Chronicles of the financial tsunami, 5th part. (September 30, 2008) As in 1929, the financial crisis of the United States arrived in Europe. The seriousness of the danger became tangible on last weekend when three European banks had to be rescued by their respective supervisory authorities: Bradford & Bingley in the UK, Fortis in Benelux and in Germany Hypo Real Estate. These three examples, particularly that of Fortis illustrate the complexity of responding to a situation of credit crunch when the crisis hit banks that have a business straddling several states. The European Central Bank, unlike the Fed is not a true federal bank in the fullness of his powers. It has not all the instruments to respond to a crisis of this type.
A central bank has several roles. Its main task is to define and implement monetary policy. This may mean price stability, only, as the ECB or two missions, price stability and growth, as the U.S. Fed. The main instrument available to him is to have the power to set the base rate director, ie the interest rate at which banks borrow and then re-lend. The central bank also has two other roles: it must monitor the banking system and serves as a lender of last resort. If your bank fails, you will not lose the money that was on your account. This task creates the conditions of trust without which the slightest rumor, everyone would run out his money, or as banks make loans based on a multiplier of their deposits, the system would be extremely fragile. The European Central Bank is responsible for the common currency and it inherited the national central banks conduct monetary policy. However, the establishment of legislation and supervision of commercial banks are still largely the domain, jealously guarded national central banks. The third mission has also not been transferred. The European Central Bank is not a lender of last resort. It coordinates the efforts of just the national central banks. It can provide liquidity as yesterday, the 120 billion euros, to prevent a bank from being grabbed by the throat, but this is his first mission, the policy rate. This system is now inadequate. European commercial banks are becoming more and more business outside their home country (in 2006 24% of their assets were held in another country of the EU, against 11% in 1997). Not to mention that only 15 out of 27 countries are part of the euro area. The case of Fortis bancassurance is particularly interesting because it illustrates the new challenges which faced the European financial system. Fortis is a banking group which is principally owned by Belgian and Dutch shareholders, but also Luxembourg and China. The assets of Fortis amounted to 30 June 2008 to 974,000,000,000 euros. For an order of comparison, Belgium has a GDP of 331 billion euros in 2007. Fortis is not only too big to fail but also too big to be rescued by a single country the size of Belgium. This is great since the Benelux has a long tradition of political cooperation and Belgium and the Netherlands have a bilateral treaty that provides for who does what in case of bankruptcy of a transnational bank. Which brings me back to the role of lender of last resort. It is not to save all banks in principle. In fact, central banks hide behind a prudent ambiguity, which aims to distill the confidence without encouraging irresponsible behavior. Clearly, a central bank will eliminate insolvent banks (like the Fed did for the savings banks in 1987) but come to the rescue of illiquid banks (like the Fed did last Friday for Washington Mutual). But the example of the failure of Lehman Brothers suggests that the distinction between insolvent banks (too decayed or depreciated asset) and illiquid banks (liquidity needs and the money exists but is not immediately accessible), this distinction n is not always easy to establish. Lehman Brothers went bankrupt and the week after the Fed and the Treasury, taking the measure of the seriousness of the situation have intervened to save Merrill Lynch. From when a claim she continues to be good and she begins to feel rotten? Just look at what is happening with multinationals such as General Electric who have been forced to borrow from the Fed to fund their cash drawer (the equivalent of "you're exposed to the end of the month ... "). If the credit crunch does not loosen its grip, people will no longer get loans, General Electric will no longer sell its products and not earning more money, the company can no longer meet its obligations. The good will become bad debts. But back to Fortis. Last year, the bank had allied with the Royal Bank of Scotland and Banco Santander to acquire ABN Amro at a price of 73 billion euros. With the combination of the subprime crisis and credit crunch, its share, estimated at 24 billion euros lost 71% of its value. The weekend after the BNP Paribas and ING Group declined the offer for the acquisition, bankruptcy was inevitable due to lack of liquidity. Central banks in the Benelux have played the role of lender of last resort and have bailed out Fortis to the tune of 11.2 billion euros. They are now shareholders can expect to sell assets when they reach maturity, which should bring, perhaps, the benefits to taxpayers in both countries. Just for the sake of the reasoning ... What would have happened if instead of Fortis ABN Amro had been had by the throat to the credit crunch? If the function of lender of last resort is not taken in hand at European level by the ECB, on whom falls the responsibility to rescue failing banks? Would it have been Spanish and Scottish taxpayers to check to save a distant active, scattered all over Holland? Ooh, the European idea was not already the coast ... Unlike the Benelux, the links between Scotland and Spain are cowards. When federal taxes paid in California are used to repair for the thousandth time the waterfront built in Florida, California taxpayers scream but he hopes that the day the San Andreas Fault will wake up and the Great Earthquake of earth- -as-all-the-world-waiting, including me, with my survival kit of the Red Cross at the foot of the bed, destroying everything, Floridians get their hands dirty. Solidarity is because it's the same people, the same country and because there is a federal government transfers to operate. We see the limits of the comparison with the European Union. While preserving the European financial system needs to adapt to the laws of the euro area to the reality of companies increasingly transnational, the extension of tasks of the ECB in the role of policeman of the banking system and lender of last resort risk of encountering myopia and selfishness of economic agents. We often forget that what has changed of the United States in the United States is the military defeat of the "sovereignty" (the term is anachronistic) during the Civil War. Our "ever closer union among the peoples" is also sealed by the blood of two world wars. But the process has not had time paroxysmal. This is his chance and its weakness. Andalusians and the inhabitants of Bratislava, the subjects of His Britannic Majesty and Swedes feel a common destiny, but a little wallet attached. Chronicles of the financial tsunami, 6th component. Billionaire Warren Buffett took advantage of the sales season. He just picked up a piece of General Electric against some lenses, $ 3 billion. This is reminiscent of the financial crisis of 1907 when JP Morgan had helped the U.S. government with his personal fortune. You do not have money, I'll ready! Following what the Fed was created in 1913 to avoid incest. The rest of the world is waiting, hoping and pray that the House of Representatives adopted the new version of Tomorrow bailout the U.S. financial system. Just to send the signal that if they do not move, blood on Wall Street will spread into your street, the stock market today with a drop of 348 points and closing below 10,500 points. The Paulson plan in its first version was spread over two pages and a half and cost about $ 1 billion of the word. Basically, he said, give me the full powers and a check for $ 700 billion and I will draw business. Do not think, pay. The revised version of the Congress had swelled to 110 pages. We had added a good dose of supervision, the right of the State to be a shareholder, a limitation on golden parachutes and so on. But the man in the street was not alarmed enough, or aware of the issues, and a majority of members preferred to do not shine, forty days before the election. The third and hopefully final version, as adopted by the Senate yesterday (thank you to the elect Jews who were willing to move the day of New Year - yesterday was also the feast of the Ait-El-Kebir, but according to my information, there is no Muslim U.S. Senator, I remind you, despite the insinuations of some advertisements para-Republicans that Barack Obama is a Protestant), in short, the new version is 450 pages. It requires health insurers to reimburse mental health (??), gives rebates on capital gains for companies (one wonders who could have make gains this year ...) and other measures to bribe of Representatives. It contains fortunately still the bailout, with some modifications including limiting executive compensation. Buried in 450 pages, a measure was added that deserves some attention. This is the modification of an accounting rule. As my teacher planning law, "Do not be lulled by appearances, it is more technical and more political it is."
Here's the problem: Following the collapse of U.S. savings and loan, in the late 80's, the securities of banks should be recorded at current value (fair market value) rather than their purchase value . This rule is called in English "Mark to market" like playing basketball and must "tag" the other player in the pants, then it is to be pegged at market price. If you combine this rule with the transparency obligation of companies to present their results at the end of each quarter, you get the perverse effect as follows: just before the controls, everyone does rule. After the arrival of the book, it relaxes. Case study: a bank has a portfolio of real estate assets that it paid $ 200 million. Bad luck these titles are for homes in Las Vegas, San Diego, Miami, Detroit and Phoenix, where prices have collapsed. If it sold its portfolio today, he would find a buyer for one fifth of that price. September 30, 2008 arrives, if it is to enforce the law, it must account for these assets to the tune of 40 million. Net loss in capital: 160 million. Of course 100% of people in Las Vegas, San Diego, Miami, Detroit and Phoenix will not see their house seized. Most repay their loans. (IT IS maybe say 20% of people who have problems. I chose the cities most in need. In the rest of the country, the situation is less dramatic. September 1, 2008, the national average seizures was 2.75%, against 30% in 1934.) Where the rub is that a bank can lend only in proportion to its equity. So comes the end of the quarter and law enforcement, the bank has eaten part of his capital. Now, except to recapitalize the bank can not lend on the basis of the 40 million equity remaining. Now nobody wants to invest because everyone is afraid to put money in a company on the verge of bankruptcy. This is the vicious circle. The question that arises is: the publication of results is it the cause of the increased fragility of the bank or does it reflect the real fragility? One thing is certain, the bank can not grant new loans. 55 of the 60 MPs who wrote to the supervisory committee of the Exchange, the SEC, to demand a suspension of the accounting rule also voted against the bailout Monday. One of their reasons is that if we changed the rule would reduce the amount of slate. The other is the lobbying of the banks. Monday we were on September 29, the banks hoped to avoid having to recognize other losses. The rule in version 3 of the text rescue has not been abolished but the SEC was authorized to suspend its application, if deemed desirable. Question: breaking the thermometer does it reduce fever? It is true that accounting is always subjective but the rules are designed precisely to make the less creative as possible. If you allow the separation between asset values and market prices is the door open to rave balance sheets, because one day my assets will be worth what I say. In credit crunch, there is the word credit comes from the Latin, "he believes." You will you believe in Santa Claus when the banks' balance sheets will be covered with silver balls? Chronicles of the financial tsunami, the seventh component
Two days after the Senate, the House of Representatives just passed by 263 votes against 171, the amended bailout plan of 700 billion U.S. financial system. It took four days of psychodrama when it rained non-stop bad news (the unemployment figures, auto sales, housing prices), so that economic agents understand that except to return to barter or to a world where people pay with their cars and homes, the U.S. financial system needed to be saved by and for users. Substantially the same time, Europeans will find themselves in crisis summit in Paris to try to agree on a bailout of their financial systems. Avoided bankruptcy of four major banks in less than a week has put the record straight. In a globalized economy, the beating of the wings of Wall Street triggered a financial tsunami in Europe and they are not dykes verbal well-intentioned leaders who will limit the damage. Analyze two situations in terms of game theory to better understand what is unfolding before our eyes. First the American case: we were in the typical case of a game with two hits with three agents: Congress, Wall Street and the People. Let the following diagram:
The hard lines represent the relationship "needs." The dotted lines represent the relationship "may punish." Congress needs of the people and can punish Wall Street. The people need Wall Street and Congress can not punish Wall Street. Wall Street needs the Congress may punish the people but not the Congress. The Congress is an emanation of the people but their own interests. We can say that it is in a position of agency in relation to the People (where the People is the largest and Congress acts as his agent). This gives the following game: First time: Monday, September 29, 2008: Congress punish Wall Street. Wall Street punishes the people. All are punished. The agents are rational, they understand that this game leads to self-destruction. It therefore leads to a change in behavior: The next move: Congress helps Wall Street. Congress has helped the people while ensuring the inclusion of its interests. The people will not punish the Congress. It has resulted in a cooperative game with a happy ending (sic): the world is not annihilated, he can rebuild. Now the European case: First time: First, the game commits a non-cooperative. Ireland says it will guarantee all assets deposited in six of its banks an unlimited amount. At the same time, the United Kingdom and France are guaranteed their best. In this game, we have two types of players: The Big Country (France, Germany, UK, Spain and Italy) can save their banks themselves. Small countries (Ireland, Belgium, Netherlands, etc.). Are too small to save their banks on their own. The Big Country will not pay for small countries because their people would punish them. Second shot: The President of the Central Bank Européennne and the President of the European Union, itself a member of Big Country are trying to meet a summit that brings together the big countries and small countries in order to establish a cooperative game. The cooperative solution is superior to the non-cooperative solution, but it is unstable. First, because the game has already begun. Secondly, because the smaller countries accept to cooperate if the Big Country help in case of bankruptcy. We're in a game of prisoner's dilemma type:
Petit Pays Petit Pays plays cooperate personal Big Country is cooperating 400 billion plan passed, the large taxpayer paid for everyone. The world is saved. A smaller plan is adopted. Some banks go bankrupt. Cost to the community over 400 billion. Big Country plays personal banks of Big Country are saved. Banks of small countries are going bankrupt. The Little Big eat. The industry is restructuring on a field clearance. Sauve qui peut!
