As Wall Street Awaits its Destruction

What do these two stories have in common?

October 30 ”“ UK Telegraph: ”œWages in China’s cities have risen by almost 20% since the start of the year, the government in Beijing said…adding to fears that the country’s economy is overheating and might export inflation round the world… Rising prices and inflation are putting pressure on the government to rein in the economy.”

October 30 ”“ Bloomberg: ”œAxon Financial Funding, a $9.5 billion structured investment vehicle or SIV, had its debt ratings cut by Standard & Poor’s after it sold assets at a loss. S&P cut its rating on the company’s debt by eight steps to BBB, two steps above high-risk, high-yield, from the top AAA investment-grade ranking.”

These stories exemplify two sides of the same economic phenomenon: extraordinary price movement in a short period of time. The only difference is that wage increases represent inflation in terms of real goods and services; the debt ratings cut represents deflation in paper assets.

We live in a strange world in which inflation and deflation are galloping rampantly about the globe, both at an increasing pace. Economists aren’t used to such a world, and their instinct is to choose one or the other as the true operating phenomenon, and in that case the default choice is almost always inflation because deflation is so rare.

Chinese philosophy posits the conflicting yet complementary forces of yin and yang, which is an appropriate analogy since China has been the source of both of these problems. China’s cut-rate manufacturing processes, relying on cheap labor, modest mechanization, and no governmental regulation, have hollowed out the manufacturing base of country after country (and not just Western, developed countries). After twenty years of unparalleled export growth, based also on an artificially weak currency, cost pressures are now building up rapidly in China. China began exporting deflation, then experienced domestic inflation, and is now switching to becoming an inflation exporter.

India has been equally culpable in this game, and I suppose we could also borrow from Hindu theology by referring to inflation as Brahma the creator, and deflation as Shiva the Destroyer. These two forces, ever competing with each other in the universe, are now let loose in the world. Inflation is winning so far, because at least under inflation some people are winners. Debtors get to repay their principal and interest with cheaper currency, and owners of real assets sit by as the value of these assets rises at a faster and faster pace.

So Brahma can accomplish some good, though obviously too much inflation at too rapid a pace can be dangerous. Investors around the world are now chasing after ”œthings” ”“ oil, wheat, gold, copper ”“ anything with tangible value that has some scarcity. One of the reasons tangible things are so valued is that Shiva is out destroying the intangible things like paper assets.

Take the interesting case of Merrill Lynch. In June it was sitting high on the world, the king of the mortgage securitization business. Four months later, Merrill Lynch has been forced to write down about $8 billion of assets, destroying 20% of its net worth and the equivalent of the past four quarters of its profits. Stan O’Neal has lost the chairmanship of Merrill Lynch, and analysts are openly discussing another $10 billion more of write-offs. Some are whispering about the possible collapse of the firm and forced merger with someone stronger.

What hath Shiva wrought? Deflation, certainly, and not just in the mortgage business. Banks, hedge funds, brokers, so-called Special Investment Vehicles (off-balance sheet repositories for bank assets) ”“ they’ve all woken up to an unprecedented and unexpected drop in the value of anything they own that cannot be readily sold. Due to the prevalence of the mark to market process ”“ so useful in the past 15 or so years in allowing the financial industry to declare profits and bonuses when paper instruments were going up in value – financial firms are now struggling to determine how truly deflated their assets are going to be.

Everyone says the banks have not ”œcome clean” about their problems. The truth is, banks don’t really know how bad their problems are. The picture changes from day to day. In August most financial markets had seized up and no one was making prices to each other. Things improved for a while but just this past week the same problems came back with a vengeance. Wednesday last week when the Fed lowered interest rates 25 basis points, it could not actually achieve this goal without injecting $41 billion into the banking system to force rates down. This was the second greatest liquidity injection by the Fed in the last ten years, the largest being right after the 9/11 attacks.

For Fed policy aficionados, the sight of the Fed pushing money into the interbank market to achieve an interest rate cut is extraordinary. It tells us that Fed Funds ”“ the purest and safest form of cash ”“ are another one of those ”œthings” that are now scarce and valued in a world that is highly skeptical of debt instruments. It also tells us that the market-setting level of overnight rates in the U.S. is higher than the Fed wishes it to be.

The one thing the financial industry does know is that it is very unfair to force them to write down assets by as much as 80%, just because they can’t sell them to anybody at the moment. But this valuation accounting process, so lucrative to the industry for two decades, cannot now be jettisoned. Financial firms now have a cadre of independent valuation experts who determine what things are worth. Some of them, like the market risk team with daily oversight of the revaluation process, or the firm’s internal auditors, are subject to management pressure but ultimately have a simple rejoinder for even the chairman if he challenges their price put on something ”“ ”œif you think I’m wrong, sell just one of these assets and we’ll all see what the portfolio is worth.”

And there’s the rub. Not only are there few buyers, but management wouldn’t dare sell an illiquid asset for 20 cents on the dollar, because the rest of the portfolio would then be written down to that amount. Unfortunately, that’s the current market price for securities consisting of sub-prime mortgages. Even Aaa rated commercial paper, which is supposed to be close in risk to U.S. Treasuries, is no longer carried at par, but is discounted to a price around 85 cents to the dollar. A financial institution like Axon Financial Funding, the firm that just experienced a ratings downgrade from Aaa to just above investment grade, is in the same way being marked down to the market value of its assets. It says a lot about the destructiveness of deflation that a Aaa rated company can fall overnight by eight grades (the usual ratings downgrade by Moody’s or Standard & Poor’s is one grade, and two grades is rare).

