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Daily Digest - Jan 25

Saturday, January 24, 2009, 7:35 PM
  • Icelandic government becomes first to be brought down by the credit crunch
  • Prescient Young Blogger Did What S. Korea Couldn't -- Foresee Global Financial Crisis
  • As Freddie Mac (FRE) Requests More Cash, The Scope Of The Bailout Gets Much Bigger
  • First Bailout Formula Had It Right
  • John Thain Called Out by the President
  • More layoffs expected at Starbucks
  • Bulls absolutely MUST break the VIX right here
  • The Aftermath of Financial Crisis (Draft/Harvard & NBER)
  • Financial Sense News Hour, January 24, 2009

Economy

 

Icelandic government becomes first to be brought down by the credit crunch

The government of Iceland today became the first to be effectively brought down by the credit crunch.

After several nights of rioting over the financial crisis, Prime Minister Geir Haarde, surrendered to increasing pressure and called a general election for May.

A poll would not normally be held until 2011.

Haarde also revealed that he had been diagnosed with a malignant tumour of the oesophagus and would not seek re-election.

'I have decided not to seek re-election as leader of the Independence Party at its upcoming national congress,' he told a news conference.

The global financial crisis hit Iceland, which has a population 320,000, in October, triggering a collapse in its currency and financial system under the weight of billions of dollars of foreign debts incurred by its banks

The economy is set to shrink 10 percent this year and unemployment is surging.

Critics wanted Haarde, the central bank governor and other senior officials to resign.
Some senior figures in his party have also said they favour an early election, but Haarde had up to now vowed to defy plunging popularity and stay on.

Protests had been held weekly since the crisis broke last year, but since Tuesday have been held every night.

On Thursday, police used teargas on demonstrators for the first time since protests against the North Atlantic island's entry into the NATO alliance in 1949.

Special forces had to rescue Haarde from his car after he was surrounded by an furious mob hurling eggs and cans outside the government offices, in Reykjavik.

 

Prescient Young Blogger Did What S. Korea Couldn't -- Foresee Global Financial Crisis

As a financial blogger named Minerva, Park Dae-sung was the dark prophet of market decline in South Korea.

In this education-obsessed country, where academic credentials are often taken as a measure of human value, he was also something of an idiot savant. He had no degree in economics. He had no professional experience in finance. He was not a wealthy investor.

He had been a so-so student who studied communications at a so-so junior college in a backwater town south of Seoul. Thirty-one years old and single, he spent much of his time alone in his room. As his father noted, "He can't even get a job."

But he knew a global economic smack-down when he saw one.

Minerva saw it coming last fall, far earlier and with far more acuity than the South Korean government, which his blog has humiliated and angered.

Besides getting mad, the government got even. In a move widely perceived by the public as a chilling echo of the 1970s, when a military dictatorship ruled South Korea, the government detained Park this month, invoking a seldom-used telecommunications law that charges him with harming the public by spreading "false rumors."

 

As Freddie Mac (FRE) Requests More Cash, The Scope Of The Bailout Gets Much Bigger

The Treasury has provided loan facilities of up to $100 billion for both Fannie Mae (FNM) and Freddie Mac (FRE). Freddie Mac is preparing to ask for $35 billion from its pool. It has already drawn down almost $14 billion. It anticipates that its fourth quarter losses will require it to make the next pull.

Industry observers believe that Fannie Mae faces nearly identical problems so it will be making its own request for more funds shortly.

The news points to the fact that another big request for new capital will come from several large financial firms which are finding that 2009 maybe a worse year than 2008 was.

According to Bloomberg, "Their losses are going to be much higher than anyone anticipated," said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. "The more and more that people are digging into these portfolios, they're finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime."

The Alt-A trouble reaches beyond the two quasi-federal agencies to most large banks and brokerages and some insurance firms.

Taken together, Fannie Mae and Freddie Mac could easily tap the Treasury for another $75 billion before the end of this month. Fannie Mae has already said that its $100 billion facility may be inadequate to cover losses.

As publicly-held financial firms begin to post their first quarter earnings a little over two month from now, the rounds and rounds of money needed for the rescue could begin to move toward a trillion dollars. The losses are gathering speed that fast.

 

First Bailout Formula Had It Right

"Blink," the mega-best-seller by Malcolm Gladwell, is about the importance of first impressions, and Mr. Gladwell's belief that "those instant conclusions that we reach are really powerful and really important and, occasionally, really good." Case in point, it turns out, is the banking crisis. It sure looks like the government's first impression about how to save the banks was the right one, after all.

"It's pretty clear that the bad assets are the problem," Barney Frank, the chairman of the House Financial Services Committee, told me, somewhat ruefully, not long ago. Mr. Frank, you'll recall, had championed the legislation for the original Troubled Asset Relief Program last September when the financial system appeared to be on the verge of collapse. The plan had been sold to him - and the rest of Congress - by Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the Federal Reserve chairman, as a way to begin buying up toxic assets and taking them off the banks' balance sheets. No sooner was the $700 billion package passed, though, that Mr. Paulson abruptly changed course and used the money to recapitalize the banking system instead.

