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Global financial system implosion begins

At the risk of starting another Banksy = shit thread, this appeared in NYC yesterday

custom_1222970895242_banksyrat7.jpeg
 
Its looks like headless chickens out there. How long before we have a serious run on the banks and thousands of companies and governments find they cant pay their staff?
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This is what worries me. People who are self employed contractors like myself are going to find that their invoices won't be paid when the companies go under.
Some of the missus friends recently put a down payment on having a house built, and the builder went out of business and they lost all their money, which was pretty much ther entire savings :(. I don't suppose the gov will be bailing them out!

TomPaine
 
Should have done it as a 10 year debt for equity swap at 50c in the $, zero rate.
Thus, banks balance sheet get bolstered, toxic shit off the books so no more right downs, everybodies crap is gone so the CP/MTN marked should start working again and its costs less than puttin g $700 billion into a fucked system where it will just drain away. Thats the markets side
The govt would now be the biggest shareholder in these firms - so sack the board, they were crap and shouldn't keep their jobs, as the biggest sharehilder you will control the rewards committee, so you can tell em to fuck off with regards to bonus - equally limiting payout in the future for the expa. The shareholders, as their holdings are now diluted whill whine, again, they can fuck off, they should have gone to the AGMs to complain - they took the risk when they bought the stock and as such had a resposibilty to make sure their comapny was properly run. It obviuosly wasn't, so they have to bear some responsibility.
Depositors funds are thus secure
Ten years on the Swap is unwound over 2-3 years, as value can be assigned to the currently unprice-able shit. As the bondholdings are released back into the market, the banks can use the returned funds to buy back the stock held by the govt, thus undiluting the other shareholders positions and re-installing the value in their stock
Essentially it is a way of both calling the market and becoming a major, active shareholder in the at risk banks and thus having control over their behaviour
It is also easy to do as its all under existing law
 
hipipol said:
The shareholders, as their holdings are now diluted whill whine, again, they can fuck off, they should have gone to the AGMs to complain - they took the risk when they bought the stock and as such had a resposibilty to make sure their comapny was properly run. It obviuosly wasn't, so they have to bear some responsibility.
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what proportion of the shareholdings of the banks are held by pension and other savings funds?
 
The guvernator whips out the begging bowl.

http://www.msnbc.msn.com/id/27006906/

On Thursday, Schwarzenegger sent a letter to Treasury Secretary Henry Paulson asking the federal government to protect California if the state is unable to secure financing for routine borrowing.

"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.

A spokesman for the state treasurer's office said pursuing a federal loan is just one option if the credit markets do not respond as Paulson predicted. California also will seek private loans within the next few weeks, spokesman Tom Dresslar said.

Unless it can secure those loans, the state is expected to run out of cash Oct. 29.

Earlier this week, the controller's office said California will need to borrow $7 billion to pay its expenses throughout the fiscal year, which ends June 30.

"We hope that (the bailout plan) will be sufficient to loosen the tight credit market so that the treasurer can issue the $7 billion we need," said Hallye Jordan, a spokeswoman for the state controller.
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Before this financial crisis California was in a very deep hole financialy. Now it is one of the key bubble states and other than Florida and Arizona is probibly going to take the hardest hit from the collapse in property prices.


In other news, the American right has already developed the vaccuous talking point that they are going to repeat to death over the whole debacle. They are blaming the Democrats for creating the subprime problem with laws designed to ensure that a certain amount of housing loans went to low income and poor credit rated people. They are true total masters at this kind of politics. They create vaugely plausable sounding talking points and repeat them till there base totaly swallows it and it log jams the debate. The piss poor standard of US telejournalism gives them a free pass on this kind of thing.
 
Joseph Stiglitz's view........

It doesn’t take a genius to figure out that the United States’ financial system – indeed, global finance – is in a mess. And now, with the US House of Representatives having rejected the Bush administration’s proposed $700 billion bailout plan, it is also obvious that there is no consensus on how to fix it.

The problems in the US economy and financial system have been apparent for years. But that didn’t prevent America’s leaders from turning to the same people who helped create the mess, who didn’t see the problems until they brought us to the brink of another Great Depression, and who have been veering from one bail-out to another, to rescue us.

As global markets plummet, the rescue plan will almost certainly be put to another vote in Congress. They may rescue Wall Street, but what about the economy? What about taxpayers, already beleaguered by unprecedented deficits, and with bills still to pay for decaying infrastructure and two wars? In such circumstances, can any bailout plan work?

To be sure, the rescue plan that was just defeated was far better than what the Bush administration originally proposed. But its basic approach remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works, and it is no more likely to work this time.

Moreover, the plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. There was a housing bubble, and loans were made on the basis of inflated prices.

That bubble has burst. House prices probably will fall further, so there will be more foreclosures, and no amount of talking up the market is going to change that. The bad loans, in turn, have created massive holes in banks’ balance sheets, which have to be repaired. Any government bailout that pays fair value for these assets will do nothing to repair that hole. On the contrary, it would be like providing massive blood transfusions to a patient suffering from vast internal hemorrhaging.