The independent experts who mark to market bank portfolios look at this Axon situation and no doubt tell their own management that it is time to put a more appropriate value on their investment and trading portfolios, before the ratings agencies force them to do it. The banks and Wall Street firms and hedge funds are all resisting these pressures for now, because they realize how much is at stake. If Merrill Lynch can lop off 20% of their capital in a wink of the eye, how secure is the other 80%? Each CEO is looking at their own highly-leveraged institution and wondering if they have enough capital to survive this crisis, and they know that every other CEO is wondering about their own institution as well. No wonder no one is lending to anybody else, and the Fed has to force down Fed Funds rates when they announced last week’s interest rate cut.

So we are enjoying housing deflation in the U.S., a steady devaluation of the dollar, and now wholesale destruction of investment and banking portfolios worldwide. Short term lending markets are shaky, the securitization process has been halted in its tracks, asset backed commercial paper no longer trades anywhere, and bank Structured Investment Vehicles are slowly being wound down. Banks which are looking poorly capitalized rather than well capitalized face the prospect of taking on additional assets totaling $1 trillion.

No one wins in a deflationary environment. Once credit becomes impossible to obtain, business contracts and recession (or something worse) follows. Debtors find it better to walk away from their debt rather than pay it back with scarce cash, and this only makes the downward spiral accelerate. While Brahma appears to be winning at the moment, enticing speculators and others to pour into commodities, metals, oil, and a few favored stocks, Shiva will win this battle in the long run. There comes a point in a deflationary environment where the average person has to begin selling ”œthings” in order to survive, or at least make payments on their debt.

Is this financial Armageddon? It’s as least as serious a financial crisis as has ever been seen in anyone’s lifetime. The vast credit creation, money making machine that has been Wall Street finance in the past two decades has been shut down. Other parts of the financial industry, like commercial paper and now overnight cash deposits, are being affected. Whereas in the past commercial banks could step up and lend money when Wall Street faltered, now the major commercial banks of the world are integrally part of Wall Street and haven’t the capital or even expertise to make loans and keep them on their balance sheet. All these players and all these markets are at the very center of the global economy, and their destruction will drive the economy down with them.

At the moment the only people who can create credit anymore are the Chinese, Russians, OPEC nations, and other countries that own ”œthings” or still have some manufacturing and servicing export ability. But they are being swamped by the rising prices of ”œthings”; both China and Russia now have price controls on hydrocarbon products (gas, diesel fuel, heating oil) in order to cushion the shock to their mostly-poor consumers. The inflection point for them ”“ the point when Shiva overwhelms Brahma ”“ will be the inevitable stock market crash in China, likely brought about by some shocking debt default that ”œno one could have predicted or expected.”

It will be then that the global economy will head into a long dark nuclear winter. In our new-found poverty we will all await the third Hindu manifestation of the divine, Vishnu ”“ the Restorer, the Maintainer. Rest assured, he will take his time to appear.

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

43 CommentsLeave a comment

  • A letter from Jim Sinclair, supposedly some hot-shot stock market analyst.

    Dear Friends,

    If you have not started to protect yourself do so on Monday please.

    I am quite concerned for all of you as inertia usually prevents people from protecting themselves. I always wondered how a certain ethnic and religious persuasion could remain in Germany as Hitler was clearly coming into power. I would have been out.

    Even then, many of those who remained in Germany saved a great deal of their fortunes by certifying their investment shares in international companies, then burning the paper certificates.

    What I am getting at is that the signs of an international financial accident are in those incidents that have recently happened.

    There is no hiding place as this is a product of the greed and avarice of the new geek kids on the block who have killed themselves, their industry and hurt everyone everywhere. I am sure that in years to come derivative traders will be seen as pariahs and criminals deserving of prison – not as the multi-millionaires they are today.

    On Monday start to protect yourself to the degree it can be accomplished by removing people and institutions between you and your assets. This is the real thing. This is what was discussed in the 1970s but did not happen. It was discussed by many in 2000 but it is happening here and now. There is no functional tool to stop a derivative meltdown. It will like the grim reaper clean out many financial institutions and start a domino effect that I do not want you to be caught up in.

    more at the link
    I did inhale.

  • A good, if disturbing, article, Numerian.

    And poetic use of the prevailing religious ideas from the countries that have increased the pace of the world economy’s march toward its inevitable resource constraints into overdrive. I used to wonder how long a phony low value for Chinese currency could be sustained by a manufacturing economy that must import some of its raw materials, oil particularly, with that same low-valued currency. The Chinese do hold a trillion or so US dollars but can they, and do they use any of that for imports or is it all just in the form of US debt [treasury notes]? You point to debt as one of the rotting timbers on which China tries to keep the dollar high and yuan low…sounds right to me. I wonder how similar the Chinese culture is to the Japanese with regard to countenancing and carrying bad debt where the alternative is a loss of face for all parties to the loan that has gone bad. If China, as a nation, holds a lot of cash assets, and they decide that some company or institution within their control owes more yuan than it can ever repay, can’t they just bail out the debtor with national funds? They are communists and even the US does that sort favor for well connected interests [remember the “savings and loav” bail out?]. I recall the recent decades of Japanese economic news having a long running theme of suffering with insolvency rather than cleaning house. Both of those economies are opaque to me regarding regulation so I do not know how to compare.

    The shift of Iraq and Iran away from conducting oil sales in US dollars is said to have influenced US war-making decisions but it is even more likely that it means the dollar itself has become a dubious paper asset.

