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    Daily Digest – Mar 31

    by Davos

    Tuesday, March 31, 2009, 2:50 PM

  • Funnies
  • Russia backs return to Gold Standard to solve financial crisis
  • Russia, China cooperate on new currency proposals:
  • OCC 4th Quarter Derivatives Report…
  • Closer Than I Thought?
  • Jim Rogers (Video US Dollar)
  • AIG Employee Bonuses a ‘Missed Opportunity’ (Video)
  • The Quiet Coup
  • No Time For T-Bonds (H/T Suzie)
  • US bank bailout fund down to $135 bln
  • GM CEO resigns at Obama’s behest (H/T Turbo)
  • Prospect of Barack Obama show causes UK to clear its decks
  • Newsweek Cover Story on Krugman
  • Washington’s banks under stress 
  • Welcome to America, the World’s Scariest Emerging Market (H/T Dragline)
  • TARP Spending to Date (Chart)



Russia backs return to Gold Standard to solve financial crisis 

Arkady Dvorkevich, the Kremlin’s chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal. 

Russia, China cooperate on new currency proposals: 

Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday.
"We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev’s top economic adviser Arkady Dvorkovich said. "Our positions are very similar.
"We have similar positions on the development of the international financial architecture," he told reporters.

OCC 4th Quarter Derivatives Report…

The 4th quarter Derivatives report is out and it has some eye opening facts and charts. I can’t reproduce the charts, but they are viewable in .pdf here.

The charts show you how much exposure is out there and in what type of derivative. The amount and composition held by the top 5 banks is very interesting.

What is most interesting is the exposure to interest rate derivatives and who the largest holders are. Goldman is far more exposed and LEVERAGED than most people realize. And note in the charts how Goldman is showing huge exposure for Q4, but not for previous quarters (graph 5A). What happened? Did they not report their holdings to the OCC before?

Also check out table 1 and 2. The world’s largest derivative holder is still JPMorgan with more than $87 TRILLION in derivatives!! Goldman has $30+Trillion! What kind of leverage do they have? I do not know, you would have to parse out and net their positions, but I’d be willing to bet that their exposure is many, many times their net worth.

Martin Weiss did a good short piece on this issue:

Alarming News: Bank Losses Spreading!

by Martin D. Weiss, Ph.D. 03-30-09

For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates.

In a moment, I’ll explain what this means for your savings and your stocks.

But first, here’s the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category. 

Closer Than I Thought? 

I am often lumped together with the "deflationistas" by those who have not (taken the time to) read my books (e.g., Financial Armageddon and When Giants Fall) or my posts on the subject of the two ‘flations at www.financialarmageddon.com and www.economicroadmap.com. 

But the truth is that I have always expected the Great Unraveling to be a multi-phase process, with deflation coming first and then inflation (unlike some other well-known prognisticators who haven’t quite gotten the progression right). In fact, here is an excerpt from the table of contents for my March 2007 bestseller:


5. Economic Malaise
6. Systemic Crisis
7. Depression
8. Hyperinflation

As to when the changeover might occur, I have often indicated that I would keep an eye on the financial markets, news reports, and the actions taken by our government (and others) for guidance.

More recently, in a post entitled "The Next Phase," I suggested that we might begin to see the the supply of money being created by authorities overwhelm the wealth being destroyed by defaults and deleveraging by the end of this year.

As it happens, the relative lack of concern about inflation among policymakers and mainstream economists is leading the contrarian in me to wonder whether the turning point is even closer than that.

That premonitory sense seemed even more pronounced when I read the following Financial Times commentary by Edward Chancellor, "Inflation Looms Over Deflation Risk." 

Jim Rogers (Video US Dollar) 


AIG Employee Bonuses a ‘Missed Opportunity’ (Video)

The Quiet Coup

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests-financiers, in the case of the U.S.-played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. 

No Time For T-Bonds (H/T Suzie) 

Count on Wall Street to figure out a way to make a quick buck in a down market. The big banks and brokerage houses that deal directly with the Federal Reserve were avid buyers of Treasury securities in auctions last week, but they were even more avid sellers of those bonds to the central bank. 