In reality, neither the President of the European Central Bank or the President of the EU have no authority to force the big countries and small countries to cooperate. In addition, Big Country were not all homogeneous behavior. They have their own strategies. In total, I have no crystal ball but I anticipate that the cooperative solution, though the most desirable will not lead one to which representatives of the States of the EU this weekend in Paris.
Well if this is true, why the New York Stock Exchange today, she fenced in a decrease of 1.55% and the CAC 40 was up it 2.96%? It's enough to lose his last certainties. There is a saying on Wall Street: "You buy on the rumors and you sell on the news" (= you buy based on rumors and you sell when the news is confirmed). The Palais Brongniart has closed up shop for the weekend before the bailout was voted in the House of Representatives. Wall Street has opened up 200 points on rumors that the plan would be adopted. When it was certainly, traders took profits. Capitalism is not suddenly become altruistic.
Chronicles of the financial tsunami, the ninth component October 7, 2008 "Do not despair Billancourt! "Sartre would have said if he had watched the press conference of Ben Bernanke this morning on Wall Street TV. "You have to hear you guys" would have added that his ghost still squinted a few minutes before the meeting of 27 Ministers of Economy and Finance of the EU, meeting in Luxembourg. The Fed chairman speaks to the equivalent of the French Association of Banks and the Stock Exchange from under 130 points at least 290 points. EU ministers are meeting and continue to decide that everyone can manage very well alone. They do agree on one point: no European bank will fail. You laugh when Rome was under water, do you know what happened to Atlantis? It is true that the principal financial European, London, outside the euro area and German government during the election campaign, the diving has a future in the North Sea. So we tinker and you scoop; French: drain the water from a boat. In the U.S., the Fed invents a fourth mission, in addition to monetary policy, banking supervision and lender of last resort. Since banks do not lend themselves more to one another and that companies can not borrow short term from banks to finance their cash needs, here become lender of first resort. What does this mean and how did we get here? In economics, there are three markets: the market for goods and services, the labor market and capital market. The capital market (in English, financial market) is split between the money market (money market) that provides short-term financing (from one day to two years) and the financial market (capital market) which funds projects longer term. There are several reasons why the money market is used by economic agents. Examples: I am a retail bank, like Bank of America or BNP-Paribas, have a lot of my clients' deposits, it would be a shame they do not relate to me. Another example, I am a merchant bank, like Merrill Lynch or Smith Barney (now I'm backed by a universal bank, but I always do the same job) and borrow short term to long-term investments; much cheaper than borrowing long term to invest long term or short term, for that matter. Another example: I am the State of California and my budget is always passed with three months late because my Parliament is a real mess. In any case, even when they agree, from the time the budget is adopted and when the taxes come in boxes and I'm still short. Last example: I am the BMW of San Francisco, borrow to buy cars and I repay once I sold. Right now, the money market dried up. Holders choose not to pay cash for fear of not being repaid. Agents who need to refinance lender and can not find are strangled. Just one figure: about 24% of the debt of banks to be refinanced each day (!!!) (so far as is known in English overnight rollover). If we remember that there is a leverage by which banks borrow up to thirty times the amount of their capital, it is clear that the sums are astronomical and that things can go wrong very quickly. Given the wondrous conditions, holders of cash fleeing stocks and bonds of companies whose prices are falling and whose very survival is questionable. They rush to Treasury bills, a safe investment and hyper-liquid. As a result, law of supply and demand, the rate at which the U.S. State pays the money that it borrows is at its lowest, almost nothing: 0.29% one month, 0.85% to three months (against 1.7% in September 1). However, if you absolutely must refinance, the rate at which banks lend to each other, Libor is 3.94% for a loan to one month and 4.14% for a loan to three months. (Against 6 or 7% last week, so looks like Charlotte de Turckheim, "it's going much better"). The difference (the spread in the language of bankers) between Treasuries and Libor is a good indicator of lack of confidence and uncertainty of the agents. They prefer the guaranteed% to almost zero as 4% with risk. Another indicator of this fear was the amount of assets deposited by banks with the Central Bank. In Europe, the ECB injected for ten days a staggering amount of cash, $ 120 billion in one weekend and at the same time the banks brought back more than 44 billion euros in deposits to his desk. To overcome this impasse, the Fed is going to lend short-term economic agents. The central bank replaces banks in their role as lender of first resort. One of the reasons why financial institutions have shown a reluctance to lend, of late, because the guarantees that they brought in a mechanism similar to the Mount of Piety were questionable or difficult to sell because the vicious circle of credit crunch, Mr. Bernanke as central banker and a professor of economic history specialist in the crisis of 1929 has just said in his press conference that from now on, the Fed will accept bills of exchange in three months with or without consideration. Today, Rome scoop still under 508 points. In 9447 tons of salt water, the couple always looking Nemo Paulson Bernanke. Chronicles of the financial tsunami, the 10th component Erratum: In the eighth section, I mentioned that 10,000 people gathered in Denver to attend the inauguration speech of Barack Obama. In fact, they were more than 80,000! Accuracy: In the sixth part: if it is unnecessary to actually Muslim U.S. Senator, however, in 2006, Keith Ellison, elected Minnesota was sworn on the Koran when he took office in the House of representatives. October 8, 2008 The tsunami arrived in Asia after falling 10 to 15.5% today and 10 yesterday and 19%, Indonesia and Russia suspend their quotes. Nikkei down 9.4%, the Shanghai Stock Exchange by 3% that of Seoul 5.8%. The tsunami is still in Europe: Frankfurt - 5.88%, London, -5.18% -7.9% today and yesterday. Paris -6.39% Monday after falling nearly 10%. As for Rome, she begins to resemble the inside of a whale. The question is not panic or not panic but what kind of panic? Monday, the day the stock market should have celebrated the adoption of the Paulson plan, the Dow had reached -800 points before recovering to close at -500. Ironically, this improvement last minute was not good news. Since Monday, hedge funds are selling because they are forced to repay money to wealthy clients whose funds are able to "redemption" (remember? After the expiration date ...). The sell mutual funds because retail investors have received their bank statements (the end of the quarter!) And reading the box at the bottom right is painful. When the market rebounded Monday during the last hour of trading, the professionals have breathed a sigh of weariness, give us a good surrender and be done! The capitulation is the technical term for when investors sell because they have lost all hope. This is good, great, a final panic. Monday was the color of a panic, and then damn! at the last minute, you still have people regain hope and who claim that there are good deals to be had in a back and forth Express. If you go to New York, you probably can not visit Wall Street, unless you know somebody (I know no one, sorry) or if your trip takes place after the death of bin Laden, but also that the American flag hangs on the front, I suggest you take a ride in the Financial District. First you will realize that the streets of Wall Street is also close the door that you can get rich through your work. Then if you walk through the neighborhood, you'll come across a statue of a big bull. I give you a hint: it's next to a Duane Reade pharmacy. Another clue: there are Duane Reade pharmacies in all corners of streets, but look for the bull. That's it, you found it? No, it's not a sculpture by Pablo Picasso. In fact, the Christopher Columbus of fortune, the Big Jim older children on Wall Street. Here is how it looks: http://www.panoramio.com/photo/3254126 In English, a bull market is a bullish market says (bull = bull) and a bear market is bearish market. It goes without saying that it is unnecessary to bear statue in this part of Manhattan. So we are clearly in a market oursier (sic). But the statistical point of view, the decline was mostly painful because since the collapse of Lehman Brothers on Sept. 15, it does not finish falling. If not by historical standards, there is still room. It is at least 30% compared to October 2007, when the stock market fidgeted with 14,000 points. Over a century, the average declines in the stock market stampedes 42%. So, give us a good panic and be done. In the meantime, we must expel water from the lungs of the real economy. The British government has just 7 recapitalize its banks, while leaving the distressed assets on the balance sheet. Which by the way is the exact opposite of the Paulson plan. In a concerted drive, the Fed, the ECB, the Central Bank of Canada, the Bank of England, Swedish Central Bank and the Swiss National Bank are to lower their prime rate less 0.5% Director. The Japanese support the idea because their rates are already so low and the Chinese themselves, fell 0.27%. It's hard to believe that this will suffice, but other measures are coming this weekend, at a world summit in Washington special under the umbrella known IMF. The Paulson Plan is also being set up at a speed not at all bureaucratic. In the meantime, each scoop. Less than 200 points today. Capitulation, surrender, to 9246 points, do I finally the mouth of capitulation? Chronicles of the financial tsunami, the 11th episode Thursday, October 9, 2008 A year ago, October 9, 2007, the Dow Jones fidgeted at 14,164.53, its highest level since it was created by Mr. Dow and Mr. Jones, who started a computer index at 15 Wall Street in 1882. This morning, the stock market opened with Dow Jones to 9258.10 points. The index is a basket of the 30 largest U.S. companies had lost 35% in one year and 15% in six days. Another index, which has 500 firms, Standard & Poor's 500 (Henry Varnum Poor was entertained in 1860 to publish a book that traced all U.S. companies to railroads and their financial arrangements), so the S & P 500 was 984.94 points, its lowest level since August 2003, down 37% compared to October 2007. It's not a very happy birthday. Taking a third index, the DJ Wilshire 5000 which encompasses values covering virtually all listed companies in one year, 7.5 trillion dollars in market capitalization destroyed. In French, the word "trillion" is a bit old. A trillion is a million power of three ("tri -") or if you prefer power 10 12. Usually they say rather trillion. But that really used to brew trillions? And as we talk in dollars, it is English that infects us. 7.5 trillion dollars is more than the GDP of Japan (4272 trillion dollars in 2007), or that of China (3.25 trillion) and almost as much as the U.S. national debt (10.19 trillion), which the first two creditors are, moreover, Japan (593 billion in U.S. Treasury bonds) and China (519 billion). 7.5 trillion is almost half the U.S. GDP (13.8 trillion in 2007). By comparison, Bill Gates, Microsoft founder and the richest man in the world weighs only 57 billion. And if we take the Forbes 400 families, that they n'accaparent 1.57 trillion, on their 400. Slightly less than the GDP of France (1.891 trillion in 2006). So the 7.5 trillion was it the wind? The IMF estimates that there were about 1.4 trillion of toxic assets due to the speculative real estate bubble. About half has already been disarmed, the other half remains of the bomb. The Paulson plan is approximately that amount. I wonder if this is how it has estimated the amount of slate. We can see how 1.4 trillion of assets could have rotted the life of at least 5000 companies banks and other participants in the bubble, plus all non-listed SMEs. During that Google or IBM is still generating record profits fall has no reason to be. Yet they fall, they fall, Madame! They do it to fall. In a snowball effect, 7.5 trillion dollars went up in smoke. For a hangover, I have an excellent recipe for onion soup. My advice, you serve at the end of the festival just before the first subway. Wall Street is on the line 3 direction Pont de Levallois.