  • The Chinese people may be capitalist in behavior, but the government is communist pretending to manage a capitalist society. The government has no independent central bank, no financial or manufacturing regulatory structure, no court system to enforce the law, and little ability to confront corruption within the Communist Party itself. The result is a capitalist free for all where greed is allowed to trump decent treatment of workers, concern for the law, long term planning, fair relations with international trading partners, and respect for the environment (oddly, that sounds like the Bush administration, doesn’t it?).

    Since the government cannot effectively stop any of this, it is up to natural constraints to do the job. At some point the stock market will reach such absurd heights, if it is not there already, and trading will be so thin, that the slightest disturbance will topple it.

    And yet the rest of the world blithely assumes China is like every other economic powerhouse – that at some point the government will clamp down and restore economic sanity. The only clamp down the government can accomplish is martial law, and when that comes it will be too late for the economy.

  • It’s no longer just the gold bugs who are counseling unusual protective measures. You are seeing this advice in some respectable blogs and newsletters, though it is certainly not main stream yet. And it probably won’t ever be found on the Larry Kudlow program or the WSJ.

  • creeping into this statement:

    The government has no independent central bank, no financial or manufacturing regulatory structure, no court system to enforce the law, and little ability to confront corruption within the Communist Party itself.

  • This article show lights about the “Castle Paper’s” who reminds Wall Street and other skyscrapers of paper values or financial instruments.
    At least, we touch with the real values, no like others that mean huge and vast values, but only in papers, ink spoiled.
    Sincerely, I catch a great insight about the world taht we are living, appeareances, images, fictions, virtuality at the limit.
    At least, we touch ground.
    Thnx for the Insight !!

  • While things seem to be deteriorating at an ever faster rate than expected in many areas — global warming, price inflation, wage and asset deflation, global conflict — this does not yet seem to be adequately reflected in the bond market. According to traditional thinking the smart (big) money is in the bond market; therefore, one must watch bonds in order to gain insight into what the big players are thinking. So far, however, bonds have neither tanked, causing long term interest rates to rise in response to inflation expectations, nor soared in response to deflation expectations, as investors resort to greater safety. Does that indicate that the big moneybags are also confused?, or is there something I’m not seeing? BTW, I haven’t seen views of Stephen Roach or Bill Gross posted here for some time now. What are they saying about this apparent conundrum?

  • the consumer is through here for the time being and that there is not enough global consumption to offset what the American consumer does for the world economy. Morgan Stanley’s bank analysts are forecasting a consumer recession, from subprime, that may spill over in the corporate economy.

    They’ve downgraded a number of banks, lowered target prices, etc.

    I don’t recall Gross of immediate past.

    Numerian’s article gets the themes pretty clearly. I just posted an article on Dubai that shows the inflation there. I can’t imagine who is going to be in all these buildings if China melts down and we have a commodity rout.

    Maybe we can export them New York rock doves(shitty pigeons).

  • 4.,7., and 8. are important means of refocusing U.S. interests on its internal weaknesses and dependencies. None of these work, however, without taking on the military-industrial complex that now drives foreign policy, and increasingly domestic policy on homeland security matters. As Ron Paul says, it is time to shut down the empire and stop playing policeman abroad.

    He also has some ideas on withdrawing from GATT, the UN, and other multilateral institutions, similar to yours. Some problems like environmental degradation and global warming can’t be solved bilaterally, and throwing away the multilateral approach is only going to make things worse. On the other hand, the U.S. will not be effective in these institutions if it is not willing to give up some sovereignty. This was the whole idea behind the prohibitions on wars of aggression, but we have gone backwards under the Republicans, who reject most of the FDR agenda.

    Reforming the international financial system is going to be tricky and difficult. A mergers/acquisition tax may work because most of this activity today is unrelated to productive purposes, only to extracting revenue from the bought company and calling it fee income for the buyer. Outlawing speculation, however, would be counterproductive. Without speculation there is no liquidity, and liquidity is precisely the thing the financial markets are discovering is in short supply.

  • It’s hard as a bond trader to speculate on long term direction for bonds when you have two opposing forces tugging at the market. You want to sell bonds if you fear inflation, but buy them if you see economic recession ahead. That’s probably why bonds for the moment are in stasis. Once deflation really takes hold globally, bonds will rally, but U.S. bonds will always be somewhat held back just because of the massive domestic and international deficits the U.S. runs.

  • It seems to me that the problem is not only neoliberalism as unregulated markets, trade and capital flow, but also the structure of ownership that makes corporations legal persons. Classical liberal thinking about “free” markets works pretty well in situations in which ownership is decentralized. However, the advent of the corporation allowed business entities to increase their market share and with it their wealth. this led to increasing economic and then political power. As a result, we no longer have a classically liberal “free market” in which competition sets equitable prices and determines the success or failure of ventures in terms of meeting needs efficiently and effectively. Rather, as corporations become more successful, they aggrandize themselves to the degree that they are capable of influencing the market directly, which no small business could ever do. As a result we have a situation in which large corporations are becoming trusts if not outright monopolies. For example, large corporations dominating an industry often act in concert rather than actually competing, and now that Walmart has become the world’s largest retailer, its economies of scale are allowing it to dominate any product segment it moves into, leaving only niche markets for the rest. This has meant the decline of small business other than local service businesses.

    Absent real competition of decentralized local entities, the multinationals have been able to take advantage of their economic and political power (including military power through the military-industrial-governmental complex) to obtain resources on extraordinarily favorable terms, socialize the costs of resource depletion and environmental degradation, use labor arbitrage to undermine the pricing power of labor, and even influence elections through lobbying and campaign contributions.

