorer and lower-rated countries will be the hardest hit by climate change. All of the 20 nations ranked most-vulnerable by S&P are emerging markets, with the vast majority in Africa or Asia. “This is in part due to their reliance on agricultural production and employment, which can be vulnerable to shifting climate patterns and extreme weather events, but also due to their weaker capacity to absorb the financial cost,” S&P said. It added that this could contribute to rising global rating inequality.
A draft law submitted to the Russian parliament seeks to impose punishment up to criminal prosecution to producers of genetically-modified organisms harmful to health or the environment. The draft legislation submitted on Wednesday amends Russia’s law regulating GMOs and some other laws and provides for disciplinary action against individuals and firms, which produce or distribute harmful biotech products and government officials who fail to properly control them. At worst, a criminal case may be launched against a company involved in introducing unsafe GMOs into Russia. Sponsors of the bill say that the punishment for such deeds should be comparable to the punishment allotted to terrorists, if the perpetrators act knowingly and hurt many people.
“When a terrorist act is committed, only several people are usually hurt. But GMOs may hurt dozens and hundreds. The consequences are much worse. And punishment should be proportionate to the crime,” co-author Kirill Cherkasov, member of the State Duma Agriculture Committee told RT. Russian criminal code allows for a punishment starting with 15 years in jail and up to a life sentence for terrorism. Less severe misdeeds related to GMOs would be punishable by fines. For instance the administrative code would provide for up to 20,000 rubles (US$560) in fines for failure to report an incident of environmental pollution, which would also cover harmful GMO contamination, if sponsors of the bill have their way.
Russia gave the green light to import of GMOs and planting of bioengineered seeds as part of its accession to the WTO, but the Russian government remains skeptical of GMOs. In April, Prime Minister Dmitry Medvedev announced that his cabinet will postpone the beginning of certification of GMO plants for growth in Russia due to lack of proper infrastructure needed to test their safety. The government also opposes imports of GMO food, saying the country has enough farmlands to provide enough regular food to feed itself.