Wednesday, November 9, 2011

Today's links

1--ROUBINI: The Next MF Global Collapse Could Be Goldman Sachs, Business Insider

Excerpt: Nouriel Roubini was in fine form yesterday, scaring the bejeezus out of his followers on Twitter by saying that several huge financial institutions could collapse in the blink of an eye like MF Global.

These houses of cards, Roubini tweeted, include:
Goldman Sachs, Morgan Stanley, Jefferies, Barclays

The problem, as Roubini has consistently warned, is the banks' dependence on short-term financing to maintain their long-term asset leverage and run their businesses.

What killed MF Global, Lehman Brothers, Bear Stearns, AIG, and other huge financial firms, after all, was the sudden refusal of short-term lenders to continue lending money to the firms.

Every day, the big Wall Street firms borrow tens of billions of dollars in low-cost short-term loans. They then use this money to make long-term bets on assets that yield more than the money costs to borrow. And then they happily keep the difference between the two.

In good times, the banks come to take this funding for granted: They just keep rolling over their huge debts every day, repaying the old loans with the money from new ones.

When the overnight lenders suddenly get suspicious and the money disappears, however, it's as if the oxygen is suddenly sucked out of the room.

2--MF Signs Death Warrant for Short-Term Funding: William D. Cohan, Bloomberg

Excerpt: People ask me all the time: How could Wall Street powerhouses such as Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. disappear virtually overnight?

How could MF Global Holdings Ltd. be here one day and gone the next? Why was Jefferies Group Inc., the midsized investment bank, whipsawed last week by rumors about its very survival because of questions about its exposure to European debt?

What the demise of Bear, Lehman, Merrill, MF Global -- and the near collapses of Jefferies, Goldman Sachs Group Inc. and Morgan Stanley (before the latter two became bank holding companies in September 2008) -- reveal in spades is that the age-old model by which these firms finance themselves is irreparably broken and should be outlawed.

MF Global found itself in financial peril so quickly because its short-term lenders decided almost overnight that they no longer wanted to take the risk of lending money to the firm. Jefferies faced the same situation -- even if it stanched the bleeding last week -- and it isn’t out of the woods. Both provide further evidence that the short-term funding model for securities firms needs to be ended because it’s simply too risky.

Before the recent financial crisis reached its most acute stages, beginning in March 2008, the dirty secret of securities firms was that without the ongoing financial support of their short-term lenders they couldn’t stay in business. In effect, the short-term lenders to firms such as Bear Stearns and Lehman had a free option -- every night -- about whether to continue doing business with them....

Admittedly, before Bear Stearns collapsed over the Ides of March more than three years ago, very few financial executives had any appreciation for this subtle funding dynamic. Yet nothing is more fundamental to most banks’ operational strategies than the ability to borrow short and lend long. Such backroom plumbing was thought best left to the firm’s repo desk and its treasurer, all blessed with a little oversight from the chief financial officer and other top executives....

Before Bear Stearns collapsed, most senior Wall Street executives would have never imagined that overnight lenders would decide to stop financing their business. But after Bear, then Lehman and Merrill Lynch, went down and was almost followed by Morgan Stanley and Goldman Sachs -- who were saved only by their immediate access to the Fed’s discount window, which made moot the question of where they would get short-term funding -- there could be no more credible excuses for not understanding the tenuousness of the funding model.

3--Gloomy outlook for China exporters as factory closure wave looms, Reuters

Excerpt: Up to a third of Hong Kong's 50,000 or so factories in China could downsize or shut by the end of the year as exporters get hit by cost rises and darkening global demand for Chinese goods, a major Hong Kong industrial body said on Tuesday.

The Federation of Hong Kong Industries, which represents around 3,000 industrialists running factories in China, said it expected orders in the second half of this year and the first half of 2012 to fall between 5-30 percent.

The European debt crisis and a fragile U.S. economy have depressed this year's Christmas orders, Stanley Lau, deputy chairman of Hong Kong's leading industrial promotion body, told a news briefing.

He said a consolidation was on the cards, with around a third of Hong Kong's 50,000 or so factories in China likely to scale down operations or close by year-end.

"We feel that this is not an overestimate," said Lau, who is also the owner of a Hong Kong watch factory in China, citing higher raw material costs and rising factory worker wages, which had already risen up to 20 percent this year.

"Many (factory owners) can't see when the market will have a rebound so they are trying to cut their losses by closing, before all their money is gone," Lau said.

4--Eurozone ministers fail to create €1 trillion bail-out fund, Telegraph

Excerpt: Eurozone finance ministers have failed to sanction measures to create the bloc's crucial €1 trillion bail-out fund – despite warnings that Europe is dangerously ill-equipped to cope with the financial and economic crisis enveloping Italy.