    Hitting around the edges is not going to change this. We need comprehensive reform if we are to return to a true free market economy should we decide to promote a purely capitalistic view of economics. If not, then some form of mixed economy would have to be proposed as an alternative, in which governmental regulation and oversight counteracts the distortions that large corporations introduce into the the so-called market economy. The alternative is the corporate state, which is in the end not all that different from a command economy with respect to freedom. The corporate state just makes a pretense of freedom, which exists only in its slogans.

  • but as someone who’s young, ignorant of finance, and due to my job very vulnerable to an economic downturn…

    Just what are unusual protective measures?

    I suppose it would be very different things depending on a given actor’s financial situation, (and I really apologize for putting a personal financial advice comment in this thread, I’m sorry, I just don’t have any idea where else to learn this) but if all I’ve got is a small pile of cash that I don’t want to see wiped out by a declining dollar / inflation, what are the safer things to do with it? Put it in a currency basket of Euro Yen and Stirling CDs? Put it in oil co stocks, or in oil or some other commodity directly? It seems any position I could choose is determined more by who else has already thought of that position, and whether they’ve already run it up or down, than by the underlying strength of the position itself. (ie, oil might be of solid value for underlying reasons, but if everyone has already moved into it I’d be buying high, and if they all have to move out of it in two years to pay off debts elsewhere I’d be selling low… because oil’s role in financial trading is not necessarily connected to oil’s role in the economy.)

    Anyway, it’s not really obvious to me what to do, and yet I sure don’t want to just sit around holding a bunch of dollars, which is what I’m doing now. I can make some general guesses at what the safer sections of the economy are, but even those sections are subject to price fluctuation as big financial players slosh in and out of them. My general sense of politics tells me the storm is gathering, but I don’t have any idea where to take shelter. I realize that’s not really what this thread was about, but if anyone cares to comment I’ll appreciate it.

    And though it means little coming from the ignorant, I appreciated this post. Thanks.

  • A lot depends on your outlook – is it short term for a year or so, or long term for five years or beyond? In the short run inflation may very well be a problem, but three to five years from now many assets may be depreciating in value. In such an environment holding on to cash in the form of U.S. Treasuries or a bank CD in a local bank with modest mortgage and derivatives exposure may be safe. In an inflationary environment only commodities, art and other tangibles hedge against inflation, unless you have an employer who adjusts your pay for inflation every year.

    Either way, just bear in mind that personal financial advice over the internet is fraught with problems. I don’t know the details of your personal situation and you don’t know my background. So if you have trusted friends experienced in the financial markets they are your best help. Secondarily find a broker or financial adviser with a good reputation for conservative investment advice.

  • Reporting on the emerging nightmare of the financial crash is all well and good, but I think it incumbent on anyone doing so to lay out some policy proposals to deal with that crash. As Milton Friedman (thanks to Naomi Klein for exposing the real Friedman in her book The Shock Doctrine: The Rise of Disaster Capitalism) wrote in 1982:

    Only a crisis — actual or perceived –produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

    They’ve had their turn. Now our turn is coming.

    First of all, we have to settle among ourselves, what is it that we desire? Do we seek to somehow save the existing system of financial capitalism, or do we want industrial capitalism?

    I am not entirely familiar with some of the policies being proposed by such as the Economic Policy Institute
    but I suspect that there are few proposals out there as radical as actually replacing the current regime of monetarism / financial capitalism. Indeed, a quick perusal of EPI’s website shows that the issue of a global derivatives debacle / financial crash is not even on the radar screen.

    Each one of us also needs to determine what role we are willing to play. For example, Alexander Hamilton is commonly seen as an advocate of monarchism, because of the various proposals for overwhelmingly powerful executive he made during the Constitutional Convention. But such a view hardly comports with Hamilton’s actions, either during the Revolutionary War, or as our first Secretary of the Treasury. Moreover, if Hamilton truly were a monarchist, it hardly seems possible George Washington would have held him in such high regard, and depended upon him so extensively, especially as Hamilton laid the foundation stones for our national economy. My own view is that during the Constitutional Convention, Hamilton self-consciously assumed the role of idea provocateur, promoting some of the more extreme positions to deliberately drive the delegates toward the final compromise they have blessed us with.

    In Hamilton’s case, he was able to assume such a provocative role while maintaining his public standing as a leading light of the day. None of us should assume we can likewise maintain our own reputations once the fight is joined, and we attempt to make our voices heard in the tumult of public debate. But, we must not flinch from putting our ideas out there, for Friedman, unfortunately, is correct. When the crisis occurs, the actions that are taken depend on the ideas that are lying around.

    Forthwith, then, I present you a list of my proposals.

    1. Place heavy taxes on speculation. For example, the sale of any security (stock, bond or derivative) held less than a year should incur a ten percent transaction tax. This would demolish the hot-money games of trading trillions of dollars each day in foreign exchange, bonds, futures, etc. One of the goals is to force capital to be patient, to shape it to conform with the demands of physical economic activity. As Hamilton asked simply and pointedly in Number 15 The Federalist Papers, “Is private credit the friend and patron of industry?” (Note the use of the term industry, which was then much more specific and meaningful than it is today).

    2. Tight, very TIGHT capital controls. Any capital leaving the country that does not have documented ties to an infrastructure project or the import or export of actual goods or services should be taxed at 20 percent or more, or what ever level is necessary to stop capital flight.

