Links 11/11/08

Maine lobstermen suffer as prices fall Financial Times. I am related to lobstermen, so this is (almost) personal.

Not such a hero after all Guardian. Aung San Suu Kyi’s star has dimmed.

Champagne sales lose their sparkle Guardian

Australian business confidence at record low MarketWatch

More A.I.G. Floyd Norris, New York Times. A very good explanation of how the new vehicle to buy AIG insured CDOs is supposed to work. Norris not only had to read the documents, but also grill people directly involved.

The shipping question Free Exchange. Hooray! We are not the only people with a shipping fixation.

Unemployment by industry: Brace for Impact Eric Jansen (hat tip reader CrocodileChuck). The tone of the opening section and the less than slick graphics might be off-putting, but this has a lot of good data and makes a persuasive case (that the trajectory for employment in the US is worse than most anticipate).

Shoot the Messenger Independent Accountant

The Bretton Woods sequel will flop Gideon Rachman, Financial Times

The End Michael Lewis, Portfolio

The G-20 communique of November 15th Dani Rodrik. It’s already out. Seriously.

“Investing” in AIG et al Steve Waldman. A well done, important tirade on the massive wealth transfer happening before our eyes, and will continue, thanks to our supposed bailouts. Waldman contends we will have either big time inflation or big time deflation, and either way, the little guy is shafted.

Antidote du jour:

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  1. a

    And don’t miss on Bloomberg:

    “Bonuses for Bailed-Out Wall Street Should Go to Zero, U.S. Taxpayers Say”

  2. River

    RE: ‘The G-20 Communique Of November 15th’…Great catch Yves! This communique is much more than the usual ‘progress was made’ variety and is surprising in it’s direct wording and tone. At least, surprising to me.

    The wording is not clear but I think we should prepare for some type of currency controls.

    ‘Recent experience has taught us that there may need to be a greater role for the active management of international financial flows by governments.

    Designing the new traffic rules for international finance, as it were, will take considerable time and thought. We have asked our ministers of finance to establish a high-level working group that will convene as soon as practically feasible to seek wider input, and craft a framework for discussion among heads of governments.’

    The subject of protectionist tendencies and the need to avoid same in the same paragraph that the Great Depression is mentioned is surprising.

    ‘The weeks and months ahead will be trying times for economic policy makers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries.’

    Also, China gets a pat on the back for spending on infrastructure, encouraging consumers, etc.

    World Bank will expand it’s own series of alphabet soup lending facilities.

    G7 nations will continue current swap lines and open more if necessary.

  3. Anonymous

    NB that Dani Rodrik is pulling our collective leg. That’s not really the draft of the G20 declaration.

  4. a

    Here’s another good one, about a well-known hedge fund (which masquerades as an educational institution to benefit from non-profit status) suffering large losses:

    (Bloomberg) “Harvard’s $36.9 Billion Fund May Suffer ‘Unprecendented Losses,’ Faust Says.”

  5. Chris

    Might be useful for these more theoretical types like Rodrik and Eichengreen etc. to get involved in a dialogue with economists from what used to be called the Third World — not only ones pre-selected for their agreement.

    It might help counter the still pervasive condescension and patronizing view from the top of the wreckage financial orthodoxy has made of US finance and economy, “do they really know what they’re doing”, and help improve foreign relations.

    The Telegraph published this piece from Stiglitz this morning. It shows a bit more insight into this kind of issue, as well as what is contributing to this new Bretton Woods stuff that’s going on.

  6. Independent Accountant

    There’s an old Polish story. The old Pole says to his grandchild, “Communist, capitalist, fascist. It all makes no difference. When the Germans and the Russians get together to talk, it’s bad for us”. That’s the way I feel about Paulson and Bernanke.

  7. Matt Dubuque

    Bush is the big holdout on G20. The religious fundamentalists at the White House and Treasury are holding out for language in the final communique essentially stating that they all share the religion of free markets.

    The Chinese, French and Germans are FURIOUS at such an asinine position.

    In terms of lobster price collapses, is this another example of a pending deflationary microburst?

    That term doesn’t even exist among the cretins at CNBC or the American press. It seems highly likely to enter it soon. First shipping, then lobsters….

    Stay tuned. Turn off your TV. Scrupulously avoid reading the American press. Don’t buy gold.

    Matt Dubuque

  8. Been there

    @ “Shoot the Messenger”

    “…The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn’t trying to politicize accounting. ‘It just says, “Study it,”‘ he told me. “It doesn’t say [to do] a study to repeal it. It doesn’t say [to do] a study to suspend it…”

    I would normally say this was a reasonable proposition (if only it hadn’t been uttered from the lips of a politician). However, the discussion should have been held years ago- BEFORE the adoption of SFAS 133. I’ve always been of the opinion that 133 is not as practical as historical cost standards for auditors to verify. Once you get beyond verifying the values of securities traded on a market exchange, there’s just too much room for monkey business in coming up with a FMV for other assets not listed on exchanges. Verifying historical cost seems to be more of a science(trace the item back to what was paid- cancelled check or charge on Bank statement) while the FASB adoption SFAS 133 moved the auditing profession in the direction of being more like an art(Let’s see, whadda we think this is worth?).