Despite publishing a more detailed mandate following a summit in Brussels, the Eurogroup delayed agreeing specifics on how to leverage the €440bn European Financial Stability Facility (EFSF), risking further market turmoil ahead of votes on Tuesday that could topple Silvio Berlusconi's government.

The EFSF also pushed ahead with a 10-year bond auction which it had put off from last week because of lack of demand. The fund, which is supposed to be the eurozone's key weapon against the debt crisis, managed to raise €3bn but only after having to pay record returns to entice investors.
Joachim Fels of Morgan Stanley said: "The leveraged EFSF may still turn into a bazooka but so far it looks more like a water pistol."

The fund is hampered by uncertainty over Greece's bail-out and eurozone membership. The country is expected to announce the new head of its interim Government on Tuesday.

Italian government bond yields hit 14-year highs, crossing the threshold economists say is unsustainable for the country's €1.9 trillion debt pile. The yield on 10-year bonds soared to 6.68pc at one point, leading to frantic speculation that Italy will require an international bail-out.
Christine Lagarde warned the crisis was in a "dangerous" phase that is threatening the wider global economy. Speaking in Moscow, the International Monetary Fund chief said: "The economy in general is in a dangerous and uncertain phase. There is clearly a darkening outlook, rising risks. If the storm strengthens further in the euro area, emerging Europe as its closest neighbour would be severely hit."

5--Why is the bankruptcy of the Greek government different from the bankruptcy of California?, Dani Rodrik's weblog

Excerpt: California shares a common currency with the rest of the U.S., just as Greece (or Ireland or Spain) does with the Eurozone. But when the state government in California goes bust:

•Californians automatically get welfare checks and other transfer payments from Washington.

•Californian borrowers do not get shut out of credit markets and those with healthy balance sheets can borrow from the rest of the nation. This is because there is no “California risk” the way there is Greek sovereign risk; borrowers in California operate under a federal legal regime and the state of California cannot force them to hold California paper or prevent them from repaying their debts to non-Californians.

•The Federal Reserve stands ready to act as a lender of last resort to any Californian bank. (Why? Well, because it is one country after all…)

•California has representatives and senators in Washington, D.C., who can push for remedies for California’s economic troubles through political channels (e.g., fiscal spending, federal assistance, debt relief)

•Californians can easily move and seek jobs elsewhere in the U.S.
The flip side of these benefits is that there is no expectation that Washington, DC must bail the state government.

A subtle point here is that Washington’s “no bail
out” commitment is rendered credible by the direct support residents of California get from Washington, DC. This support limits the economic/political fallout in California. By contrast, the bankruptcy of the Greek government condemns the entire Greek financial system and sends the entire Greek economy down the drain.

6--Housing Vacancies Still Near Record High, CEPR

Excerpt: Perhaps I missed it, but I didn't see any coverage of the Census Bureau's release of data on vacancy rates for the third quarter. It's a mixed picture.

The vacancy rate for rental units had fallen sharply in the second quarter from 9.7 percent to 9.2 percent. However this was completely reversed in the latest data, which showed a 9.8 percent vacancy rate. This is still down from the peak 11.1 percent peak reached two years ago, but far above historic vacancy rates. The vacancy rate for ownership units was little changed at 2.4 percent. This is down from a peak of 2.9 percent in the fourth quarter of 2008, but almost a full percentage point above the average from the pre-bubble period.

The vacancy data certainly suggest that any hopes of an upturn in housing any time soon are seriously misplaced. There is along way to go before the excess supply is depleted.

7--Germany to G20: German Gold “Must Remain Off Limits”; Italian Gold Sale Again Proposed In Germany, WSJ via Zero Hedge

Excerpt: Germany has rejected proposals by France, Britain and the US to have German gold reserves used as collateral for the Eurozone bailout fund.
Germany Economy Minister Philipp Roesler said on Monday that the
German people's gold reserves cannot be touched and “must remain off

"German gold reserves must remain untouchable," said Roesler, who is
head of the Free Democrats (FDP), a partner in Chancellor Angela
Merkel's coalition.

Roesler added his voice to opposition to an idea proposed at the G20
summit of using reserves including gold as collateral for the euro zone
bailout funds.

The Bundesbank and Mr. Seibert, spokesman for Merkel, said Sunday
that they too ruled out the idea discussed at the summit of Group of 20
leading economies last week.