Even if a bailout plan were implemented quickly – which appears increasingly unlikely – there would be some credit contraction. The US economy has been sustained by a consumption boom fueled by excessive borrowing, and that will be curtailed. States and localities are cutting back expenditures. Household balance sheets are weaker. An economic slowdown will exacerbate all our financial problems.

We could do more with less money. The holes in financial institutions’ balance sheets should be filled in a transparent way. The Scandinavian countries showed the way two decades ago. Warren Buffet showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential.

This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets. Finally, it can be done far more quickly.

At the same time, several steps can be taken to reduce foreclosures. First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit. The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor. Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses. Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs.

By contrast, US Treasury Secretary Henry Paulson’s approach is another example of the kind of shell games that got America into its mess. Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities. The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government. But that requires overpaying for the assets, benefiting only the banks.

In the end, there is a high likelihood that if such a plan is ultimately adopted, American taxpayers will be left on the hook. In environmental economics, there is a basic principle, called “the polluter pays principle.” It is a matter of both equity and efficiency. Wall Street has polluted the economy with toxic mortgages. It should pay for the cleanup.

There is a growing consensus among economists that any bailout based on Paulson’s plan won’t work. If so, the huge increase in the national debt and the realization that even $700 billion is not enough to rescue the US economy will erode confidence further and aggravate its weakness.

But it is impossible for politicians to do nothing in such a crisis. So we may have to pray that an agreement crafted with the toxic mix of special interests, misguided economics, and right-wing ideologies that produced the crisis can somehow produce a rescue plan that works – or whose failure doesn’t do too much damage.

Getting things right – including a new regulatory system that reduces the likelihood that such a crisis will recur – is one of the many tasks to be left to the next administration.

Joseph E. Stiglitz, professor of economics at Columbia University, and recipient of the 2001 Nobel Prize in Economics, is co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.
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http://www.todayszaman.com/tz-web/detaylar.do?load=detay&link=154720&bolum=109
 
I'm not quite sure I completely understand the alternative that he's arguing for, but this is a beautiful quote :)

Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities. The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government. But that requires overpaying for the assets, benefiting only the banks.

In the end, there is a high likelihood that if such a plan is ultimately adopted, American taxpayers will be left on the hook. In environmental economics, there is a basic principle, called “the polluter pays principle.” It is a matter of both equity and efficiency. Wall Street has polluted the economy with toxic mortgages. It should pay for the cleanup.
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david dissadent said:
Iceland hits the proverbial brick wall.

Debt 6 times GDP a currency in free fall and a world of hurt on the way.
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Let them eat pickled ram’s testicles
by ALDA on OCTOBER 4, 2008

So, our fearless leaders are presently working around the clock to try to save us from imminent disaster. Apparently there have been back-to-back meetings since early this morning between the government and all “vested-interest parties” who presumably are negotiating on behalf of us simple folk: union leaders, pension fund managers and suchlike.

It’s kind of bizarre to think that, if the blackest doomsday predictions come true, in just a few short weeks we could be back in the dark ages, eating pickled ram’s testicles and singed sheep’s heads, in between grazing on Iceland moss. Indeed, while shopping at Bónus yesterday [which was uncomfortably empty of wares - they’re the ones who keep saying we’ll have a food shortage, probably just a ploy to get us all to buy more, though*] I found myself involuntarily thinking of what we might actually have left to eat if worse comes to worst. And, you know, it wouldn’t be half bad. We could probably subsist on harðfiskur [dried fish], smjör [butter], Nicelandic cheeses, skyr, hothouse veggies, lamb and fresh fish for as long as it would take us to figure out how to grow tropical fruits in our greenhouses in Hurdygurdy.** Plus at least we have lots of hot and cold water so we wouldn’t be thirsty or cold or smell bad.
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From here

:eek:
 
The suggestion has been made that Iceland be "fast-tracked" into the EU. I'm assuming this also means joining the Euro? This will add weight to the likes of Will Hutton who think that Britain should also join the Eurozone to help fend off the crisis.
 
Darios said:
The suggestion has been made that Iceland be "fast-tracked" into the EU. I'm assuming this also means joining the Euro? This will add weight to the likes of Will Hutton who think that Britain should also join the Eurozone to help fend off the crisis.
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and lose its rich fishing grounds ? Unlikely
 
Belushi said:
The German govt has just guaranteed all private savings accounts.
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Link


Oct. 4 (Bloomberg) -- Hypo Real Estate Holding AG, the ailing German property lender, said a 35 billion-euro ($49 billion) government-backed bailout plan collapsed as commercial banks withdrew their support.

``The intended rescue package involved a liquidity line to be provided by a consortium of several financial institutions,'' Hypo Real Estate said in a statement on the DBF newswire today. ``The consortium has now declined to provide the line. The group is now in the process of determining the consequences of this'' and ``alternative measures are being investigated.''