Chronic financial tsunami (12th part) October 10, 2008 I had gone to bed leaving the grants from midnight to their discomfiture. This morning I turn on Wall Street TV: London, Frankfurt, Amsterdam, Zurich, Paris -7.73% ... I do my tour of the Berezina. Hong Kong, Bombay, Sidney -8.3%, Singapore 8%, 4.1%, Seoul, Tokyo -9.6%. All is well, Madame la Marquise. On the top edge of my screen, in orange the Dow lost 600 points. I put the sound. It's a free fall since the opening. We are below 8000 points. I leave the Dow to its fate and I will brush my teeth. When I return, traders are applauding. I never get used to the ritual which means that at the end of each session, we hear the bell and everyone claps. Especially on days when the market collapses ... It's even more bizarre on the Nasdaq, the technology stocks because it is a virtual marketplace. It is unnecessary trash, just a window on Times Square. Yet in 16 hours, every day, people applaud their computers. Anyway, here it is 6:40 in the morning, 9:40 in New York, why are they cheering? I bite my toothbrush. I reattach my screen and I see beautiful orange digits: 20. The arrow is green and pointing up. Volatility is the measure of a state of instability. The Chicago derivatives provides a hedge against this risk. By buying an option, it acquires the right but not the obligation to do something by a certain date. If the need comes, it is used. Otherwise, it expires and so be it. The market where buying and selling options is a kind of mirror in which the Exchange is planning its future. On the futures market, there is an index of turbulence. This is the VIX, to some extent the fear thermometer. It reflects the instability anticipated by agents in the securities of 500 companies in the S & P 500 (Remember, Mr. Poor ...). Will put our toothbrushes, you're awake? There are two types of options. The puts and calls. Sorry but the official language of the church is English. A put is when you have the right but not the obligation to sell a stock at a certain price. This means that somewhere, someone is obligated to buy you the action, the exercise price, if you decide to get rid of it. A call is when you have the right but not the obligation to purchase one share at an exercise price. Again, someone agrees to sell you back the share at a price determined when you need it. We do not panic, you'll see, I will not make you a trader, but you will be an informed citizen. Another very important thing to understand is that when you buy a stock, the maximum you can lose is the price you paid. This happens when the business fails. When you play with the options, it's very different. Not for you, since you are an investor who holds the option but not the obligation. You, the maximum you can lose the purchase price of the option. However, the person at the other end of the transaction bears the risk of potential loss that tends to infinity. A schedule, it will provide you with the action or you redeem, as applicable, regardless of market prices. She can win but lose much, much more than the price you paid. You multiply this risk by 500 titles and millions of shares and you are welcome to Las Vegas. Under normal circumstances, the change in the course of action is relatively slow and weak. One option cost me a small fee. At present, the future is bleak and darkened by the minute. So, say I am very worried about the future of Morgan Stanley. It is Monday, the course is $ 22. I will try to protect myself by buying a call option, with an exercise price higher and as high as possible relative to the downward path that I fear for the future. One who will commit to cover me for the price I want is here to make a profit and has also the same information as me. In times of panic, the cost of this option tends to increase and the price at which I want to make sure. The cost of the option in my example reach almost $ 22. Plus the cost of the option increases, the volatility increases, which reflects an increase in the VIX because it means that the action will go down and after a while it will again become a good deal. So people will rush to buy it. At that time, those at the other end of calls (obligation to sell) will lose money. As a result, found themselves exposed to volatility risk and should protect themselves by trying to sell or encourage others to sell, sometimes with false rumors. You can play yo-yo all day. Greed and fear are the accelerator and the brake in the brain of a trader. These days, the stock market crisis has become so severe that there has been a fear of falling and fear of ruin. General Motors and Ford will may have to merge. Wells Fargo has eaten the bank Wachovia. Morgan Stanley will survive there? Or will he absorb? The VIX is a barometer of fear and the beginning of the week, he prances over 60, where normally it varies between 20 and 30. Today it reached 74. Thus in the space of a session, it tumbled 700 points, rose to 20, Bush spoke and they fell to -200 to -500 to crumble. It is. We tasted. Then everything is played in the last hour of trading. Brokers must cover their positions, as in a game of musical chairs.
He is 16h, everyone hits very hard in his hands. After two Everest and Kilimanjaro, the Dow at -128, floats on a polder. Morgan Stanley's action, it closed at 9.68 dollars. If only I could be sure, but you will have understood: when there is a lot of volatility, the price of insurance is prohibitive. It was not until next week to see if the sales in free fall this morning was the last stop before crashing. If Monday's stock market goes up and stays in the green, we have today attended a capitulation in the rules. If not, well, all over again.
Chronic financial tsunami (13th episode) October 11, 2008
One thing is sure, the stock market will not go a weekend. Until midnight Sunday, it was peace. It's good practice, we can market, jogging, his laundry, even entertaining friends of Austria and Costa Rica. The weekend also allows me to catch the news behind which I run all week. I was going to tell you about the nasty speculators' s adonnent in short selling as betting on shares falling, I had brought the thing with my column yesterday on the derivatives markets, but a reader asked me a question from Warsaw. After Ireland, Denmark and Germany, the United States plans to guarantee deposits in their entirety as well. This is to avoid that people run out their money from smaller banks and create a risk to the entire system. This risk is all the more real that we live a period of severe credit crunch: banks do not lend themselves more to each other, or few and very short term. How much would it cost the French government to guarantee all deposits held by French banks? You remember the pool in which to bathe Uncle Scrooge? Suffice it to say the government "Bankers, count the pieces in your pool! "So we can sleep in our beds? The Rapetouts had not studied economics. All notes and coins of all Uncle Scrooge in France are only a very small part of the assets of economic agents. The money of a country is the set of values that can be converted into cash. The ticket of twenty euros in your pocket is much more liquid than your life insurance, but both are included. Your home, it is not liquid at all and is not part of the money, even if it has value. To estimate the size and structure of money supply, economists have developed statistical indicators which are called the monetary aggregates. Monetary aggregates comprise means of payment consistent. Hence the diagram below:
This is not our solar system after a nuclear war. These are three concentric circles, the smaller is called M1 and contains the rooms, tickets and deposits, c is to say the checking account. The second circle, called M2, but also includes the first booklets, Codevi roughly every term savings within two years. The third circle includes M1 and M2, and adds the titles and certificates of deposit. Guarantee deposits does this ensure that M1, M2 or M3? Obviously guarantee M1 would not solve anything. Now you want me too and numbers. But then, since the introduction of the euro or the European Central Bank or the 15 national central banks do not publish more statistics by country. The Fed has also stopped publishing the amount of M3 in 2006, which told the gossip that's that you can not report that the state turns the printing press. But you understand and now you can explain to Rapetouts that printing money is M1, not M3. It can still be approximated. Suppose the government chooses to guarantee M3. Based on the idea that money is a veil of the real economy, it would miss the pro-GDP of France in the EU-15. In 2007, M3 was $ 8.5 trillion euros in the eurozone.
France represents 14% of GDP in the EU-27 and 22% of GDP in the euro area. Where M3 is approximately equal to 1.9 trillion euros! We understand that the government will think twice before signing with closed eyes full guarantee of deposits. If we wanted it cheaper, we could not guarantee that M1. The note would amount to 0.85 trillion euros (22% of 3750), but investors are not really reassuring, since M1 contains only coins, notes and accounts. Obviously, 1.9 trillion, or almost as much as the GDP of France is what it would cost the taxpayer if all financial institutions in France were bankrupt at the same time. Unlikely event! Remember that Ireland offered to guarantee its deposits up to twice its height GDP precisely because its GDP is low. So when you see what happened to Iceland, which had wanted to play the hedge fund, we say that someone should translate the fable of the frog and the bull in Icelandic.
Chronic financial tsunami (14th episode): October 12, 2008 Guess what the stock market that has the best shot out of the game this week? South Africa, less than 9.22% in five days? Israel, -8.42%? No, Iraq, 20%. It must be said that with a budget surplus of $ 90 billion, a monthly cost of $ 10 billion for war paid for by U.S. taxpayers and one of the largest oil reserves in the world, investors have felt the flavor delicious profit. No one's subscription to nullify release today, because the journal publishes the results of the Exchange. However, in the semantics of a post-Marxist, there is a gradation from the small investor learned, the investor, the investor, sunk to the speculator, the profiteer, the gambler. One day in March of this year, the housekeeper of the gallery where I worked complains about the price of "tortillas" these corn pancakes that are the people of Central America what the bread for French, a staple food that is our joy. They have increased by almost 50% in a few months, she explained to me in Spanish. And it continues: Because oil prices, people began to make fuel with the corn. I was quite impressed by his economic reasoning. She tells me that the pastor in his sermon Sunday was explained that it was not God. That people get rich by raising food prices is not new. However, I may surprise you to learn that some people still make money when commodity prices fall, coffee or chocolate, or when markets tumble. This is called short selling. A ... let's see how will I call, speculator? An economic agent will take action to another investor, sell it, hoping its price will fall. Then, once it fell, he may redeem it at a price lower and make it to the person who lent it to him. For example, it takes an action Morgan Stanley on Monday, its price is 22 dollars. He sells it. He gets $ 22. Friday, the action does not cost more than 9.68 dollars. He was right, the action broke the figure. He bought one and makes the lender. He pocketed 12.32 dollars of profit minus the rental price of the share. In fact this example is totally fictitious because since Sept. 19, the practice of short selling (his French name) was prohibited by the SEC, the U.S. stock market watchdog. The ban was adopted after a series of near-bankruptcy of several banks since early September. This did, first, that financial institutions but the violence of his raids traders soon convinced the supervisory authorities of the Exchange to include in its list of nearly 1,000 shares. Scholarships British, German and French have banned short selling as well. Are we doing the devil's advocate: Short sellers say that their behavior, they show their defiance against a company that has problems. In a way, they are the messengers who bear the bad news to the attention of the investment community. They are pricks. They are not drilled the ball. They did not create the problems of Lehman Brothers, they only reveal them. Where it gets complicated is that the raids have redoubled force when oil prices were falling at unbelievable speed They had increased so much, it must be said, reaching almost 150 dollars per barrel, some analysts and announced $ 200 for the summer. Finally, strangled by the current demand in Europe, despite the strong euro and the U.S., despite the oil cars, began to decline. We all liquid, you take his bet and we will speculate elsewhere. Then the raids began on the banks. Well, I feel I n'extirperai not very compassionate of you. The fundamental difference between a speculator and an investor's time horizon line. An investor buys a stock with a view to keep it a while, a business cycle, for example. A tax on savings well made it punishes the speculator taxing its immediate profit and creates incentives for investors to remain stable investor, the company needs time to reap the benefits of its investments. The business of short selling is a bit of a poacher, a little pirate. You run the false rumors, taking precautions that we can not identify you. If you're smart, you sell the shares without having borrowed, since you have three days to adjust your operations. As you save you the rental price. The practice of naked short selling (literally selling unhedged) is prohibited, but things are going well in the barn when the farmer's back is turned. During the days preceding the bankruptcy of Lehman Brothers, the volume of sales of certain securities exceeded the total outstanding shares. As the SEC could not control every operation, it has completely banned short selling. The ban expired last Thursday. Since then, the SEC recommended that mutual funds not to lend or rent their actions to calm the game Speculation Will it increase? The short selling is a perfect example of the problems caused by deregulation. There was a rule instituted after the crisis of 1929 which prohibited to conduct an operation of short selling as the price of a share had not increased. Must make the price tick up so he can make tac down. It worked like a fuse in case of rumor or attempted manipulation. This rule is called the "uptick rule" applied only to short sales. No one prevents you from selling your work if you own it. But in his zeal deregulation, the SEC abolished the rule in 2007. The ban on short selling remains in place on the French until the December 22, 2008 and the UK markets until the January 22, 2009. Rather than banning short selling, perhaps he should restore the rule breaker.
