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    Daily Digest – Mar 27

    by Davos

    Friday, March 27, 2009, 4:43 PM

  • ‘I’m having a very good crisis,’ says Soros as hedge fund managers make billions off recession
  • In Goldman Sachs We Trust
  • Rahm Emanuel’s profitable stint
  • Gregg: U.S. couldn’t even join EU due to debt levels
  • Soros Says Commercial Property Values Will Fall 30%
  • UN panel touts new global currency reserve system
  • When Giants Fall Presentation Online
  • Video: Geithner calls for single agency to oversee systemic risks
  • Space storm alert: 90 seconds from catastrophe  

Economy 

‘I’m having a very good crisis,’ says Soros as hedge fund managers make billions off recession 

A hedge fund manager who predicted the global credit crunch has said the financial crisis has been ‘stimulating’ and the culmination of his life’s work. 

George Soros, who predicted the global financial crisis twice before, was one of the few people to anticipate and prepare for the current economic collapse.

Mr Soros said his prediction meant he was better able to brace his Quantum investment fund against the gloabal storm.

But other investors failed to take notice of his prediction and his decision to come out of retirement in 2007 to manage the fund made him $US2.9 billion.

And while the financial crisis continued to deepen across the globe, the 78-year-old still managed to make $1.1 billion last year.

‘It is, in a way, the culminating point of my life’s work,’ he told national newspaper The Australian.

Soros is one of 25, top hedge fund managers from across Wall Street who have defied the credit crunch crisis to reap a total of $11.6billion (£7.9bn) last year.

The managers made their profit by trading above the pain in the markets, according to Institutional Investor’s Alpha Magazine.

Former maths professor James H. Simons, who has made billions in hedge fund Renaissance Technologies, earned $2.5 billion running computer-driven trading strategies.

And John A. Paulson, who made his fortune by betting against the housing market, came in second earning $2 billion.

The managers made the profit in a year when losses were recorded at two of every three hedge funds and when hedge funds lost an average of 18 percent, according to the New York Times.

Despite the global financial crisis, the combined pay of the top 25 hedge fund managers still managed to top every year before 2006.

Mr. Paulson said his pay was high, partly because he is the largest investor in his fund and that he did not receive a bonus.

He said the the pensions, endowments and other institutions which invest in his fund do not object to the profits he and his team make.

‘In a year when all their other investments lost money, we’re like an oasis,’ he said in the Times.

‘We have investors who were invested with Madoff, and they can’t thank me enough.’

Alpha Magazine’s 2008 Top Moneymakers:

1 – James Simons, Renaissance Technologies Corp, $2.5 billion
2 – John Paulson, Paulson & Co, $2 billion
3 – John Arnold, Centaurus Energy, $1.5 billion
4 – George Soros, Soros Fund Management, $1.1 billion
5 – Raymond Dalio, Bridgewater Associates, $780 million
6 – Bruce Kovner, Caxton Associates, $640 million
7 – David Shaw, D.E. Shaw & Co, $275 million
8 – Stanley Druckenmiller, Duquesne Capital Management, $260 million
9 – (tie) David Harding, Winton Capital Management, $250 million
9 – (tie) Alan Howard, Brevan Howard Asset Management, $250 million
9 – (tie) John Taylor Jr, FX Concepts, $250 million

In Goldman Sachs We Trust

As President Herbert Hoover wrote in his memoir regarding speculation: "There are crimes worse than murder for which men should be reviled and punished." Among them are inaction when our entire nation desperately needs a sign that Washington understands the true dimension of the problem.

Rahm Emanuel’s profitable stint

Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

One of those allegedly asleep-at-the-switch board members was Chicago’s Rahm Emanuel-now chief of staff to President Barack Obama-who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.

Gregg: U.S. couldn’t even join EU due to debt levels

The United States wouldn’t even be eligible to enter the European Union if it wanted to because of its debt levels, Sen. Judd Gregg (R-N.H.) claimed Thursday.

"We won’t even be able to get into the EU if we wanted to," Gregg said this morning on MSNBC, "because our government is so large and so huge."

The European Union’s Stability and Growth Pact (SGP) adopted in 1997 requires a budget deficit to be less than three percent, and requires a national debt beneath 60 percent of Gross Domestic Product (GDP).

"We’ve been lectured by France on the fact that we’re not fiscally responsible right now," Gregg, the would-be commerce secretary, noted with incredulity.

According to the Congressional Budget Office, the yearly budget deficit would fall well beyond that threshold in coming years.