    3. A mergers and acquisitions tax. It is simply absurd and self-destructive to allow more money to go into companies buying each other up and out, than to go into research and development or capital improvements.

    4. Begin massive infrastructure projects in the U.S. For example, replace ALL public school buildings in the U.S. that are more than 15 years old, except those of architectural and historical significance, such as the Frank Lloyd Wright campus at Florida State. Build an underground high-speed rail system, first from Boston to Washington, then extend it to the Carolinas and Florida. Similarly along the West Coast. Personally, I would go for mag-lev systems. Replace the electrical grid, both generation and distribution. Start to address the $1.5 trillion shortfall in infrastructure MAINTENANCE identified by the American Society of Civil Engineers – no more collapsing bridges. The effect such a program should have on employment and wages of the lower and middle classes should hopefully be immediately apparent to the thoughtful observer.

    5. Withdraw from GATT. Reintroduce protective tariffs of 30 to 100 percent. You have to look back to the 1800s to see how effective tariffs are as a policy instrument. This would also address the problem of China exporting either deflation or inflation.

    6. Rather than GATT, or any new round of trade talks, begin a series of bilateral and multinational agreements aimed at actual national development. For example, Panama wants to widen the Canal. The U.S. can supply capital and construction equipment for this project. Other projects would include a real trans-continental transportation system for Africa, and the greening of Chinese industrial capacity.

    7. Crash programs for such goals as creating alternatives to gasoline and other fossil fuels. Again, it is self-destructive for so little money to go towards such goals, in comparison with the trillions going to mergers and acquisitions, and pure speculation.

    8. Reinstitute laws aimed at ensuring local control of news media, and break-up the communications oligopolies. The current situation, with a handful of corporations controlling nearly 80 percent of the news media in the United States, is clearly unacceptable.

  • News that the Fed held an emergency meeting today, Sunday. Rumors are rampant that Citibank is in trouble, perhaps even insolvent.

    U.S. stocks to extend losses next week
    Turmoil on Wall Street, Citi, to take toll

    SAN FRANCISCO (MarketWatch) – U.S. stocks will extend their losses next week as concern over poor earnings, oil nearing $100 a barrel, and more turmoil in the banking and brokerage industries promise to rock Wall Street for a second week, with Citigroup Inc. at the center of the action on Monday after an emergency weekend board meeting.


    I did inhale.

  • your debts, reduce your expenses (spend money on nothing you don’t need or which won’t save you money in the future), save money, make sure you’re on good terms with your spouse (really, this is financial advice) and your friends, family and neighbours.

  • There’s a mystery on Wall Street. Merrill Lynch wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didn’t feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their “Level 3” asset portfolios.

    more here
    Level 3 storm about to hit Wall Street
    By Martin Hutchinson

  • I’ve been meaning to write on that article (it was posted elsewhere last week). Basically, if forced to actually account for their assets, it looks like much of Wall Street and many banks are actually insolvent.

  • Citigroup chief resigns
    Published: Sunday November 4, 2007

    Citigroup chief Charles Prince resigned at a board meeting Sunday, paying personally for the world’s top banking group’s poor performance in the subprime mortgage crisis, The Wall Street Journal reported.

    Board member Robert Rubin, the influential chairman of the company’s executive committee, will be named Citigroup chairman, while Sir Win Bischoff, chairman of Citi Europe, will become interim CEO, said the economic daily.

  • My idea on changing the paradigm;

    Humanity is rapidly approaching a crossroads, where we will begin cooperating on a scale that we never have before, or we will descend into a state of warring tribes like we have never seen before. Appeals to the conscience only work on those willing to listen, while it is the less altruistic who need to pay the most attention. If there is one thing that does get people’s attention, it’s the money.

    In 1996, Bob Dole had a campaign slogan, “We want you to keep more of your money in your pocket.” The first thought to cross my mind was, ‘Thank God it’s not my money, or it would be worthless.’ The logic of this is that the actual currency doesn’t belong to the holder, only its value. The monetary system is a function of government, which in a democracy is the people. Therefore money is actually a form of public commons, similar to a public road system. Instead of transportation, it’s a system of economic exchange. While you are in total possession of the section of road you’re driving on, its value is due to it being connected to those everyone else is on. So is the value of the money in your pocket due to its broad interchangeability. It is not an issue of socializing wealth, but of understanding what money is to begin with. Your home, business, car, etc. are private property, but the roads linking them are not. Money is more like the public road system, than private property. It provides a broad economic connectivity, without which the economy could not function.

    Money has always been a form of public utility (Render unto Caesar…), but because it evolved out of barter and for much of history was minted out of precious metals to gave it inherent value, the issue of function has been confused with the issue of possession. Now all monetary value is a matter of public trust in government accountability and this is being abused to the breaking point. It was only a generation ago that the wealth of governments were still symbolized, if not based on the gold in the treasury. For many countries, it’s now how much US dollars and debt they are holding. This is not a stable situation. When the liquidity bubble does burst, faith in the concept of printed money will be shaken to its core. In order to restore faith in an invaluable economic tool, it would be useful to emphasize this public function. There is no longer a gold standard and it is the taxpayer who bears ultimate responsibility for government obligations.

    Here is a little history to consider in understanding why we are where we are.