Chronic financial tsunami (15th episode): October 13, 2008 When I recognized the White House Rose Garden on the screen of Wall Street TV, I became very worried. This morning, the Dow Jones was up 400 points. It will ty that Bush starts speaking and everyone starts to sell. There were two desks, like the night before the Mayor's chain. (The Mayor of New York, Mr. Bloomberg's financial information chain, the chain 130 not to be confused with Wall Street that is on TV channel 58). The prime minister Gordon Brown and his finance minister Alistair Darling gave a press conference to explain in detail their plan for stabilizing the financial system. Finally, executives who run! The intelligence of the responses of two Britons seemed even more brilliant in its contrast with the tenant leaving the 1600 Pennsylvania Ave. Sometimes the tenant. The camera is pointed at the other desk. Here, Berlusconi? The tenant welcome him. He continues: Christopher Columbus had three ships, the Niña, the Pinta and the Santa Maria ... The board makes the antenna. Wall Street on TV, even in the pub, you can still see the signs displayed on the top edge of your screen. Phew, we dodged a bullet! The Italian had reached the shores of the Bahamas on Dec. 1 October. The NYSE is open, even if banks are closed for Columbus Day, which falls on a Sunday. Throughout Latin America, we celebrate this day under various names more or less anti-colonialist. In Spain it is called Día de la Hispanidad. Today is also the Canadian Thanksgiving. They thank God, not the Indians have them fed in the first few winters. So what, the New York Stock Exchange dates back to 940 points, closing at London + 8.26%, 11% in Paris and I come out sparkling water? First the reasons of prudence, then the reasons for hope. Trading volume today was low: 1.22 billion shares traded. Is it because half the traders were left with guindailler gnochis watered Asti to Mulberry Street? Or rather, do not we'll just dip a toe now that the water comes over you by the nose? Morgan Stanley, which you remember was closed at $ 9.68 Friday, rose by 86% (!) In one sitting. Now that the short selling no more secrets for you, you know what happened: Sunday night at midnight, the ban on short selling expires. Thursday, short sellers are betting their raid on a collapse of the title. It's going from bad to worse. 22, 18, 15 ... comes the weekend, time out! It is Monday, the third day of the trade, one where you have to cover their positions. There is panic among City speculators who had taken short positions (selling). Mitsubishi Financial will acquire 21% of Morgan Stanley, which is down the level of leverage of 24 to 20 times equity. Now that the sustainability of the company is no longer at issue because Mitsubishi Financial has a strong back, and as Morgan Stanley was clearly undervalued, we see the rally, the hordes of traders running to buy as much as possible of actions in order to hedge in the third and final day of trade. The price goes back to 18.10 dollars. If you had short Morgan Stanley on Thursday, you just lost $ 3 per share. With a low volume, speculators can play yoyo: they take their profits when it goes up, then they shortent other businesses and returning the money. Then rally and profit taking. With a larger volume is more difficult as more expensive. Another example that calls for caution. It is half past twelve in the Paris Bourse. The Europeans have finally managed to agree, it's a fairy tale, the CAC40 back more than 10%. Suddenly the rumor that Société Générale has lost a lot of money, not because of another Kerviel but in real estate and it's going to have to recapitalize. In less than an hour, the action loses 20% of its value. Leaders deny, but insane, insane, there is always something. One day when the stock climbed almost 12%, the action ended down 2%. Why the rumor she took? Because bank transparency has become an oxymoron, like cake or diet an educational program on TF1. Finally, we are in full disarmament of the debt by hedge funds. And there are huge sums. But the reasons for hope are being put in place. This weekend, the Europeans fell to agree on a stabilization plan. The credit policy is shared by Jean-Claude Trichet, President of the European Central Bank, Sarkozy, head of the rotating presidency of the EU and Gordon Brown, whose plan is the brainchild (= the son of his brain) as beautifully said the Anglo-Saxons. This is to recapitalize the banks that suffered losses not only because of U.S. subprime, but also their national bubble. The government will buy shares with their big checks. They also undertake to guarantee interbank lending and inject liquidity to loosen the grip of the credit crunch. Finally, if it is true that everyone will pay the piper, s countries undertake to coordinate their actions closely. The principal value and the main difference of the Gordon plan Paulson plan is to recapitalize the banks right away. Yes, the government becomes a shareholder, which was hard to swallow for Paulson, champion of liberalism and former CEO of investment bank Goldman Sachs. But this will result in capital injections in exchange for "preferred stock" which give you a higher rank to receive dividends but no voting rights. As Gordon Brown said yesterday on TV of the Mayor, "We are not in the business of running banks, we are in the business of Stabilizing the economy" (= our goal is not to find ourselves but to manage the banks to stabilize the economy). So our ideological triumphalism must be tempered by a large dose of pragmatism. The plan also organizes a segmentation in the UK banking sector, with one hand, institutions such as Royal Bank of Scotland, Lloyds, HBOS and Northern Rock will be there to "public service bank" that is easy credit to businesses and households, but the margins of profitability and competitiveness are modest. On the other, Barclays, HSBC and Standard Chartered will have a free hand to raise significant capital markets and go back to conquer the world. In this Nov. 13, I do not sulk my pleasure to share with you the news of the nomination for the Nobel Prize in Economics to Paul Krugman. I studied his textbook on international trade, clear, beautiful and translated from English by a Belgian publisher who sold it at exorbitant prices. The English version related cost 20 pounds at the time. Translation in Boek cost 70 euros. I always thought it was the best illustration that free trade is superior to protectionism. Paul Krugman, Amartya Sen and Muhammad Yunus Kahneman were my personal heroes when I tried to resist the simplistic and pollution and other mental Baker Milton Friedman. Today I'm happy for him.
Chronic financial tsunami (16th episode) October 14, 2008 Tokyo was closed yesterday due to holiday. The second Monday in October, the Japanese celebrate Taiiku no Hi, the day of Physical Education. Americans could use another holiday especially if called Health Sports Day. In any case, his return was in the Nikkei form, closing up 14.2%! The New York Stock Exchange on the other hand is a febrile patient. The charter shows that red line has varied by 700 points during today's session. She had reached 404 points just after opening, was lowered into the throes of a -302 to 15h and it ends down -76 points. European stock markets seem to be going merrily after the announcement of Gordon Brown's plan, despite its stratospheric cost 1.8 trillion euros (a little less than the GDP of France). London rejoiced with 3.2%, 2.75% Paris, Frankfurt 2.70%. The little Iceland would be as big as an ox reopened his place after three days of forced closure. She drove a long Kracher to croak before - 66%.
Following the British example, Bush and Paulson have decided to spend a third of the $ 700 billion appropriated by Congress to acquire more shares in nine major U.S. banks. This morning, Bush sought to reassure that this was unorthodox "to kill non market economy but to preserve it." Hedge funds, on the other with stars in their eyes and imagined that Citigroup Golman Sachs will be holding forth on the Sovietized and chain of the Mayor, "my dream is to compete with a bureaucracy" (= that is the dream if our competitors become round leather ").Let us be modest triumph, there nationalization nationalization. Those of Paulson or Brown are not those of Pierre Mauroy.First, it is not full nationalization. The U.S. Treasury will inject $ 25 billion in four banks: Bank of America, JP Morgan and Citigroup and Wells Fargo. Goldman Sachs and Morgan Stanley will receive 10 billion each, State Street and Bank of NY Mellon, as two or three billion. In the British case, if shareholders do not hand in the pocket, the state could end up with 60% stake in Royal Bank of Scotland who paid £ 20 billion and with 40% stake in Lloyds-conglomerate HBOS for 17 billion bill. The French Treasury will inject as, for example, 1 billion euros in Dexia, but that does not give him a controlling or a blocking minority.Indeed, different countries are to buy "preferred stock", also known as "preference shares" in the United Kingdom. Preferred shares is their French name, give the holder a higher rank for the payment of dividends but they s' no accompanying voting rights. As announced in the British couple in his press conference the day before yesterday: "We are not in the business of running banks" (= We're not there to manage the banks). Ben Bernanke, the head of the Fed today was not saying anything with this formula so Anglo-Saxon: "We are not going to micromanage the banks" (= we will not deal with banks at the microscopic level).Unlike the golden shares, which are actions with a veto and that many European governments have used privatization to keep in control, ability to prevent, the solution adopted today is the State a shareholder liability. In the American case, the Treasury does not even get seats on boards of directors.It does QUESTION therefore ideologically not nationalization, but rather the arrival of a white knight, who happens to be the rule, rather than Warren Buffet or George Soros or a sovereign wealth fund of a country Arabian Nights. In fact Warren Buffet has negotiated more than the U.S. state as its preferred stock in Goldman Sachs report to him 10% against 5% in treasury (9% after five years of presence). But in fact the state did not intend to make old bones in these banks. They can and are encouraged to repay the taxpayer and get him out of the capital.The Fed announced today it will begin to pay from October 27 to certain companies handpicked by taking their commercial paper as collateral. A comparable measure in Britain was announced Monday and will take effect next Monday. The European Central Bank had done the same. Today, the Paris Stock Exchange announced that it would create a market for the exchange of commercial paper and certificates of deposit, always with the aim of reducing the short-term liquidity.The rate-Libor interbank lending are still high, although the overnight rate has fallen to him 2.46875% 2.18125% against last Friday.Europeans can rejoice that they have avoided the collapse of their financial systems but the macroeconomic outlook is very bleak. Of course, interest rates may fall further in Europe, where the Fed has more or less exhausted all its cartridges. But the degree of indebtedness of the States before the 1.8 trillion plan Brown makes room for maneuver in fiscal virtually nonexistent. The economy certainly needs a financial system to function. It also has an urgent need to consumers, otherwise the pump is rebooted, but nothing came of it.Gordon Brown seen as the man who met his fate. However, the risk of inflation, the bursting of the housing bubble and the slowdown in the UK financial sector announced the purpose of difficult months.In the U.S., the Democrats hold their breath until the November 4 presidential. A plan to stimulate the demand for $ 150 billion is under discussion. Nancy Pelosi said yesterday that the middle class could not wait until the inauguration of the next president on January 20 and hoped to pass it immediately after the victory.