"What appears to be happening is the 16 primary dealers that were responsible for helping underwrite the auctions are now long with the hope of quickly selling the bonds at a higher price to the Fed before the next supply infusion comes in a few weeks," said Josh Stiles, senior bond strategist at IDEAglobal.

The operation was the second of its new program that commenced on Wednesday, and is part of the Fed’s plan to purchase $300.0 billion in Treasuries over the next six months. (See "The Buyer Of Last Resort.") With short-term rates having been effectively pushed to zero, the central bank has decided to purchase government bonds as a way of pushing down interest rates and spurring economic activity. 

US bank bailout fund down to $135 bln 

US Treasury Secretary Timothy Geithner said Sunday that $135 billion remained from a $700 billion dollar fund approved by Congress to shore up the financial sector reeling from crisis. 

GM CEO resigns at Obama’s behest (H/T Turbo) 

The Obama administration asked Rick Wagoner, the chairman and CEO of General Motors, to step down and he agreed, a White House official said. 

On Monday, President Barack Obama is to unveil his plans for the auto industry, including a response to a request for additional funds by GM and Chrysler. The plan is based on recommendations from the Presidential Task Force on the Auto Industry, headed by the Treasury Department. 

Prospect of Barack Obama show causes UK to clear its decks

Britain will get its first chance to see Barack Obama this week when a White House cavalcade – complete with armoured limousines, helicopters, 200 US secret service staff and a six-doctor medical team – sweeps into the UK.

Obama will fly into London for his first visit to the UK as president of the United States on Tuesday to take part in the G20 summit in the capital’s Docklands area. He will not be travelling light.

More than 500 officials and staff will accompany the president on his tour this week – along with a mass of high-tech security equipment, including the $300,000 presidential limousine, known as The Beast. Fitted with night-vision camera, reinforced steel plating, tear- gas cannon and oxygen tanks, the vehicle is the ultimate in heavy armoured transport.

Newsweek Cover Story on Krugman

Evan Thomas writes in Newsweek: Obama’s Nobel Headache. An excerpt:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he’s wrong, and you sense he’s being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, "The Best and the Brightest." Krugman may be exaggerating the decay of the financial system or the devotion of Obama’s team to preserving it. But what if he’s right, or part right? What if President Obama is squandering his only chance to step in and nationalize-well, maybe not nationalize, that loaded word-but restructure the banks before they collapse altogether? (emphasis added)

Krugman is making the establishment nervous! Probably because they all missed the housing bubble – and Krugman called it correctly.

Washington’s banks under stress

Ailing financial giants such as Citigroup, Bank of America and AIG have drawn most of the attention as the worst banking crisis since the Great Depression grinds on.
But several of Washington’s community banks also are clearly straining under the weight of the crisis, a Seattle Times analysis shows.
At least a dozen of the 52 Washington-based banks examined are carrying heavy loads of past-due loans, defaults and foreclosed properties relative to their financial resources. Many of these banks have set aside relatively little cash to cover problem loans, the analysis shows.
And even the relatively healthy banks are under more pressure than they were a year ago.
Among the symptoms of serious trouble at local banks, according to year-end data from financial reports filed with federal regulators:

• More than a third of Bremerton-based Westsound Bank’s assets aren’t generating any revenue.


Welcome to America, the World’s Scariest Emerging Market (H/T Dragline)

Back in the spring of 1998, when Boris Yeltsin was still at Russia’s helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to "emerging markets" throughout Asia, Eastern Europe and Latin America, and I thought I’d seen it all. Yet I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.
At the time, I could not imagine that anything remotely similar could happen in the United States. Indeed, I shared the American conceit that most emerging-market nations had poorly developed institutions and would do well to emulate Washington and Wall Street. These days, though, I’m hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a "lost decade" after its own real estate market fell apart in the early 1990s. But I’m more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we’re trying to fix it.

TARP Spending to Date (Chart)

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