    The money supply has to grow along with the economy. Inflation is caused by the supply of money growing too fast, so the law of supply and demand makes it worth less. Interest rates are raised to slow the growth of the money supply, when the economy is reaching peak potential, since the amount of money might expand faster then the economy is able to grow. During the late sixties and seventies, the money supply was allowed to grow faster then the economy in order to pay for Great Society programs, the Vietnam War and the oil crises. By the end of the seventies, inflation was spiraling out of control and Paul Volcker was given the job of taming it by raising interest rates as much as it would take to do the job. This led to a serious recession, but by 1982 inflation had peaked and he could take the pressure off.

    There is a minor logical hitch to this scenario, though. By raising interest rates to the point of causing actual economic harm, he was reducing the growth of the economy and therefore the need for money. How do you reduce an oversupply, if you also reduce demand?

    The Federal Reserve fine tunes the size of the money supply by buying and selling government debt. To put money into circulation, they buy government debt with fresh money and to take money out, they sell debt they are holding.

    In 1980, Ronald Reagan was elected on a platform of what his primary opponent, George Bush, referred to as “Voodoo Economics,” i.e. increased spending and tax cuts. The result was a serious increase in deficit spending. Now ask yourself, if the Federal Reserve sells debt to reduce the money supply, wouldn’t the Treasury issuing fresh debt have the same effect? By 1982, the deficit was getting close to 200 billion and that was real money in those days. The dramatic growth in deficit spending by the US government was a significant factor in bringing inflation under control.

    The borrower/producer/spender is the engine of the economy, with the saver/lender as the fuel tank. While it seems inflation is propelled by those who want to be paid more, both producers and labor, taking it out on borrowers doesn’t bring supply in line with demand. Inflation is caused by the government putting too much money into circulation and the reservoir of surplus money in the economy is what is held by the saver. Earnings are taxed more then savings, so tax cuts put money into production, rather than savings. Government borrowing draws money out of savings and spends it in ways that increase and support private sector investment, through increases in services, infrastructure, security, etc. This compounds the demand for money.

    At the time, economists were concerned government borrowing would crowd out the private sector, but the government issues whatever people are willing to borrow at the short term rate it sets, by buying back government debt. The problem is long term rates are set by the market and with inflation, people are more inclined to buy assets, than lend money, so the supply of money to borrow is limited and the cost , interest rates, goes up. If there is a lot of money around, but inflation isn’t a concern, people lend it for whatever the market pays and long term rates go down. So the secret of our unstoppable prosperity is to have lots of money running through the system, to keep rates down and production up, but not have any start to clog the arteries and cause inflation to rise. The question is finding ever more places to invest and spend it, but the long term productivity of all this growth tends to decline. The result is fewer small business cycles in exchange for a large one.

    Normally only as much money can be saved, as can be effectively invested, otherwise it causes inflation of asset prices. So where would all the money the government borrows be going, if the government didn’t borrow it? The stock market? Real estate? Inflate the derivatives balloon a little more? The economy is flooded with about as much money as it can hold. If the government wasn’t borrowing lots of money and recycling it through the public sector, there would be a lot less money needed all the way around and this would be inflationary. Government debt serves to support the value of the money, as well as the economy.

    What will be the long term effect of this borrowing and how will it get paid down? Recently some mid-western states have sold public highways to private investors and they have been turned into toll roads. How soon until Yellowstone goes on the block? Private armies buying surplus warships? It would make sense to tax more savings from those most able to afford it, but this usually causes such people to find other ways of storing wealth. If we were to understand money as a public utility, it might better define how to manage wealth to help the larger community and environment.

    In the seventies, the national economy was mostly based in the US, and inflation percolated through it, with prices and wages increasing together. Today the global economy keeps prices and wages in check, so consumer inflation is moderate, but low interest rates are creating an enormous speculative bubble among investors. Eventually it will pop and send a tidal wave of surplus money back into the regular economy, driving up prices far more then wages. Until then the gap between the rich and everyone else will continue to expand at ever increasing increasing rates, as inflated asset prices turn investment capital ever more rapidly into play money and more is needed.

    In some third world countries, the politicians skim off enormous wealth, and we can see it is economically unproductive and socially destructive, yet those running our financial and industrial institutions to do the same and claim it is simply a cost of doing business. Only as much total money can be saved as can be effectively invested, otherwise it is inflationary. So these oceans of private money reduce the ability of the average person to save and invest. Endless wealth accruing to those in positions of power will eventually come to be understood as economically barbaric, and we will climb one more step up the evolutionary ladder.

    Everyone needs some amount of wealth in order to both be secure and to have a commitment to the larger system. Some need more then others, like a truck needs more road then a car. Those with none have less consideration for society and are governed more by fear than respect. Those at the top need to remember that a stable society is as important to them as to everyone else. If money were thought of as a public utility, it would have definite psychological effects. People might be less inclined to define their personal ego in terms of the size of their bank account and start leaving natural wealth undisturbed, while investing more effort in their communities and environment. A healthy economy, a healthy society and a healthy environment do not have to be mutually exclusive.

    Growth is bottom up, not top down, so capitalism is at its most vibrant when wealth is most evenly distributed. The problem with treating the economy like a game of Monopoly is that when one person controls everything, the game is over and you start again. In real life this stage is called revolution.

    Money is a public utility, not private property. Pass it on.

  • Imagine someone actually paying attention to growth of the money supply. Holy Paul Volker! It was accepted wisdom back in his day that money supply growth in excess of the mean economic growth rate (of some defined previous period) will lead to inflation. So the market became obsessed with money supply statistics and what they implied for interest rates. Ten years later under Greenspan this began to be thrown out the door. Inflation was being targeted, not money supply. Then it became core inflation as the target, not actual inflation. Before you knew it we were right back in the 1970s under Arthur Burns, who kept paring away bits and pieces from the inflation data to get to some mythical core inflation that no one actually paid. Hence his excessive growth in money supply and inflation, and the eventual need for Paul Volker to clamp down with 11% prime rates.