Chronic financial tsunami (17th episode, More pain, no gain):October 15, 2008Immediately returned to Austria, the friend I saw Sunday has just been fired. The shareholders of the SMEs in the wood industry have lost a lot of money on the stock market and seek to cut costs. Bertrand is the first casualty of the crisis around.The plan was announced in Europe Brown two days ago and the aggiornamento of the Paulson plan yesterday were supposed to produce a "confidence shock" and stabilize the economy. Apart from the Tokyo Stock Exchange that still sparkled + 1.06%, the rest of the markets began to eat. It's like this technique of interrogation of suspects, authorized by the tenant's leaving 1600 Pennsylvania Ave., The "washboard". You drown Thursday, Friday drowns you, then you remove the head of the water Monday and Wednesday you nigga Hong Kong -4.96%, Frankfurt: -6.82%, Paris: -7, 16%, London: -7.16%. , Sao Paolo: -13.6%.What our leaders are going to be able to announce to reverse the trend? An asteroid? The landing of aliens? I'm not in New York but anyone who reads me from Manhattan, please, go check, I would not be surprised if the big bull next to the pharmacy is surrounded by traders, bumping his head on the pavement . You will not be confused with the homeless, the police of Mr. Bloomberg yesterday.Ben Bernanke said this morning before the Economic Club of New York "Crisis Will End When trust IS restored" (= The crisis will end when confidence is restored). The CEO of Bank of America which was called as his eight other colleagues in major banks by Mr. Paulson launched the CEO of Wells Fargo who was reluctant to accept public money, "Anyone who does not Have a healthy fear of the unknown Is not Paying Attention "(= anyone who does not have a healthy fear of the unknown is not paying attention to what is happening). The barometer of fear, the VIX ended today at 55.1. It's 22 days away that oscillates above the threshold of 30, already considered a high range. It is also the seventh consecutive day that ends at over 50. Some hope, however: the puts (option conferring the right to sell at a fixed price) on the bank stocks were at a good price, which proves that traders do not anticipate a decline.Oil prices continue to slide him from session to session: -5% -17% in today and six quotations. This is good news and bad news. Good, because all developed economies are oil and therefore a fall in oil prices below $ 75 as now, or even $ 50 as the commander a more realistic balance between supply and demand reduces the cost of dependence for importing countries. But the decline also reflects the pessimistic expectations in the productive sector.On currency markets, funny things are happening within and between members of the Triad.Japan sees the course of his money back. Interest rates have been very low, 0.5%, many people, famous for Hegde household funds borrowed in yen and investing had gone elsewhere in Asia. Since the intensification of the crisis, we backtracked and the carry trade is the name of the phenomenon comes home. Increases the demand for yen. On the futures market, options for short the yen fell 50% over a month. This shows once more that the yen is a good safe haven in Asia.The European currency fell by 17% against the dollar since July. European companies make a lot of business outside the European Union. They are therefore exposed to currency risk. Ex: I am EADS, I produce in euros and I paid for my dollar Airbus. Changes in foreign exchange rates make the profitability of foreign operations uncertain, unless I cover myself with an options market.Since the collapse of Lehman Brothers and the guardianship of AIG, IT IS the world's largest Forex, the foreign currency market. I do not have recent figures but to realize the importance of this phenomenon, suffice it to say that in April 2007, it traded each day to 3.2 trillion dollars. The lack of liquidity produced sudden changes in foreign currencies much stronger than normal, even while ensuring becomes prohibitive. (Since it is unnecessary lot of suppliers and the demand has increased because the exchange risk has increased, the cost of insurance explodes). You recognize me? I volatility.European companies may find themselves on the wrong side of the fence, such as facing a sharp decline in Asian currencies and Latin America. Against the dollar as the lack of liquidity was evident, pulling the dollar up but disrupting European companies. The European Central Bank to deal with the failure of the private sector began to auction off dollars. When selling the latest, 70 banks participated. The request was for 88.6 billion dollars. Only 20 billion had been met.Since yesterday, the Fed and European Central Bank announced an agreement to exchange currencies (currency swaps) unlimited. I'll lend you as many euros as you need, you lend me the dollars will be made when the accounts will be out of the woods. Again, this is to loosen the stranglehold of credit Chuncha. We see here that Professor Ben Bernanke has learned all the lessons of the crisis of 1929 and he implements them at the head of the Federal Reserve.The dollar, he, has a triple effect. First he becomes the safe haven of choice for many people outside the United States. Second, U.S. investors repatriate their own capital, because it is better to wait for the tsunami of cash holding the dollar shares on the Bovespa, Bolsa or the Hang Seng. Finally, the decline in oil prices gives less envy those who are paid in dollars to sell since they are worth more.So I do not know if the Martians are coming to our rescue but may ¬ be if Barack Obama is elected, he will propose to fight against unemployment by going to build dams on Mars. Hope the earthlings do not discover that they are indigenous to unfair competition in terms of wages.
Chronic financial tsunami (18th episode)Erratum: about the 15th episode: M Bloomberg me that his eponymous chain is broadcast on channel 128 and not on channel 130.
Thursday, October 16, 2008:I present to you Joe the Plumber. It's not a song by Vanessa Paradis. There really is and is not Polish. He shouted at Barack Obama during his campaign and with his small company that knows no crisis, he embodies the American dream of success through work and effort. Sarah Palin in his debate against Democratic running mate had already done a lot of nods to Joe six packs who drinks beer and lives in a small town, away from the polluted air of the elite. Last night, the last of three presidential debates, McCain was buddy-buddy with the plumber. So, gentlemen candidates for the French way, to quote Antoine Pinay, or Main Street, what do you do for all that is not returned to driving taxis at night listening to the rumba?"Start a recovery plan at European level would lead us very automatically in some countries to take leave with respect to sound rules of the Stability Pact" Europe, says Juncker, head of finance ministers of the Eurozone. This phrase makes me shudder because it reminds me of the narrowness of view, the ideological blindness of the Hoover administration after the 1929 crisis. It is true that in the words of one of my friends, Luxembourg, is not a nationality, it is a profession.The government, all governments have to make two levers of economic policy.Monetary policy itself has two dimensions: the external value of money (you can devalue or let its currency appreciate) and its internal value (you can lower interest rates make money cheaper and encourage investment or can be overcome if we are afraid that the runaway inflation).Fiscal policy in turn allows for the deficit is to boost the economy by supporting the demand either by promoting investment. It can also raise taxes selectively for reasons of social redistribution. Alternatively, you may decide to invest public money in a particular sector as strategic, such as the fact the U.S. government in the military-industrial complex through the Department of Defense, the DOD for short.In 1929, when the crash occurred, the government Hoover continued his merry way fiscal and monetary policy has contracted. In the name of a dogma that Keynes analyzed in detail, the Hoover administration did nothing. Three and a half years later the situation had become so dramatic that Roosevelt had set up a recovery plan unprecedented millions of Americans out of unemployment and poverty. Here I have an idea for you, Ms. Juncker: for Christmas, why you do not offer your husband a copy of the "Grapes of Wrath" Steinbeck and a paperback edition of "Gatzby the Magnificent"? It reads a line in the Thalys. You can even leave it on the seat.The European currency was born of a pact of blood from one part of Germany which had a strong currency (and very bad memories of hyperinflation that led to Nazism) and other countries who remained anemic after speculative attacks against the snake in 1992-1993. Germany has said, I give you the strength of my money, if you promise that 't will never be inflation. England said "thanks, no thanks aim! "(= No thank you). All the others have said, "Thank you, oh thank you! "The convergence criteria were supposed to be temporary and prepare to merge the economies. The ECB inherited monetary policy. As for fiscal policy, it remained the preserve of states but it was so well corseted that Germany had nothing to fear from the soft budget constraints. Then the stability pact gave the convergence criteria of a permanent nature.I call it, I cut my hand and I focus the other behind his back.Sometimes the crisis of 2008, all the world's economies are on the brink of recession, food prices increased by 6.1% year on year in the United States, 12.7% UK, 7% France. Everywhere, unemployment is rising and if you can call it progress. Instead of understanding that we can not manage the business as usual because one is not a usual situation, Mr Juncker, as a character in Scott Fitzgerald served us tea with cookies and we Gourmet on healthy-rules-of-covenant-of-stability. Where is your healthy fear of the unknown? Obviously some do not pay attention to what is happening around. M. Junker, give me your mobile number, I'll give it to Kenneth Lewis. It will explain everything to you.The Vix has now exceeded 82 points. The Dow Jones closed at 401 points. After the fall of 700 points yesterday, it is unnecessary to send enough good news to the house. The FTSE: -5.35%, the CAC 40: -5.92%, DAX: -4.91%. The casino economy Casini and everyone swallows the salt water.
Chronicles of the financial tsunami: Drips wealth (19th episode)October 16, 2008It's going much better! Have not you noticed? The Dow ended its best week since 1982, up 9%. Big deal, you say: in 1982, the U.S. floundering in an economic slump, which proves that we must have a healthy distrust of percentages.Calculators and close our eyes open, I did not say open your TV.I do not do my shopping at Wal-Mart, the barbarians of the consumer. Where they go, nothing grows back. But at Trader Joe's, the Leader Price's bio, the caddies are less full and people come with lists. On Grant Street, the shiny Gucci store is empty. No one pushes the door in Hermes. Tory Burch has languished in the alley chic Maiden Lane. I pass my old gallery. I recognize the pictures on display, they were already part of the stock, forgiveness of the collection, before leaving in June. Ah, here is a lady with bags of Loehman's, Tati brands.Robert Reich, former Labour Minister and advisor to the Clinton candidate Barack Obama summarizes the economic philosophy of the Bush years to a formula: "Trickle-down economics" (= ridges running down the wealth). It was already the old idea of Reaganomics (= the economy of the Reagan era, inspired by Milton Friedman and the Chicago School). Make the rich richer, they consume goods and services. It will employ an army, wealth trickles down the social ladder.My middle-class world and that of the other America, the one that gets up early and has no health insurance intersect with the beautician. Sonia is Brazilian. She lives in the United States for thirty years. She is raising her two daughters, the youngest is 15. With much effort, in 2003, she managed to buy a little house in Richmond, a suburb many colorful and always makes the headlines when there are problems, and there all the time. Richmond is a bit of Creil the Bay Area. As she blows on the wax, I asked her if she was able to refinance their variable rate loan. Unfortunately Bank of America did not accept. From quarter to quarter, his monthly payments continue to rise and revenues fall. This effect of scissors cut his sleep.Libor, the rate at which banks lend to each other is an acronym for London InterBank Offered Rate. It is published every day at 11:00 by the Central Bank of England. There is a daily Libor, a one-month Libor, a three-month Libor. There are dollar Libor, Libor for euros. All holders of variable rate mortgages maintain intimate relationships with Libor, as Monsieur Jourdain with prose. Because of the credit crunch, Libor rates have increased significantly. The 3-month rate now stands at 4.6% against 2.88% on September 17. Certainly, the drop in daily shows a glimmer of progress. He had reached 6.88% on October 3 and again was close 5.09% 9. Friday, it closed at 1.67%, its lowest level since September 2004. But the variable rate borrowings are secured to the three-month Libor. Meanwhile, Sonia will do as his neighbors and put his house up for sale.Robert Reich proposes a new economic philosophy after November 4th: he calls the "trickle-up economics." It is to rewrite the economic laws of gravity. If America who gets up early and has not for health insurance was health insurance and better wages, if America gets up early to pay less taxes and if the dripping of money paid a little more, the rich go up the slums to the sky. It is not by impoverishing the rich that will enrich the poor? In the platform of Barack Obama, 95% of voters will not experience tax increases. To tax households earning over $ 250,000 a year, he said "spread the wealth" (wealth = share). The rich will not do very poor. And the middle class can sleep at night, with his shield under the pillow.