Everywhere I've turned these last few weeks, I've heard variations of the same refrain. "The original Paulson plan had it right - they had to get the bad assets off the banks," said Ronald J. Kruszewski, the chief executive of the investment firm of Stifel Nicolaus & Company. "Before you are going to get intelligent capitalists to invest their money in the banks, you have to get these landmines off their balance sheets," said Brett Duval Fromson, the managing partner of the Margin of Safety Fund. "The reason things are frozen is that nobody knows if the banks are insolvent or not - thanks to the bad assets on their books," said Henry F. Owsley of the Gordian Group, an investment bank that specializes in "distressed situations."

"If they wanted to follow the R.T.C. script, they would come to the immediate conclusion that they have to get assets out of the banks, and establish a market clearing price," said Tim Ryan, head of the Securities Industry and Financial Markets Association. The R.T.C., of course, was the Resolution Trust Corporation, which managed (and sold) the bad assets on the books of banks during the savings and loan crisis of the 1980s and 1990s. At the time, Mr. Ryan led the Office of Thrift Supervision, and helped direct the response to that crisis.

It's pretty much unanimous, in other words. With a new administration, and a new economic team - which includes former Federal Reserve chairman Paul A. Volcker, who was among the first to publicly call on the government to begin buying bad assets - it seems clear that dealing with the bad assets should be one of the first orders of business. So how do we go about it?

John Thain Called Out by the President

We're not sure how John Thain is feeling about being called out by the President this morning. For some background, most readers are aware of yesterday's report from CNBC's Charlie Gasparino on how Mr. Thain spent $1.2 million to renovate his office at Merrill Lynch last year. This came during a time when the firm was already on the skids and laying off employees. It appears as though President Obama saw the story too, because in comments this morning, he basically said that it is unacceptable for companies receiving government aid to be renovating 'offices and bathrooms.' President Obama must be even more surprised with the fact that he paid the same designer eight times less for his work on the White House ($100K) than Thain paid him to do his office ($837K). Since when does the government get better deals than the private sector?

John Thain could be thinking he must be pretty important if even the President of the United States is talking about him. But most likely, Mr. Thain is shaking in his boots. When the President of the United States calls out your actions as a symbol of greed and what's wrong with Wall Street, you may want to think twice about taking the Bentley when you go out 'antiquing' this weekend.

Who would have thought that Merrill Lynch would already have an ex-CEO that is less popular than Stan O'Neal? Somewhere out there, Mr. O'Neal is saying, "Thank God for John Thain!"

More layoffs expected at Starbucks

Another big round of layoffs is expected at Starbucks, possibly 1,000 people - a third of its headquarters employees - and some district managers and field employees, according to an e-mail sent to a stock brokerage's customers Friday.

"The cuts might be next week or in February," wrote Diane Daggatt, a managing director at McAdams Wright Ragen in Seattle.

Starbucks declined to comment on possible layoffs. The Seattle coffee company releases its first-quarter results on Wednesday.

No barista jobs are in jeopardy, Daggatt wrote.

That will be a relief to dispirited workers who have begun to question changes at the store level since Howard Schultz reclaimed the CEO spot one year ago this month.

At first inspired by Schultz's return to the helm, they wonder now where Starbucks is headed. Many fear for their jobs as the coffee chain's sales continue to slide, forcing Starbucks to close 616 U.S. stores and trim employees' hours.

The Seattle coffee company slashed more than 2,000 jobs last year, including 1,000 in July that included 180 positions in Seattle. At that time, about 3,500 people worked at its headquarters.

 

Bulls absolutely MUST break the VIX right here 

It all comes down to follow through. If the market shows strength today and the VIX is broken below the noted support level, da bullz be in biznizz. We cannot control markets so we do the next best thing; we try to find as many early warning indicators as possible (e.g. the breakdowns of the EMA 20 & SMA 50 on the broad market daily charts) along the road to wherever we are going. There is a big picture, macro plan for sure. But the short term stuff along the way can be a real bear can't it? 

The Aftermath of Financial Crisis (Draft/Harvard & NBER)

Financial Sense News Hour, January 24, 2009

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9 Comments

homosapiens's picture
homosapiens
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Posts: 11
Re: Daily Digest - Jan 25

Inviting Disaster? - China complains about Obama Administration

German Magazine "Der Spiegel" is partnering with CNN, but I was unable to find related information on the CNN site. According to this article referring to the Chinese news agency Xinhua, the Chinese central bank is miffed about Timothy Geithner accusing China of manipulating its currency in order to support exports. "The accusations have caused immediate irritation in China and official media are seeing a clear turn away from the policies of the old administration" the article further states.

Buffett says in NBC interview that US is in 'economic Pearl Harbor

Hence he doesn't mention an aggressor. Could the Dollar be the "new pacific fleet" anchoring in the believed safe haven of Pearl Harbor?

This article in the Asia Times send some shivers down my spine this morning...