Still, Gregg expressed resignation with the likelihood that the Obama administration’s proposed budget would emerge successfully from Congress.

"He’s in charge, and they’ve got the votes here in Congress," he said.

Soros Says Commercial Property Values Will Fall 30%

March 26 (Bloomberg) — Billionaire investor George Soros said U.S. commercial real estate will probably drop at least 30 percent in value, causing further strains on banks.

"Commercial real estate has not yet fallen in value," Soros, speaking at a forum in Washington, said. "It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent."

U.S. commercial real estate values have fallen 30 percent from the 2007 peak as cheap financing disappeared and the recession reduced occupancies, RREFF, the real estate investment unit of Deutsche Bank AG, said yesterday in its 2009 forecast. Total returns in a commercial property index used by pension funds may decline as much as 11 percent this year, the group said.

Soros, 78, said the risk of further declines in property prices is reason for the administration of President Barack Obama to move quickly to recapitalize banks. Soros said Obama acted too slowly on a banking overhaul and should have moved immediately upon taking office.

"At that moment of enthusiasm, fresh out of the gate, he would have gotten that money, and then we could have recapitalized the banks the right way, which would be to draw a line over the existing past accumulated bad assets and create new banks on top of these old banks," Soros said.

‘New Bank, Old Bank’

"Instead of good bank, bad bank, have new bank, old bank and keep the old capital to cover the old assets which are still deteriorating and will continue to deteriorate for several years" because of the coming decline of commercial real estate values, Soros said.

Soros also said that the U.S. may face a new round of inflation should the flow of credit recover because of the large increase in the money supply stemming from the Federal Reserve’s purchases of Treasury securities.

U.S. central bankers decided last week to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home-loan and other interest rates.

"In order to make up for the collapse of credit, we are effectively creating money," Soros said. "If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation."

"Right now we are in a period of deflation, but it could easily tip over, where you are facing inflation," Soros said. "You are then faced with the prospect of draining money supply as fast as credit is created."

UN panel touts new global currency reserve system

A UN panel of expert economists pressed Thursday for a new global currency reserve scheme to replace the volatile, dollar-based system and for coordinated steps by rich countries to stimulate their economies.

"A new Global Reserve System — what may be viewed as a greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity," the panel said.

As part of several recommendations to tackle the global financial crisis, the panel also noted recovery would require all developed countries, in the short term, to take "strong, coordinated and effective actions to stimulate their economies."

And it stressed the need to "lay the basis for the long-run reforms that will be necessary if we are to have a more stable and more prosperous global economy and avoid future global crises."

The commission, led by US economist Joseph Stiglitz, a frequent critic of globalization and unbridled free markets, is primarily aimed at finding solutions for developing countries.

On the monetary front, Stiglitz, the 2001 Nobel economics laureate, told a press conference here there was "a growing consensus that there are problems with the dollar reserve system.

He noted that such a system was "relatively volatile, deflationary, unstable and (had) inequity associated with it."

"Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz noted. "It’s indicative of the nature of the problem. It’s a net transfer, in a sense, to the United States, a form of foreign aid."

This week, China’s central bank chief Zhou Xiaochuan suggested the dollar could be replaced as a reserve currency by an International Monetary Fund (IMF) basket comprising dollars, euros, sterling and yen, saying it would not be easily influenced by individual countries.

But the UN panel warned that a two (or three) country reserve system "may be equally unstable."

It said a new Global Reserve "is feasible, non-inflationary and could be easily implemented, including in ways which mitigate the difficulties caused by asymmetric adjustment between surplus and deficit countries."

Stiglitz said his panel’s experts were currently trying "to lay out the conceptual framework of how this might be done."

The issue of the world currency reserve is expected to be raised at the April 2 summit of the G20 club of developed and emerging economies.

On Wednesday IMF managing director Dominique Strauss-Kahn said that talks on a new global reserve currency to replace the US dollar were "legitimate" and could take place "in the coming months."

But US Treasury Secretary Timothy Geithner earlier defended the dollar as a key global reserve currency.

"I think the dollar remains the world’s standard reserve currency, I think that’s likely to continue for a long period of time," he said.

Among other recommendations, the Stiglitz panel proposed western aid to help developing nations out of the crisis, better market regulation, a reform of central bank practices and of international financial institutions, as well as the creation of a new structure such as a United Nations economic council.

It specifically called for immediate, additional funding for developing countries "just to offset the imbalances and inequities created by the massive stimulus and bail-out measures introduced by advanced industrialized countries."

