- 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
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.
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."
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.
"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?
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!"
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.
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?