TOKYO - As the United States seeks to finance its ballooning budget deficits by printing more US dollar bills, Japanese economists are increasingly concerned that the excessive use of dollar seigniorage by US financial authorities will further shake confidence in the US currency at a time when the world lacks an alternative globally accepted currency.

The US government projects that even without the forthcoming US$825 billion fiscal stimulus package, the national budget deficit to September 2009 will be $1.19 trillion, the biggest since World War II, or 8.3% of gross domestic product (GDP). This amount is likely to grow as the US government continues to rescue failed parts of the economy. How will the US cope with its enormous and growing debt obligations?

And here is what really scares me in this article...

Seigniorage is the revenue that a government raises by printing money. Suppose it costs one dollar to print a US$100 bill. As long as the world deems this bill worth $100, the US government receives the revenue of $99 every time it prints out a $100 bill 

Let's hold the fingers crossed that the world keeps on "deeming this bill worth $ 100" or otherwise our economists may have a problem explaining their ponzi scheme of perpetual growth and how to pay for it.

Take "growth" out of the options! - Tom

Vanityfox451's picture
Vanityfox451
Status: Diamond Member (Offline)
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Posts: 1636
Re: Daily Digest - Jan 25

Hi Davos,

many people express their personal views on this site and I've had the pleasure of doing just that on more than one occasion as my counter suggests. Today, I found a link that I wished to write on and the subject turned from what the subject was as a heading to a point of view I've held for some time. While some may feel that I'm being self indulgent, I think I'm big enough to deal with the comments it will create. This is why I hope you aren't offended that I'm using your blog as a link to that page...

http://www.peakprosperity.com/forum/britain-brink-economic-depression-say-experts/12118

Kind Regards,

Paul

CB's picture
CB
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Posts: 365
Re: Daily Digest - Jan 25

 From the Washongton Post 1/24 - a summary of the current bad news from the establishment media:

 

Quote:

 Downturn Accelerates As It Circles The Globe

"The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain yesterday becoming the latest nation to surprise analysts with the depth of its economic pain.

Britain posted its worst quarterly contraction since 1980 on the heels of sharper than expected slowdowns reported from Germany to China to South Korea. The grim data, analysts said, underscores how the burst of the biggest credit bubble in history is seeping into the real economies around the world, silencing construction cranes, bankrupting businesses and throwing millions of people out of work.

"In just the past few days, we've had a big downward revision, we're seeing that an even bigger deceleration is on the way than we thought," said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics.

The depth of the troubles, analysts say, indicates that nations may need to spend more than the billions of dollars already planned on stimulus packages to jump-start their economies, and that a global recovery could take longer, perhaps pushing into 2010.

Analysts are particularly concerned about the slowdown in China and the recession in Europe. There is mounting concern about the stability of the euro and the British pound, which dropped to a 24-year low against the dollar yesterday. Analysts are fretting about the possibility of a debt default in a euro-zone country that could send fresh shock waves through global financial markets.

The problems in Europe now appear to be as bad if not worse than those in the United States. In the last quarter of 2008, the British economy shrank at an annualized rate of 6 percent. That is worse than economists expected, but also showed the British recession may be even harsher than the one in the United States, where analysts predict data expected next week will show the U.S. economy to have contracted between 5 and 5.5 percent in the last quarter of 2008. ......."

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012304172.html?hpid=topnews

 

 

Damnthematrix's picture
Damnthematrix
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Ballmer Gets “It”
homosapiens's picture
homosapiens
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Re: Daily Digest - Jan 25

" in the United States, where analysts predict data expected next week will show the U.S. economy to have contracted between 5 and 5.5 percent in the last quarter of 2008. ......."

And it looks like the IMF will once more revise its ecomomic global outlook down to 1.5% growth from 2.2% in October 2008. (To be published next Wednesday)

 Tom in Colo - growth is not an option.

 

kemosavvy's picture
kemosavvy
Status: Martenson Brigade Member (Offline)
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Posts: 254
Re: Daily Digest - Jan 25

DTM,

ballmer is not the first one to say that, Jeff Immelt, CEO of GE said the exact statement in early november, that the economy was suffering not from a recession but instead a reset.

http://www.greenbiz.com/blog/2008/11/09/immelt-emotional-social-economic-reset

 

suesullivan's picture
suesullivan
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Re: Daily Digest - Jan 25

Excellent collection of links, davos, and thanks for the asia times link, Homosapiens.

bobb dobbs's picture
bobb dobbs
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Posts: 31
Re: Daily Digest - Jan 25

Hello Paul,

I believe the lines you attribute to Thomas Wolfe are by TS Elliot.

Vanityfox451's picture
Vanityfox451
Status: Diamond Member (Offline)
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Posts: 1636
Re: Daily Digest - Jan 25

Hi Bobb,

how public and awful!! I found an old jotter from years ago I used to scribble in and found the quote. I'm in my 40's now and the jotter turned up out of storage from my school days. T S Elliot 'Four Quartets'... My 15 year old self was so sure it was Wolfe, I'll never trust my memoirs again!! I don't feel my poor ego could take erasing Wolfe and replacing him with Elliot so, I think I'll leave the world to guess the author again.

Thankyou,

Paul

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