It said the funds could come through the issuance of SDRs approved by the IMF board in 1997.

SDRs are an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries and support the Bretton Woods fixed exchange rate system.

They are allocated to member countries in proportion to their IMF quotas.

When Giants Fall Presentation Online (Video)

More on robbing the US tax payer and debauching the FDIC and the Fed

The US authorities have no money to fulfil their ambition of stopping large US banks from failing without taking them into public ownership. The $300 bn left in the TARP kitty is all that is available for recapitalising banks, purchasing toxic assets and providing other financial support. Congress has thrown its toys out of the pram and is unwilling to appropriate more funds for the rescue of the banking sector.

As an aside: it is astonishing that Congress and much of the US populace are apoplectic about $165 mn (perhaps $182 mn) of bonuses paid to AIG executives and employees, when $170 billion or so of public money is at risk (and tens of billions probably already gone out of the window) in the rescue of this most undeserving of companies. Perhaps you can only get indignant about what you can comprehend…

The US authorities are reduced to begging, stealing and borrowing the rest of the funds they believe they will need. The two main proximate sources of funds are the FDIC and the Fed. The ultimate sources of funds will be (1) the US tax payer and the beneficiaries of future US spending programs that will have to be cut, (2) the holders of nominally denominated liabilities of the US state, including the monetary liabilities of the Fed and US Treasury bills and bonds.

Owners of dollar-denominated debt instruments will see the real value of their claims on the government eroded by future inflation if, as I expect, the recent and prospective future increases in the US monetary base (driven by credit easing and, in the future also be quantitative easing) cannot be reversed in the future. The main obstacle to such a reversal will be the US fiscal authorities, who are unlikely to let the Fed dump large amounts of US Treasury debt, acquired by the Fed as part of its quantitative easing program, into the markets.

I believe that the raids by the US Treasury on the FDIC and on the Fed are illegitimate and, in the case of the FDIC, quite possibly illegal.

(More)

Video: Geithner calls for single agency to oversee systemic risks

Environment

Space storm alert: 90 seconds from catastrophe

IT IS midnight on 22 September 2012 and the skies above Manhattan are filled with a flickering curtain of colourful light. Few New Yorkers have seen the aurora this far south but their fascination is short-lived. Within a few seconds, electric bulbs dim and flicker, then become unusually bright for a fleeting moment. Then all the lights in the state go out. Within 90 seconds, the entire eastern half of the US is without power.

A year later and millions of Americans are dead and the nation’s infrastructure lies in tatters. The World Bank declares America a developing nation. Europe, Scandinavia, China and Japan are also struggling to recover from the same fateful event – a violent storm, 150 million kilometres away on the surface of the sun.

It sounds ridiculous. Surely the sun couldn’t create so profound a disaster on Earth. Yet an extraordinary report funded by NASA and issued by the US National Academy of Sciences (NAS) in January this year claims it could do just that.

Over the last few decades, western civilisations have busily sown the seeds of their own destruction. Our modern way of life, with its reliance on technology, has unwittingly exposed us to an extraordinary danger: plasma balls spewed from the surface of the sun could wipe out our power grids, with catastrophic consequences.

The projections of just how catastrophic make chilling reading. "We’re moving closer and closer to the edge of a possible disaster," says Daniel Baker, a space weather expert based at the University of Colorado in Boulder, and chair of the NAS committee responsible for the report.

It is hard to conceive of the sun wiping out a large amount of our hard-earned progress. Nevertheless, it is possible. The surface of the sun is a roiling mass of plasma – charged high-energy particles – some of which escape the surface and travel through space as the solar wind. From time to time, that wind carries a billion-tonne glob of plasma, a fireball known as a coronal mass ejection (see "When hell comes to Earth"). If one should hit the Earth’s magnetic shield, the result could be truly devastating.

The incursion of the plasma into our atmosphere causes rapid changes in the configuration of Earth’s magnetic field which, in turn, induce currents in the long wires of the power grids. The grids were not built to handle this sort of direct current electricity. The greatest danger is at the step-up and step-down transformers used to convert power from its transport voltage to domestically useful voltage. The increased DC current creates strong magnetic fields that saturate a transformer’s magnetic core. The result is runaway current in the transformer’s copper wiring, which rapidly heats up and melts. This is exactly what happened in the Canadian province of Quebec in March 1989, and six million people spent 9 hours without electricity. But things could get much, much worse than that.

Worse than Katrina

The most serious space weather event in history happened in 1859. It is known as the Carrington event, after the British amateur astronomer Richard Carrington, who was the first to note its cause: "two patches of intensely bright and white light" emanating from a large group of sunspots. The Carrington event comprised eight days of severe space weather.