    Having said that, I’m truly conflicted on this issue because SFAS 133, if followed properly, does seem to provide to provide important additional information. In theory, 133 made a great deal of sense. However, in practice (human nature being what it is) we can see it was not followed appropriately. The various CDO values blessed by the auditors, over the past few years, turned out to be highly inflated (probably due mostly to misrepresentations of risk associated with these instruments).

    ps- I seem to recall the Baucus was one of the hardliner holdouts to the Treasury’s initial bailout bill. Wonder where he’s coming from on this.

  9. lineup32

    Quite interesting article by Michael Lewis, and his description about the role of CDS swaps in the subprime market says much about our financial system.

    “There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

  10. Anonymous

    Reading in succession (1) Waldman’s post, (2) Lewis’ article and (3) your post on Fannie should be required for anyone involved in regulating our financial system. It is so painfully obvious that the point of the system (as it is now constructed) is to transfer the risks to the shareholders and keep all (and I really mean, ALL) the profits at the executive level. Of course, this is not just a concern with financial companies. The system doesn’t work. Incentives are clearly not aligned. Who could still argue this point? Shareholders (even the big boys like CalPERS) are clearly not able to police the foxes in the henhouse. This is a MARKET FAILURE, and the voting public should not tolerate it any longer.

  11. Don

    Tuesday, November 11, 2008

    “he was cautiously optimistic about the future of the financial services industry”: No Havoc Here

    Does this guy think he’s Jonah? What’s with Ha-Navi act? From the FT:

    “The global economy is entering a slowdown of epic proportions, comparable to the Great Depression, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.

    Speaking at the firm’s annual banking and financial services conference, Mr Thain said that while he was cautiously optimistic about the future of the financial services industry, he was not at all optimistic about the near-term prospects of the US economy and global markets.”

    Good Lord, that’s self-serving. Everyone else is in the crapper, but the financial services industry looks peculiarly resilient ( Maybe because of the massive infusion of government largess ). Um, where should smart money go, I wonder?

    “Mr Thain also said that the economic problems afflicting the US, where housing prices and other asset values were falling, would wreak havoc across the world.

    “There is no such thing as decoupling,” he said, referring to the popular theory that emerging markets could sustain reasonable growth rates even while the world’s leading economies suffered through recessions. “All equity markets are linked. Each individual economy will be more or less affected, depending on reliance on global trade and commerce.”

    He’s telling everyone to build a teva. It should be made of…I forget. Is there still such a thing as divorce?

    “Despite his gloomy take on the economy, Mr Thain expressed cautious optimism about the state of the financial services industry. Referring to the US government’s $700bn bailout package and the direct infusion of $125bn to recapitalise the nation’s biggest banks, Mr Thain said “all of that is starting to take effect and things are starting to get better.”

    Thankfully, all you silly taxpayers propped us up while you’re consigned to havoc. We can afford arks.

    “Still, he added, there remains “a huge amount of dislocation in credit markets. Although things are starting to improve, this is going to be a long process.”

    Thankfully, he’s saying, it will take quite a while for this to be worked through, so we can make out quite well.

    “The combination would also give Merrill Lynch’s vaunted team of wealth management advisers access to BofA’s “huge pool of wealthy individuals”, Mr Thain said.”

    Forget the little guy. Zero in on the rich.

    I wonder if this pool of wealthy investors is like the giant pool of international money that led to the bubble?

    Don the libertarian Democrat

  12. Ostrich

    Here’s a question on the AIG deal. As I get it from the Norris blog and today’s NYT article, the identified use of cash is:

    Swaps deal — $70 bil to cover the questionable securities at par, divided between lost collateral and purchase at present market.

    Securities lending deal — $23 bil to take the stuff off AIG books, plus whatever has been paid out to the other side already.

    Assuming that doesn’t add up to 150 bil, what’s the rest for?

  13. lineup32

    Botton line we are getting a smaller ecomony with all the debt overhang, excess inventory of housing and other related assets that were overproduced plus we woun’t be needing a few extra million workers except health and gov’t. Oh my!

  14. Anonymous


    This is reading derigour. I have been comparing what’s happening now as a legacy of what wasnt learnt in the late 80’s (using Bonfire of the Vanities as a comparison rather than Liars Poker) and that we are now paying the price of what wasnt learnt then.

    What concerns me is that without lessons being learnt NOW (by not enough pain being inflicted on those who caused the problems), what we reap in the future will be a multiple of the pain inflicted now.

    The other concern, stated by another reader on another post yesterday, is that we (mistakenly) expect these “crooks” or “charletons” to be repalced by people with integrity and that most likely will not be the case.

    Great article.

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