Mr. Seibert dismissed media reports yesterday that the plan to boost
bailout funds, to aid Italy or another large euro zone country, would
require Germany to sell off part of its gold and foreign exchange

“Germany’s gold and foreign exchange reserves, administered by the
Bundesbank, were not at any point up for discussion at the G20 summit in
Cannes,” he said.

Mr. Seibert was responding to proposals to sell about €15 billion of
Germany’s gold reserves of over 3,000 metric tonnes, worth a reported
€139 billion.

A Bundesbank spokesperson said it was aware of the plan and said the institution “rejected” plans to touch federal reserves.

The Sunday Frankfurter Allgemeine newspaper said the
initiative marked a fresh round in an ongoing struggle between the
Bundesbank and the Merkel administration over reserves the bank manages
on behalf of the German people.

8--Housing: Shahien Nasiripour, Michael Mackenzie and Nicole Bullock, Financial Times

Excerpt: ... report that the U.S. property market is resistant to attempts to revive it. “Nearly five years after America’s housing market showed the first signs of distress, prices are once more falling after false dawns in 2009 and 2010, with forecasters aiming for prices to return to last year’s levels some time in 2014. Construction of homes for families remains depressed. Sales of new homes are at record lows while those of existing homes are a third below their 2005 peak. Delinquencies remain near record highs, and the pipeline of seized or soon-to-be-seized homes waiting to hit the market continues to grow, leaving would-be buyers fearful that the largest investment of their lifetimes will soon be devalued thanks to a flood of distressed homes dragging down prices. All of which leaves US homeowners in the lurch as government policies and record low interest rates fail to arrest the property slump.”

9--Student, Auto Loans Push Consumer Credit Higher, WSJ

Excerpt: U.S. consumer credit grew during September, bouncing back after a big dip the previous month.

Consumer credit increased by $7.39 billion to $2.452 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast a $4.0 billion expansion in consumer credit. The figures are a significant turnaround from August when consumer credit fell $9.68 billion, according to revised figures.

The jump was driven by an increase in nonrevolving credit, which includes student loans, perhaps suggesting that more people are returning to school as unemployment remains high.

10--Euro Zone Recession Signals Grow, WSJ

Excerpt: Euro-zone retail sales fell sharply in September and German factory output slumped, raising the likelihood of recession as consumers, businesses and governments retrench at the same time.

Retail sales in the 17-nation currency bloc fell 0.7% in September from August and were down 1.5% on the year, statistics agency Eurostat said Monday. It was the first fall since May.

The news triggered a drop in the euro against the dollar as investors responded to new evidence that the currency bloc is heading for an economic downturn.

Germany’s economy ministry reported separately that industrial production in that country, the euro zone’s manufacturing center, fell an adjusted 2.7% in September from August.

Production will weaken further in the coming months as fewer orders come in, it said.

Evidence that consumers are tightening their belts and businesses are lowering output comes as governments slash budgets to try to end a protracted sovereign-debt crisis.

11--US poverty at new high: 16 percent, or 49.1M, Seattle PI

Excerpt: A record number of Americans — 49.1 million — are poor, based on a new census measure that for the first time takes into account rising medical costs and other expenses.

The numbers released Monday are part of a first-ever supplemental poverty measure aimed at providing a fuller picture of poverty. Although considered experimental, they promise to stir fresh debate over Social Security, Medicare and programs to help the poor as a congressional supercommittee nears a Nov. 23 deadline to make more than $1 trillion in cuts to the federal budget.

Based on the revised formula, the number of poor people exceeds the record 46.2 million, or 15.1 percent, that was officially reported in September.
Broken down by group, Americans 65 or older sustained the largest increases in poverty under the revised formula — nearly doubling to 15.9 percent, or 1 in 6 — because of medical expenses that are not accounted for in the official rate. Those include rising Medicare premiums, deductibles and expenses for prescription drugs.

"We're now about to go into federal debt discussions showing a major increase in elder poverty and a decrease for African-Americans. That just defies common sense, and the political implications could be devastating," said Douglas Besharov, a University of Maryland public policy professor and former scholar at the conservative American Enterprise Institute, who called the new measure "arbitrary."

12--Boom for whom, Paul Krugman, NY Times

Excerpt: The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise?

And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

Here’s a comparison of the postwar boom with the deregulation alleged boom, using real average family income from the Census and real average income for the top 1 percent from Piketty and Saez (see chart)

If you’re looking at the average, the last generation is a poor shadow of the postwar boom. But if you’re talking about the 1 percent, wonderful things have happened.

No wonder then, that Very Serious People — who, after all, get to be considered Very Serious because the elite likes them — have retained faith in deregulation despite repeated disasters.

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