Munich-based Hypo Real Estate sought the lifeline after its Depfa Bank Plc unit, which lends to governments, failed to get short-term funding amid the credit crunch. The bailout would relieve the company of having to tap money markets for the ``foreseeable future,'' Chief Executive Officer Georg Funke said Sept. 29.

The European Commission, the executive arm of the European Union, yesterday approved the rescue. The European Central Bank and the Bundesbank were supposed to contribute 20 billion euros, and a group of unidentified banks, 15 billion euros. The plan called for Hypo Real Estate to use 42 billion euros in assets, mostly debt owed by government borrowers, as collateral.
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The Hypo bailout blew up yesterday, this seems a rushed descion by the Germans as the British do not appear to have been in the loop on the guarenteeing of the deposits.
 
Oh and on the less credible parts of the internet the buzz over a week long bank holiday is huge. Big enough to make me question whether the idea of one has not been floated at some meeting or other as an emergency measure in the event of a really bad day on wall street. I was reading all that this morning and sure as fate the first 4 cash points I got to today were out of money. Luckily I have enough for a couple of beers tonight though :)
 
elbows said:
Aha yes Iceland, probably one of the few countries in a worse predicament than the UK,
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I think just about everyone is in the shit. I think the UK will be amoung the first hit hard as it is so heavily dependent on its banking industry but as economic activity slows, the export economies will also slide into recession. China, Japan, Germany and the other big exporters rely on the US to buy there goods. China without that additional growth may actualy fair much much worse than most people assume, unless they can internalise consumption and raise living standards, but that will make there goods less competative internationaly.

We are all in the same boat in terms of the economic crisis.

Actualy, ironicaly the most fucked could be the big oil exporters. Those dollars will not be worth as much and oil will probibly fall heavily as demand sinks bellow supply.

Ofcourse cheaper oil will be one way of re-awakening the global economy taking a big stress of off many companies.

This week’s Fed monetary report showed that during the week ending Sept. 22, money supply (as measured by seasonally adjusted M2) increased by $165.5 billion to $7,900 billion. On an annualized basis this is an astonishing 108.94 percent growth rate. The Fed has been aggressively pumping money into the system in the hopes that radical monetary stimulus will restart lending. However, the newly created money is being hoarded by banks as they “stuff the mattress” with short-term Treasury notes.
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:eek:

This is called a “liquidity trap” and it occurs when interest rates are at or close to 0 percent and monetary policy is no longer effective. Newly minted money is injected into the banking system but trapped by financial institutions that are paralyzed by fear. When banks don’t recycle their money through normal lending activity,
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This is why I objected to the bailout.

With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo.
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Hence why Wells and Citi are going to war over Wachovia I guess.

Hopefully Mr. Paulson’s fiscal moves will provide enough fiscal laxative to unplug the banking sector and get money flowing again.
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News from Germany suggests not.

http://economix.blogs.nytimes.com/2008/10/04/will-paulsons-two-plans-unplug-the-liquidity-trap/
 
zoltan said:
and lose its rich fishing grounds ? Unlikely
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Having come up in another thread I was just wondering of the failures in Iceland are there equivelant of the Darien expedition. A financial failure so huge it ultimately destroys your sovereignty . The fishing rights are dwarfed by the debts and the currency is under imense pressure.
 
Yes we are all in the shit but I still think the UK is well placed to be especially badly hit over time.

I see the latest rumblings are the UK's new contingency plan where there would be a taxpayer funded recapitalisation of the banks, with juicy benefits for the taxpayer should the banks become functional and profitable again one day. I guess that would be a bit better than the American bailout, where the taxpayer only ends up with the toxic assets. Anyway they havent said they will do it for sure yet, but it is now an option if the week ahead brings a lot more turbulence.

Meanwhile there is confusion about the detail of Germany's deposit garauntee, and the few markets that have opened so far on Monday are currently down.
 
The markets are having another bad Monday so far. I guess there will be some interesting developments this week in response.
 
This just out on Reuters . . .


11:00 06Oct08 RTRS-Pope says financial crisis shows money an illusion

VATICAN CITY, Oct 6 (Reuters) - Pope Benedict said on Monday that the global financial crisis showed that faith in God trumped a lifetime spent pursuing material wealth.
"We see it now in the collapse of the great banks that money disappears, it's nothing," the Pontiff said.
The global financial turmoil, the worst since the Great Depression, has wiped away hundreds of billions of euros (dollars) in shareholder wealth and felled banking institutions that just months ago seemed untouchable.
The pontiff, using a biblical metaphor, said people who ignored the word of God to pursue wealth had effectively built their homes on sand instead of on a solid foundation of faith.
It was a possible reference to the collapse of the U.S. housing market, which triggered the financial crisis.
"Whoever builds his life on this reality, on material things, on success ... builds (his house) on sand. Only the word of God is the foundation of all reality," he said.
 
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