Chronic financial tsunami (20th episode):October 20, 2008The Dow Jones closed at 9265 points today, up 4.6%. Tomorrow? As Paul Krugman said in an interview in El País this weekend, the U.S. stock market, and by extension others, may well continue to pique his seizures "manic depressive". Until the situation has stabilized, I suggest you take a trip and go see how the emerging pay the price of the financial tsunami.Ukraine, Pakistan, Argentina and Hungary are on the brink of insolvency. Behind the heterogeneous nature of this list and to the geopolitical consequences very different, there is a common mechanism: foreign investors withdrew their marbles. These states were able to develop precisely thanks to the influx of foreign capital, the same formula that enabled Spain and Portugal to take off economically in the 80's. But the sudden change of situation puts the future of these economies at risk.Consider the Hungarian crisis: Hungarian central bank had set a 8.5% interest rate that is the basis for loans in forints. Hungarian commercial banks had begun to offer loans at rates more competitive, by borrowing abroad. In August 2008, 49% of business loans were denominated in euros, Swiss francs or dollars. On the same date, 62% of consumer loans were granted in foreign currency.Suddenly the tide turns, investors sell their assets, get rid of the local currency and want euros (or to other countries of dollars): the forint collapses (-12% in two weeks). Consequently aggravating the credit crunch: the euro are becoming scarce. This is the effect of scissors.The European Central Bank went to the aid of Hungary by providing a loan of 5 billion euros to turn the Bank of Hungary to lend euros to commercial banks that lend themselves more. This is particularly dramatic because Hungary is a member of the European Union but not in the euro area. The ECB has done a cost-benefit calculation: 80% of the assets of the country were in the hands of foreign investors including Austria. So if we can avoid the lack of liquidity (the debt is payable because the assets are not available) from becoming insolvent (debts are not payable because the assets were rotten), 5 billion euros c It was small price to pay. We limit the contagion effects to the euro zone, already in bad shape.Romania and Lithuania are in similar situations, while Latvia and Estonia are close to the case in Iceland have wanted to play the hedge fund. What about Poland? And to rescue Pakistan and Ukraine?Another viewing angle: one would have thought that the collapse in 5000 ruined index points in the U.S. economy would benefit the big emerging markets: BRIC, Brazil, Russia, India and China.The decoupling theory has a hard time. She argues that the United States are no longer the locomotive of the global economy. Europe is most of his business in his area. Japan is an economic giant. China has a huge domestic market. Brazil has to trade with India. All roads do not lead to Rome.In fact, the BRIC economies is seriously slowing down.Russia has been a great stock market panic (-73% from the record of May), compounded by concern about Putin's foreign policy on its steps. $ 30 billion left the country since the war in Georgia. As foreign investors withdraw, the valve closes the easy credit. While the income from energy makes Russia a rich country, but the drop in oil prices bodes well for tomorrows less. The flight against the ruble is not the result of foreign local people hoarding dollars and outside the financial system. Foreign exchange reserves of the central bank are at their lowest since the currency crisis of 1998, with only $ 66.9 billion.Russia has developed a plan to rescue its banks $ 160 billion and nationalized four of its banks. It will repurchase shares on the stock exchange with a nest egg of $ 175 billion. The Government states that it is unnecessary crisis in sight. Growth instead of 8-9% in previous years would be limited to 5% in its most optimistic estimates.If the barrel stays above $ 70, the budget deficit will not know. Except that the power politics of Vladimir Putin requires a gargantuan increase in military spending. We can finance with a gross size of the Urals at $ 150, but $ 50? Russia is facing a debt of $ 180 billion coming due in late 2009. With $ 50 a barrel, Russia would experience zero growth. You've thought so hard that I heard you: we need a good war ...Tomorrow, China.
Chronicles of the financial tsunami: Emerging II (21st Episode)October 21, 2008After the ceremonial pomp and precision calligraphic deployed at the Olympic Games in August, many expected that China spans the corpse of Wall Street and ascended the throne in September. The average growth rate above 10% over 30 years, foreign exchange reserves of $ 1.9 trillion in late September or twice reserves Japanese trade surplus of 30 billion per month, the rise seemed irresistible. So what? Where is the Emperor?Chinese growth will slow in the third quarter at around 9%, falling below the 10% mark for the first time since 2002. In 2009, it should be around 8%. These rates would be the envy No matter what government the G7. But with a population of 1.3 billion people, China can not succeed in its transition to become a modern country without continuing to grow exponentially.Chinese growth is export-driven as evidenced by the ubiquity of Made in China labels in stores. While China is the banker of the United States, owning much of the U.S. public debt (519 billion dollars, after Japan, $ 593 billion), Europe has taken over from the States United as the first customer in China. The value of EU-China trade represents 110% of trade China-United States in 2008 (against 65% in 2001). There are many reasons for this prevalence, the principal: the strength of the euro. The euro traded at $ 0.89 in 2001, $ 1.40 last year, $ 1.60 in August, $ 1.30 today.The financial tsunami triggered in September 2008 by the nationalization of reinsurers Fanny Mae and Freddie Mac and the bankruptcy of Lehman Brothers plunged the world into a very serious economic crisis. Now that the U.S. is under water and drink the cup of Europe, the volume of Chinese exports is expected to shrink. For example, several Chinese producers of textile products and toys went bankrupt this week.China is not likely to drive growth around the world through its imports even before the crisis erupted, it accounted for only 6.4% of final demand in Asia. But can it replace the shortfall due to lower exports by turning to the satisfaction of its domestic market?On paper it is royal. You have a population of 1.3 billion people (I hesitate to use that word in the land of Confucianism, replace it with potential customers) and seventy years of communism: the fridges to us, pretty scooters, the 'atomix and Dunlopillo!Moreover, according to government figures, the retail trade is booming: 17.9% in September against 13 or 14% a year earlier.The building also has experienced a boom, since at the end of the 90s, the Chinese government has made privatization of urban housing. He transferred ownership of the state to their occupants. The Chinese cities overnight found themselves rich in their homes. Speculation ensued. Construction contractors have purchased land to build more densely. Shanghai today has more skyscrapers than Manhattan.But in recent months, the housing market seems to have reached a plateau. Housing starts have slowed. Potential buyers are waiting because they anticipate lower prices. Similarly, the latest figures car sales, airline tickets and other major purchases reflect a slower growth.In fact, China may well count 1.3 billion population, its middle class is 60 million. She arrives at the 100th rank in terms of income per capita. Even taking into account the purchasing power differentials (a bowl of rice is cheaper in China and San Francisco), China accounts for only 10% of the global economy, against 30% for U.S. and 25% for the European Union. In 2007, when 1.3 billion Chinese consumed 1.2 trillion worth of goods and services, 300 million Americans engaged them, to 9.7 trillion dollars of consumption (nb: as the destruction of the environment does not come subtraction of GDP, I do not know if he should call it progress, but I digress).So China's domestic demand is simply too low to replace a faulty application or European American.Only structural reforms will eventually develop the domestic market. This week the Chinese government announced a land reform that will transfer the ownership of land to the peasants. This should lead to a restructuring of the plots now too small to accelerate the rural exodus and encourage the development of intensive agriculture. He has also run health coverage for all its people.The structural reforms will take time even if the road of the future. Meanwhile, close neighbors, especially South Korea, but also the Middle East and Latin America are having to worry about, the ones who were privileged opportunities in the Chinese market. As for the Western countries managed to export to China, like Germany with its machine tools, they will also experience a decline in orders.10-20000000000 of dollars have left China since the beginning of the financial tsunami. Chinese banks have little concern for credit crunch. The trade surplus, $ 29.4 billion in September are back in the circuit of dollars month after month after month without swimming and China 1.9 trillion dollars of foreign exchange reserves.The Shanghai stock market is down significantly, however: - 30.43% in three months. That of Hong Kong - 46.99% in 52 weeks. (The difference between the two is that foreign investors can not freely invest in Shanghai.)The Chinese government in turn could use his vast fortune to lend $ 500 billion in U.S. government to finance a second stimulus package. By helping its main trading partner in the storm pass, it would protect the engine of growth, its exports. It would be a kind of New Deal made in China.
Chronicles of the financial tsunami: (22nd episode)October 22, 2008Argentina announced it would nationalize its pension funds. Apparently this has little to do with the global financial crisis. Apparently only. This measure is to return in the public regime dismembered by the ultra-liberal Menem problem. The stock market plummets. The public is concerned.President Cristina Kirchner is elected the Peronist party, also called Justicialist, which through different periods of Argentine history has sometimes been anchored on the left - as now-right now-mostly. Raul Menem who had occupied the Casa Rosada from 1989 to 1999 and has ruined the country with a mixture of corruption and incompetence was also a "Justicialist." The two share a populism that they have inherited the party's founder, Juan Perón, President twice (1946-1952 and 1973-1974) and his very famous and charismatic first wife, Evita.Cristina Kirchner succeeded her husband in October 2007 as President. Since their accession, and following the end of the financial crisis of 2001, in which Argentina was declared insolvent vis-à-vis the rest of the world, the couple has continued to enjoy rising raw materials for the country reduce debt.Argentina is a real breadbasket, with meat, soy, corn and coups. Only one president in the twentieth century has completed its mandate, Raul Alfonsin (1983-1989). With a past full of dictatorships and corrupt practices, Argentines maintain skepticism of good quality facing the public.If you walk in Buenos Aires, it is not uncommon to see tagged on the facades of banks the words "thieves" and "hustlers" in memory of the way between 2001 and 2002, investors have been robbed. First, by limiting the amount of payouts then converting unilaterally and without warning the assets held in accounts in dollars. Finally, the peso was devalued by 28% by another Peronist Eduardo Duhalde, before decamping to the Casa Rosada by helicopter to avoid lynching. Banks do not even bother to remove graffiti. They know that the hands raging would return the next night with spray paint.The past does not pass and commodity prices fall dramatically. In this context comes the declaration of the President ten to nationalize pension funds:Created in 1994 by Menem in ultra-liberal euphoria, back when the peso was pegged to the dollar and therefore overvalued, with a rate of 1 to 1, the Argentine pension funds have attracted three million contributors.There are two ways of financing pensions. Contributors is today paying the pensions of retirees of today and tomorrow's contributors pay the pensions of today's contributors: the PAYG system. Or contributors to invest their money today and when they retire, they retire with an output of capital or as a pension, the pension system is funded. France and the United States have mixed systems, with a mandatory part and optional part. In many emerging countries, people do not have to contribute and if they choose to do is often pension funds.In Argentina, the economies of the three million contributors were allowed to recreate a local capital market. Since the cessation of payment of 2001 and until it pays its debt, Argentina has been ostracized by the international lenders, including the IMF.There is much to say about how unfair that Western banks have left successive leaders, starting with the military junta (1976-1983) mortgaging the future by letting the debt get carried away. But as the Arabs say, Lifête mete: The past is dead.In all cases, institutional investors had injected the money raised in treasury bills (55%) and the stock market (11%) who had prospered in recent years with returns of around 13% year. But then, this year's pension funds have lost 40%, which told the President that "the pension money is in the hands of speculators."Mrs. Kirchner argues that it is taking measures in the same spirit as the U.S. and European governments are nationalizing banks.The goose that lays the golden eggs has thirty billion dollars in assets and received 5 billion in annual contributions. By nationalizing the assets, the government is spared having to pay the Treasury that were the assets of the "Goofs" and gets a lot of cash, approximately 30% of the total, 10 billion dollars.Ten billion is half the sum that Argentina has to repay its creditors next year. Otherwise as he recalled the IMF last week, beware! If Argentina had not had such a bad payer, it could refinance the debt to Western banks. But the Paris Club, representing the creditors cheated in 2001 is no longer the lender.So, in order not to miss the deadline and be able to return to the concert of world capital, the government has to raid $ 30 billion of private savings, unilaterally and without warning. Inevitably, this brings back memories.The other half of the amount due will be waived due to foreign exchange reserves and customs duties, hoping that the price of raw materials does not continue to decline. If the cash used to pay the debt, it will no longer serve to support the local economy. This is what is called crowding. It's not that the temple speculators tremble (the Merval lost 11% today), it is especially after a decade of looting and destruction, the possibility of re-industrialization the country away for lack of investment. Without trust, without any legal intertemporal decision is possible. It navigates to and it does not emerge from underdevelopment, in fact we go ahead.Evita cries from his balcony. Speculators on the Chicago Mercantile Exchange released their umbrella.