    Oddly enough, a part of the Fed subscribes to your theory about money being a public utility. These are the operational people who manage Fed wire for Fed Funds and securities. They view Fed wire as a public service that is essential for a modern economy. All sorts of work has been put into perfecting the Real Time Gross Settlement system that is Fed wire, and convincing other central banks around the world to modernize in a similar way. Money therefore settles on the Fed utility at the nanosecond – the real time it takes to transfer balances from one member bank to another.

    Maybe the monetary policy people think the same way. Certainly they agree with you that forces much larger than the Fed control long term rates. But they have not yet reverted back to Volker-era emphasis on money supply, and they don’t have a clue what to do about asset bubbles. In that sense they are still Friedmanesque monetarists: “inflation is always and everywhere a monetary phenomenon.” Except when it’s an asset phenomenon bleeding into pricing decisions. Then the Fed thinks it’s helpless, though lots of European central banks think otherwise. This is a policy debate with huge real-world consequences, and we are about to find out the costs of the Fed being on the wrong side of this debate.

  • The top U.S. bank loses its CEO just because of some write-downs of securities. Is that really what is going on, or is there something deeper to the story we aren’t hearing? I bet the market tomorrow morning will wonder the same thing, though there may be a blip up in Citi stock because of the faith people have in Rubin.

  • AT first I appreciate a Lot this Article, Congrats for it !!
    The issue in mention shed a light to my mind in order to get a better
    understanding in relation to the powerful interests that rule the world like as we know, and let to view another way to become the world, humanistic and rational.
    The article in mention as above I say, remind me that still there are a moral reserve in US, a country devaluated and hated in the most countries and people all over the world.
    Finally, I think that Wall Street is far away of its own self-destruction, perhaps its proper dynamics and irrational would be its
    final executor or benefactor, depending by the side that you watch.

    Thnx a LOT !!

  • is really really good advice. The thing so many people do not realize is that their debts are on floating rates. Visa debt, lines of credit against their houses, even mortgages and car loans can have clauses that allow interest to rise. You could see your debt expenses double over a very short period of time, just suck up all your cash.

    My other focus has been alternatives to transport should the price of fuels spike higher. Don’t get caught stranded when gasoline or diesel spikes to $6 a gallon. Sound crazy? Well, Its $8 a gallon in England.

    I have been replacing every appliance with the most energy efficient out there. And plan on figuring out some ways to produce some of my own energy.

    I do see what I call a mismatch emerging. It could get ugly fast.

  • Al-Waleed has been seriously considering this for quite awhile. In light of the present big shakeup I’m wondering if this is also in play behind the scenes. For anyone who doesn’t know who Prince al-Waleed bin Talal is, he’s ranked somewhere between the world’s 5th to 13th richest men (depending on who’s making the list) and has been for many years. He is Citibank’s largest shareholder, which holdings, in turn, represent up to half of his multi-billion dollar fortune. (He’s also the guy who’s offer of 10 million dollars to New York City relief after 9/11 was loudly and triumphantly rejected by Guiliani. – Such a smarty pants, that Guiliani!)

  • EW YORK (Reuters) – Saudi Prince Alwaleed bin Talal favors bringing back Sanford “Sandy” Weill to lead Citigroup Inc on an interim basis, CNBC television said on Monday.

    Citigroup late Sunday announced the resignation of Chairman and Chief Executive Charles Prince and said it may record an $11 billion write-down for subprime mortgages. Robert Rubin, who had chaired Citigroup’s executive committee, was named chairman, while Sir Win Bischoff, who heads Citigroup Europe, was named acting chief executive.

    Alwaleed, Citigroup’s largest individual investor, had long publicly supported Prince. He withdrew that support last Thursday once it became clear Citigroup would report a big write-down, CNBC said.

    Weill stepped down as Citigroup chief executive in 2003 and as chairman in 2006.

    (Reporting by Jonathan Stempel and Edward Tobin)

  • Alwaleed just took away Chuck’s throne. The real prince made his fortune when he bought into Citibank at about $8.00/share way back when John Reed had run the bank into the ground. Alwaleed doesn’t want to see the price right back to where he rescued the bank, but that is probably in the cards no matter who is running the show. And Sandy Weil isn’t coming back; he’s too smart. He knows his strength is in cleaning up banks by firing half the staff and finding a buyer for the new, improved bank. He can certainly do the first part, but this time around even with half the staff gone no one is going to want Citibank.

  • Monday November 5, 6:00 pm ET
    By Jonathan Stempel and Dan Wilchins


    NEW YORK (Reuters) – Citigroup Inc’s (NYSE:C – News) problems deepened on Monday as it was unable to assure investors that a potential $11 billion write-down for subprime mortgages won’t grow, and its nearly pristine credit ratings were downgraded.

    The largest U.S. bank also reduced its previously reported third-quarter profit because of worsening credit markets, which it expects will reduce future cash flow. Moody’s Investors Service and Fitch Ratings lowered Citigroup’s debt ratings.

    Its stock hit a new 4-1/2-year low.

  • Massive government program to get us off the oil teat and into alternative energy and more sustainable living.

    That’s how we get out of this. We need to be able to tell the Saudis to fuck off.