There were eyewitness accounts of stunning auroras, even at equatorial latitudes. The world’s telegraph networks experienced severe disruptions, and Victorian magnetometers were driven off the scale.

Though a solar outburst could conceivably be more powerful, "we haven’t found an example of anything worse than a Carrington event", says James Green, head of NASA’s planetary division and an expert on the events of 1859. "From a scientific perspective, that would be the one that we’d want to survive." However, the prognosis from the NAS analysis is that, thanks to our technological prowess, many of us may not.

There are two problems to face. The first is the modern electricity grid, which is designed to operate at ever higher voltages over ever larger areas. Though this provides a more efficient way to run the electricity networks, minimising power losses and wastage through overproduction, it has made them much more vulnerable to space weather. The high-power grids act as particularly efficient antennas, channelling enormous direct currents into the power transformers.

The second problem is the grid’s interdependence with the systems that support our lives: water and sewage treatment, supermarket delivery infrastructures, power station controls, financial markets and many others all rely on electricity. Put the two together, and it is clear that a repeat of the Carrington event could produce a catastrophe the likes of which the world has never seen. "It’s just the opposite of how we usually think of natural disasters," says John Kappenman, a power industry analyst with the Metatech Corporation of Goleta, California, and an advisor to the NAS committee that produced the report. "Usually the less developed regions of the world are most vulnerable, not the highly sophisticated technological regions."

According to the NAS report, a severe space weather event in the US could induce ground currents that would knock out 300 key transformers within about 90 seconds, cutting off the power for more than 130 million people (see map). From that moment, the clock is ticking for America.

First to go – immediately for some people – is drinkable water. Anyone living in a high-rise apartment, where water has to be pumped to reach them, would be cut off straight away. For the rest, drinking water will still come through the taps for maybe half a day. With no electricity to pump water from reservoirs, there is no more after that.

There is simply no electrically powered transport: no trains, underground or overground. Our just-in-time culture for delivery networks may represent the pinnacle of efficiency, but it means that supermarket shelves would empty very quickly – delivery trucks could only keep running until their tanks ran out of fuel, and there is no electricity to pump any more from the underground tanks at filling stations.

Back-up generators would run at pivotal sites – but only until their fuel ran out. For hospitals, that would mean about 72 hours of running a bare-bones, essential care only, service. After that, no more modern healthcare.

72 hours of healthcare remaining
The truly shocking finding is that this whole situation would not improve for months, maybe years: melted transformer hubs cannot be repaired, only replaced. "From the surveys I’ve done, you might have a few spare transformers around, but installing a new one takes a well-trained crew a week or more," says Kappenman. "A major electrical utility might have one suitably trained crew, maybe two."

Within a month, then, the handful of spare transformers would be used up. The rest will have to be built to order, something that can take up to 12 months.

Even when some systems are capable of receiving power again, there is no guarantee there will be any to deliver. Almost all natural gas and fuel pipelines require electricity to operate. Coal-fired power stations usually keep reserves to last 30 days, but with no transport systems running to bring more fuel, there will be no electricity in the second month.

30 days of coal left
Nuclear power stations wouldn’t fare much better. They are programmed to shut down in the event of serious grid problems and are not allowed to restart until the power grid is up and running.

With no power for heating, cooling or refrigeration systems, people could begin to die within days. There is immediate danger for those who rely on medication. Lose power to New Jersey, for instance, and you have lost a major centre of production of pharmaceuticals for the entire US. Perishable medications such as insulin will soon be in short supply. "In the US alone there are a million people with diabetes," Kappenman says. "Shut down production, distribution and storage and you put all those lives at risk in very short order."

Help is not coming any time soon, either. If it is dark from the eastern seaboard to Chicago, some affected areas are hundreds, maybe thousands of miles away from anyone who might help. And those willing to help are likely to be ill-equipped to deal with the sheer scale of the disaster. "If a Carrington event happened now, it would be like a hurricane Katrina, but 10 times worse," says Paul Kintner, a plasma physicist at Cornell University in Ithaca, New York.

In reality, it would be much worse than that. Hurricane Katrina’s societal and economic impact has been measured at $81 billion to $125 billion. According to the NAS report, the impact of what it terms a "severe geomagnetic storm scenario" could be as high as $2 trillion. And that’s just the first year after the storm. The NAS puts the recovery time at four to 10 years. It is questionable whether the US would ever bounce back.

(More)

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