    “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

    Charles Darwin

  • Crisis, what crisis? America carries on
    Gerard Baker: American View

    Few public figures have been lucky enough to enjoy the sort of reputation that has attached to Robert Rubin.

    When he was US Treasury Secretary under President Clinton, the former Goldman Sachs chief was widely credited with an unmatched economic wisdom and a managerial financial genius that made him, in the eye of most pundits, a cross between John Maynard Keynes and JP Morgan.

    In the space of six short years in Washington in the 1990s, it was generally agreed that he had balanced the federal budget, restored faith in the dollar, saved Mexico from financial collapse, rescued Asia from the regional economic crisis that threatened to overwhelm it, and steered the world through the last great global financial panic when Russia defaulted and a flashy US investment institution failed in 1998. If the sun shone on the global economy in that happy period, it did so only because Mr Rubin bent its rays in the right direction.

    True, he had to share the credit for many of those triumphs with Alan Greenspan, the Chairman of the Federal Reserve at the time.
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    But history has been less kind to the old central banker than it has been to Mr Rubin. Mr Greenspan now travels the world explaining to sceptical audiences that he is not really responsible for the succession of financial bubbles that followed the two men’s co-dominion over the world economy. Mr Rubin’s standing, meanwhile, is so pristine that, like Charles de Gaulle at Colombey-les-deux-Églises, he is begged, one last time, to come to the aid of a world that can’t manage without him.

    His appointment at the weekend as chairman of Citigroup, the vast, unwieldy issue of Sandy Weill’s ambition and now the object of much of the world’s current financial alarm, is filled with such irony. Mr Rubin has been partly responsible for running Citigroup all through the period in which the bank has got itself into so much trouble in the US sub-prime mortgage market.

    He doesn’t share the burden of fault that Chuck Prince, the ousted chairman and chief executive carries, but he is hardly without blame. And yet, here he is again, the repository of hope for worried markets.

    He has spent much of the past seven years publicly bewailing the fragile state of the US economy and fretting about the unsustainability of the various financial booms. And yet, here he is again, (tens of millions of dollars personally richer) given the task of restoring faith in the American banking system.

    To be fair, his main job, presumably, will be to find a successor to Mr Prince as chief executive and then retire gracefully from the scene. But his arrival back in the limelight is a timely reminder of what is supposed to be the central role that the financial system plays in the health of the economy.

    Mr Prince’s departure brings to two in a week the number of chief executives ousted at large US financial institutions. Last week it was Stan O’Neal at Merrill Lynch. To paraphrase Oscar Wilde, to lose one chief executive may be considered a misfortune, to lose two looks like carelessness. And yet America as a whole seems unchastened by the experience.

    The oddest conundrum for global investors these days remains the apparent invulnerability of the US economy to the disasters playing out in its financial sector. Between them Citigroup and Merrill Lynch have now reported losses of about $20 billion on their investments in asset-backed securities.

    Behemoths though they may be, these figures cannot be more than the tip of a nasty iceberg of losses across America’s financial system.

    And yet the much-feared contagion from Wall Street to Main Street still seems illusory. Even as we have watched the traumas unfold in New York in the past week, we have had further encouraging evidence that the economy remains buoyant. Gross domestic product in the third quarter – the period when the financial ball really started to unravel – was remarkably robust. And the first set of data from the fourth quarter – led by last week’s employment report for October – showed, if anything, a slight acceleration. The economy added 166,000 jobs last month, the best figure in six months. Yesterday, the Institute for Supply Management said its service sector purchasing managers’ index for October was up from a month earlier.

    What to make of this continued divergence between the financial world and what some commentators call the real world?

    The view of some in the markets is one of simple disbelief. They don’t trust the Government’s numbers – especially the employment report, which has been subject to large revisions in the past. They think we will learn soon that things are much worse than they look.

    Others think the present may be OK, but it is the future they worry about. The housing market will eventually drag down consumers; the credit crunch will eventually crimp all borrowers.

    For this group of worriers, we are entering a kind of apocalyptic moment, with markets offering almost iconic numerical significance – the $2 pound, closing in on the $1.50 euro, $100 oil and $1,000 gold. It all signals, if not the End of Times, then at least a much larger economic crisis still to unfold.

    Then there is a third group – the muddling-through crowd. They continue to think that, despite everything, the fundamentals of the modern US economy really are sound; inflation is under control; global demand is booming; wages are growing, and all will be able to withstand the current nastiness.

    Whether they are right or wrong, it is the people in this third group that still seem to have the ear of investors.

  • political will to do that has been lacking for decades. The Saudis, etc. do not want that to happen. And telling the Saudis to fuck off would be going against a foreign policy consensus spanning multiple administrations.

    This is just my theory, but high oil prices act as a regressive tax (which party likes those?) transferring wealth to the plutocracy. So why would we want to stop the gravy train.

  • No. The unrefuted, accepted assumption is that we are stuck with the status quo. I had long held that opinion, until recently, when I learned about the FairTax. It gets rid of all embedded taxes, making our own goods and services more competitive. It encourages saving and investment. It will bring back trillions (estimates are ~ $11 trillion) of dollars from sheltered, offshore accounts. It is a somewhat progressive, broad-based tax — twice as large as the current tax system — which also taxes the growing underground economy, estimated at $1 trillion to $3 trillion dollars.

    An interesting Wall Street article:
    “…the underground economy is undermining the effectiveness of the IRS. If the IRS could collect all the taxes it says that it is owed from the underground economy in a given year, then the current budget deficit would disappear overnight. And if the IRS could collect these taxes every year, then the nation would have surpluses far into the future.

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