Chronicles of the financial tsunami: (23rd episode)Erratum: yesterday, for the first name of former President Menem, Carlos Saul had to read and not Raul, as I wrote.October 23, 2008I have temporarily hijacked a jet on the tarmac waiting to take you back to Ezeiza in Washington. For two days, a parliamentary committee examining regulatory mistakes that led to the crisis. Yesterday she had invited the CEOs of the rating agencies Moody's, Standard & Poor's (yes, the same as the index values of 500 New York Stock Exchange) and Fitch to come how triple-A rated bonds had could turn into pumpkins rotten one day in August 2007. Today was the turn of Alan Greenspan, the former oracle, forgiveness Fed Chairman (Ben Bernanke before), John Snow, the former finance minister (before Hank Paulson) and Christopher Cox the director in office of the Securities Exchange Commission, the stock market watchdog, to answer for their actions.First table yesterday, the chairman of the board reads an email between two employees of S & P:- In fact, the deal is anything.- Yes, I know. The model parameters do not capture half the risk.- Should not note such a thing.- Here, there is even the bonds issued by the cows- But there is too much risk. Personally, I feel uncomfortable to give my approval. [1]The rating agencies role is to assess the risk of default of an issuer of debt. They are the heart of the information system that allows investors to make rational choices da without having to spend hours and days visiting businesses, to read all schedules off-balance sheet after taking night classes to accountant . The work is delegated to specialized institutions which note issuers, the triple-A (excellent risk-free investment) to D (dedicated to the investment loss). For a detailed schedule of ratings, see here:
http://upload.wikimedia.org/wikipedia/commons/c/c3/Main_Credit_Ratings.pngThe agencies also publish notes of "perspectives" on the likely evolution of transmitters and a "watch list" of issuers with a rating may be lowered surreptitiously. All this analysis is the seal of seriousness, independence and impartiality.How about if the filmmakers paid critics and their articles were then used as advertising? There would be a conflict of interest ... This is exactly how things work up to now. Indeed, the rating agencies are paid by bond issuers. (A more healthy is that agencies are paid by investors).
"The story of the credit rating Agencies Is A story of colossal failure" (= the history of credit rating agencies is a story of colossal failure), exclaimed Mr. Waxman, the chairman of the commission investigation. "The rating Agencies broke this bond of trust, and Federal Regulators ignored the warning signs and DID nothing to Protect the Public" (= the agencies have violated the public trust and the institutions responsible for regulation have clogged ears and n 'have done nothing to protect people), the MP continued to thunder.In fact, in 2006, delirium deregulation, the SEC had sought to instil more competition among agencies, which has only create more negative effects: the agencies making up the notes to gain market share to competitors.A former S & P explained yesterday that a better modeling of the risk of mortgage loans was not adopted for budgetary reasons. S & P already controlled 92% market share of securities linked to mortgages in the United States. Investing in a better model would not generate an increase in profit.The most amazing were the stories of CEOs of the three agencies, S & P, Fitch and Moody's, which share the market. Block, they have denied responsibility for the subprime scandal. Gin and a long list of safeguards that exist within their institutions. "We are not alone in being surprised by the drop in home prices" said the CEO of S & P. We were plunged in 2002 in hearings before the criminal court after the collapse of Arthur Andersen, the company that had advised of his right hand and certified the accounts of the left hand of Enron, Wordlcom and many others.Second table: Mr Alan Greenspan, former chairman of the U.S. central bank from 1987 to 2006 said this morning before the inquiry: "I'm shocked, shocked, to find gambling here" (= I am shocked, shocked, to find that gambling, here).No, actually, that's Captain Louis Renault in Casablanca. Written evidence that the banker had read before parliamentarians said he was "in a state of shocked disbelief" (= in shock and disbelief). But he added: "We are in the Midst of a once-in-a century credit tsunami. "(= We are in the midst of a credit tsunami, such as occurs in a century).Greenspan attributed the excess in the market for real estate securities with excessive enthusiasm, insatiable demand from investors and their lack of critical approach to the opinions of rating agencies. He acknowledged that would not be outside of the crisis as the property prices would not stabilize. He considered that overall the markets have functioned well, even whether to regulate credit default swaps (which will soon be a separate column). When the Democrat Waxman asked him straight in the eye: "Did you wrong regarding the benefits of deregulation? "The old oracle said," Partly. "Tomorrow I will take you to see what looks like a partial error in Brazil.
Chronicles of the financial tsunami: emerging IV (24th episode)October 24, 2008"Crisis? Ask Bush is his, not mine! "According to President Lula, the effects of the tsunami were to be" almost imperceptible "in Brazil. On 24 September, he accused in Sao Paolo, "the casino's financial system where some have played roulette and lost. "But he wanted reassurance:" We will not allow that Brazil is a victim of these games of chance. " It is true that exports to the United States account for only 2.5% of Brazil's GDP against 25% of Mexico's GDP. Yet the dams have dropped.American portfolio managers had invested in Brazil with money borrowed on the basis of the assets they held in the United States. This is known to shop on line. This mechanism, BA-ba's investment banker, you can leverage the clout of your money by using the leverage.However, if the assets that serve as collateral depreciates, for example because you were given to subprime-backed securities or shares whose price has fallen sharply, one day you will receive a phone call. In a margin call or margin call, the broker requires you to give more guarantees in the balance or any liquid. The combination of margin calls and redemptions from your rich clients, if you are a hedge fund or your small savers if you are a pension fund, all very concerned marks the end of the game. Farewell, veal, turrets, deer and partridge, you have to sell and return empty-handed.In three weeks, three billion dollars left the country and the real lost 25% of its value. But it is important to understand that the capital outflow is totally disconnected from economic fundamentals here in Brazil. The core indicators are healthy Brazil: The growth is around 5-6% per year. Unemployment is around 10-11% with a large informal economy. The public debt amounts to 35% of GDP is less than half that of France. And inflation is severely opposed by the President of the Central Bank, Mr. Meirelles has assumed the position along with Lula, a former lathe operator, a former trade unionist arrived at Alvorada Palace, the palace of the dawn.Between 1980 and 1994, prices increased by over 100% per year, Brazil has even been an abscess of hyperinflation (2000%) in the early 1990s. When Mr. Meirelles has arrived, pranced inflation to 12.5% and interest rates to 25%. He immediately raised the rate to 26.5% which caused an outcry. He was accused of stifling growth. The government has let it happen and with great mastery, he managed to reduce inflation to 2.96% in 2007.Interest rates have cheap the growth of consumption. Domestic demand grew at a rate of 8.5% per year. To us, fridges, pretty scooters, and atomixers feijoada! In June the country reached 100 million credit cards, for a population of 190 million, up 17% over 2007. But domestic production, it has only grown by 5% in 2007. Even the most from the use of production capacity, the rate of domestic investment is too low relative to the size of the population. It is said that growth comes up against the production frontier.Brazil is the world's largest exporter of beef, steel, ethanol, and the importance of manufactured goods. This imbalance causes a deficit in the trade balance and create inflationary pressures, not more than 5%! shouts the central banker.Finally, for the moment, the falcon Meirelles has other problems. Most Brazilian companies did not anticipate the rise of the dollar. So they had borrowed in U.S. dollars when they are paid in local currency, peso, euro or yuan. Foreign exchange loss makes the scarcity of dollars even more dramatic. Thus, taken in reverse, the Mexican retail chain Controladora Comercial Mexicana SAB has gone bankrupt.To prevent this can 'home, after Meirelles injected liquidity since late August, put the package yesterday by announcing $ 50 billion in the form of currency swaps with other central banks. This is to defend the external value of money and meet the needs of dollars of business choked by the credit crunch.In the hope of attracting foreign capital or curtail their departure, the Finance Minister has also eliminated the IOF tax of 1.5% on foreign capital and 0.38% for loans denominated in foreign currencies; the Imposto Sobre Operacoes Financeira was a kind of national Tobin, named after the Nobel Prize in Economics in 1972 who had imagined a small amount of tax that would kill the speculation by taxing capital movements but does not deter.Public banks were also allowed to come to the aid of private competitors lower and absorb them.Following the example of Peru and Chile and the difference of Argentina, the country has gotten rid of the ball of the external debt. He became a net creditor with the rest of the world. His nest egg amounts to more than $ 200 billion of foreign reserves.Yet in two months, the real has lost a third of its value. Evil echoes a refrain in the piping of international capital. It rhymes like a nursery rhyme but it rips like a scalpel Brazilian economic fabric, "High Yield Is No Shield Against Deleveraging" (= high yields no longer protect against the disarmament of the debt).It is even more unfair that Brazil 's was kept out of American investments and rotten Lula re-elected with 60% of the vote in 2006 has really applied the philosophy of "trickle-up economics" (dribbling wealth from bottom to top).In 2002, he promised to respect its commitments to the IMF and give land to 400,000 poor families by 2006. He kept his word. While the incomes of 10% of Brazil's richest grew by 7% between 2001 and 2006, those of the poorest 10% rose by 58%. The amounts allocated to social programs are four times larger in terms of GDP that Mexico has a population yet only about half that. The number of Brazilians with liquid wealth is greater than $ 1 million has jumped from 19% last year, ranking the country third behind China and India in the list of the new millionaires. Nationalized banks granting many micro-loans to hundreds of thousands of people. The Bolsa Familia provides small grants 45 million poor Brazilians to help them buy food and cover their basic needs. With a budget of $ 5.6 billion it was the most effective instrument, in addition to the minimum wage law to raise people above the poverty line in Brazil as measured by monthly income less than 80 dollars. Unlike Argentina, here are middle class and uses.Alan Greenspan and Dick Fuld, the CEO of Lehman Brothers are three small towers and then leave. Latin America poses a tourniquet on his veins slashed.Chronicles of the financial tsunami: a housing so expensive (25th episode)October 25, 2008If you missed the first fifteen minutes, you wonder why people are clinging to a raft, they drift away from the lake and shout in an unknown language "subprime, subprime! ". Rather than rewind the tape, I invite you to eat a salad.The restaurant entrance is flanked by Doric columns. We read on the front: "Put Your Mouth Where Your Money Was" (= put your mouth where before you put your money). In the Belly of the banker, you have to wait when there is no reservation.A banker had taken all his mortgages and was torn with your fingers to make a big salad. Inside you have the lettuce, arugula, romaine, spinach leaves. When he had finished mixing all the pieces had become so small that it was hard to recognize them. He then served in small glasses. Customers loved it. The whole world wanted. There was a queue outside the establishment, worse than Berthillon on the Ile Saint-Louis.Other bankers said they were "Hey, what is the recipe? Let's copy it! ". Any finance began to make great salads, ripping them into small pieces and serve them to the starving populace high.One day, a Reuters dispatch falls: some of the sheets are stained with an undetectable E. coli and radioresistance. You eat it, damn it, you die.Then all the bankers of the earth no longer wanted to touch the bowls of salad. Fields of lettuce, arugula, romaine or spinach began to rot. Nobody wanted to raise, even with gloves. In any case, customers would strike salad.E. coli is the subprime mortgage, made to people who clearly could not repay. The bowl of salad is the bundle of loans. The act of tearing them and serve them in a glass is what is called securitization.The waitress above. The room is paved with colored marble. The oval windows bring light. It weaves between the tables and we mean that in the corner. The safe was turned into kitchens. She's waiting for us on the menus. While you are asking me to translate some words, I tell you that my salads, I like the best show on American television: Charlie Rose on PBS, daily from 0:00 to 1:00 in the morning. This show is so famous that it is included in the films. A recent example: "Elegie" with Penelope Cruz in a scene from Isabel Coixet, the professor, a renowned intellectual is a fake interview with Charlie Rose. Thursday night, the real Charlie Rose had invited David Smick, author of a book under the nuts, The World is curved just released. This is the best explanation in plain language I heard on the genesis of the crisis, and if you speak English, I invite you to listen to the full interview:
http://www.charlierose.com/shows/2008/10/23/2/a-conversation-with-david-smickBut while we attack the salad, I start you dissect the American dream: the manicured house in a suburb without sidewalks that call evil tongues Suburbia, as if out of the city, you go abroad . The three garages, family room, and all the other rooms you've never heard the concept: the den (part of the father, literally the den), the entertainment room (the TV room), the library ( the library), covered with false bindings.United States, 75.5 million households live in their homes and own them. With declining home prices, which in some areas up to 30%, 12 million households or 16% are found to owe the bank more than their house is worth. In 2006, the figure was 4%. In 2007 it was 6%. Among people who bought the last five years, 29% are in this situation.June 30, 2008, 9.16% of mortgages on one to four homes were in default or had reached the stage of entry. In 2007, the figure was 6.52%, a record for forty years. Most of the loans now in default were issued between 2006 and 2007, when the Bush administration has pushed because he wanted a nation of small landowners, but without the social housing policy, that Fannie Mae and Freddie Mac agree to give security to files less good, while prices continued to climb.There were several categories of loans: conforming loans that met the all requirements in terms of personal contribution and proof of income and did not exceed $ 417,000 ($ 625,000 in expensive areas). Then there were the non-conforming loans, which for one reason or another did not meet the criteria. The amount was higher than the maximum guaranteed by Fannie Mae and Freddie Mac, they are then jumbo loans. Either the person could not provide all the supporting documents, these are called Alt-A loans (as Alternative A). The nickname had found that their bankers are most telling: "liar loans": loans liars. Then there were the loans to people with insufficient income, the subprime hard and fast. Loans compliant and a large portion of the loans were jumbo loans without history. E. coli is lodged somewhere in the Alt-A and subprime. But the unconscious hands tore the salad.You can not believe they could lend to people who could not repay. It's like a priest who would specialize in people who have no soul. The list of dirty trick is unquenchable, I do not choose one. They were advertising on the radio.Here's how running a negative amortization loan (negative amortization) you buy a house beyond your means. The monthly payments amount to $ 3,000. It is spacious, it's yours, it costs $ 600,000. $ 3000 is what you earn with overtime and bonus. No problem. You will repay $ 2000. $ 2000 per month, you are well you cope? We'll just rent the room next to the garage. It gives you a variable rate loan. Alan Greenspan may well keep the cheap money, in fact, your rate is quite high because you are considered at risk. Do not think, sign. In any case in two years, you can restructure the loan. You sign, you move, you are happy as hell. Finally, you also live the American dream. You have three jobs and no health insurance, but every month, religiously, you repay your two thousand dollars.Every thirty days, an additional $ 1000 added to the debt principal. So two years later, you need $ 624,000. The estate agent told you that the house would be worth $ 800,000 then. Except that no luck bankers are striking salad, all fields are rotting and no one wants to finance the cultivation of green leaves. Your house is now worth far Suburbe $ 450,000.But I have $ 624,000! For you, like 12 million Americans, the dream is over. The other 64 million households owning learn the bad news and are not affected: 24 million have paid off their homes and continue to pay 40 and accumulate capital.The decline in property prices has made housing more accessible, but the tightening of the criteria of banks that few can enjoy. At the same time, why buy now? A majority believes that prices will continue to decline. The game of thousand dollars, they wonder how Lucien Jeunesse stabilize property prices. Paul Krugman, half laughing, half-serious suggestion to lower supply by destroying the houses. Republican McCain proposed that the state bought the house depreciated by paying the full price and banks offering loans at market prices to borrowers strangled. This is the premium irresponsibility. A candidate Barack Obama has a moratorium and a renegotiation on a case by case basis.
Chronicles of the financial tsunami: the Three Bears (26th episode)October 27, 2008The week ends with Dow Jones to 8378 points, a level even lower than October 10. A 8451 points there seventeen days, the stock market was thought to live his Waterloo. In retrospect, this was it that a Trafalgar? Fear does not start, the VIX stood at 87.3 Friday, before closing at nearly 80. And if we had it all wrong. And if it was Stalingrad, 1812, a long and endless quagmire?How long will continue for the process of capitulation? Friday, displayed the reason for so much pessimism was precisely the global awareness that we were in recession, ie a phase of no growth or faiblissime. The cause just as real in this endless fall is that buyers have the cash but are on strike.So where are we? First the losses of European banks are only now being understood. In addition, stock markets in Asia cashing the bad news of a Western demand atrophied. Finally, the United States, the dollar rises, currency refuge while the presidential election just eleven days left in abeyance.Remember the Bear and the Bull? The bull (= bull) was the symbol of the bull market (bullish market), the scholarship that goes. The bear (= bear) embodied a bear market (bearish market) or depressed. The menagerie market has a variety of species. When the bull hibernate, depending on the year, three types of bears emerge from their den. None are stuffed, but some may be more fear, others more difficult.The bear cycle (cyclical bear) is a market where the variation between the zenith and nadir around 20 to 25%. It's a black bear, we are very scared but it is not dangerous.The bear secular (secular bear) is a market in which lower the highest point and the bottom is a drop from 45 to 50%. This bear-there is a formidable predator.The bear devastating (Devastating bear) is the grizzly of the market value. The fall reached 75% to 90%. The collapse of Japanese stocks in the 90 current or liquidation of Chinese stocks held by non-residents (called "A shares" held by the Chinese ones are called "B shares" and do not mix) are examples Recent devastating bear markets. The other example is the memorable crisis from 1929 to 1933.The current crisis seems to be the second category with a net decrease to -45%. The economic history since World War II taught us that we can touch the bottom of ways. Sometimes it was a capitulation to a wagon Rethondes. Sometimes the end of a market oursier (sic) is done without fanfare, in a dry slow and inconclusive, as in December 1974.The crisis of "point.com" after the bubble burst related to technology stocks in April 2000 was part of a speculative process. The agony was prolonged due to an external shock, the attacks of September 11. So it's not a very good example.Let's say the bears are causing cyclical slowdown but growth eventually leave. In the case of secular bears, the growth trajectory is deflected. Polar bears are devastating secular uncontrollable; growth is completely dislocated.A bear becomes devastating when the government does not intervene, or too little or too late. We have just witnessed a bloodbath in the rules on the Chinese stock market type-A. One example among hundreds, China Mobile, the largest mobile phone company in the world, with 400 million subscribers has seen the share price fall by 75% in one year. The government felt that after being arrested has crossed the chasm of -65%.During the Great Depression 30 (the Great Depression, as they call the United States), the central bank began to tighten monetary policy at 1928-1929. After the crash, there was a credit crunch. Fearing the onset of inflation, the Fed has continued its merry way and even more contracted the money supply by raising interest rates.In general, the metamorphosis of a secular bear a bear following a devastating big bankruptcy that threatens the entire system.During the Great Depression, the asteroid that fell on the Stock Exchange called the collapse of Bank of United States, December 11, 1930. At the time, when a bank put the key under the door, there was no deposit insurance. (The FDIC in the United States will be precisely established in June 1933 to address this kind of disaster). 500,000 depositors lost all their money.The rest of the story is sad and painful. The recession became a depression. The government has been reached that in 1933, is 3 ½ years after the fall of the asteroid. 25% of Americans were now unemployed. Deflation had ruined the economy. In Europe, the Nazis had the opportunity to take power legally.The fall of Lehman Brothers September 15, 2008 is the equivalent of the collapse of the Bank of the United States. It has caused irreversible effects in the system.But the authorities reacted in a manner very different from 1930. The Fed has injected liquidity immediately. By making short-term loans, to businesses and banks, its balance sheet has tripled in size within weeks. During the Depression, he had contracted by 25%.If the Democrats win, there will be a stimulus package, estimated at between 150 and 300 billion dollars. The budget deficit could reach $ 1 trillion in two years (7% of GDP), to descend slowly. While Bush inherited from Clinton a budget surplus, the deficit of the United States is not alarming in itself. It amounted to 162 billion in 2007, 455 billion are planned in 2008, representing 3.2% of GDP.The combination of two arms, monetary and fiscal, should stem the secular bear and prevent it from turning into bears devastating.Remember at the end of World War II, the budget deficit accounted for more than 10% of U.S. GDP and the debt / GDP ratio exceeded 100%. You do not kill a grizzly with flies.
Chronicles of the financial tsunami: prions of finance-Part-(27th episode)October 28, 2008When I lived in France, I gave my blood three or four times a year. Having followed the case of contaminated blood the onset of AIDS until the trial to compensate victims, I always wanted to serve the community with my precious liquid O negative. The Nobel Prize in Economics for 2005 was awarded to Kahneman (still alive) and Tversky (posthumously) for showing that the act of giving can be rational and that due to the fact that whoever gives far poorer well-being increases a sense of heart-warming (warm glow). Unaware of my impure altruism, one day I see a truck of blood in the streets of San Francisco. I knock on the door.It makes me sit there and hands me a long questionnaire to fill out. Fifteen minutes later, the lady offered me cookies and said, "Sorry, we can not take you." My anticipation of the warm glow hanging from his lips, I look at her incredulously. "You have lived in Europe in the 80's and with the mad cow disease, we can not take any risks. "I try to explain that in my rebellious youth, redundant, I was a vegetarian. Nothing to do. She tightens cookies. I leave with my good feelings shoulder.If only the U.S. government and the police Wall Street and Chicago ("Washington", as they say in the U.S., making a wholesale price) had demonstrated as much care, the crisis of 2007-2008 n 'probably would not have happened.Here, go to the bistro.After the 1997 Asian crisis, JP Morgan realizes that it has granted many loans to poor debtors. John Pierpont Morgan, the banker who in 1907 had a score of colleagues trapped in his library on Madison Avenue until they solve the financial panic, had fallen asleep on its laurels. Clearly, the bank was losing money with some large customers to whom she could not say for reasons of loyalty bancoter to go elsewhere.The problem was that the loans remained on the books for decades. Until they were expired, the equity was reserved and could not do other more lucrative. She also provided lines of credit (ie, promises of loans), for which she was poorly paid but during another crisis could all be activated simultaneously, causing heavy casualties.The mission was given the code name "Transformation of credit." It brought together bankers, strong in math and good at banter.Their idea was to combine two things that had never been: Securitization - hydrochloric acid - and credit derivatives - aluminum.Securitization, you will recall, is the act of mixing different kinds of salads and tear them into small pieces and then serve in bowls just waiting around. Securitization (Securitization) was not invented by JP Morgan. In fact, she has earned Robert Merton and Myron Scholes in their Nobel Prize 1997 for research published in 1966.People love this kind of bowls because they guarantee an income by spreading risk over lettuce, arugula, romaine and spinach. So if the price goes up and spinach than lettuce drop roughly balanced and that you continue to earn on your investment. The consolidation gives you some security, hence the English name of the securities (securities).Derivatives also existed. During our visit to Chicago Edge Of Exchange, we played with the action of Morgan Stanley to the tune of calls (option gives me the right, but not the obligation to buy) and puts (option gives me the right, but not the obligation to sell). Then in the queue for taxis at the airport in Guarulhos, en route to the Bovespa, we talked about how companies can protect themselves against exchange risks by buying puts or calls on the currencies in which denominated contracts. Similarly, when we say that oil prices go back down or they actually talking about future barrels which will take possession two or three months later. The same goes for the rest of the raw materials.Like the T-shirts and action figures of The Simpsons who have reason to be that the existence of the television cartoon, derivatives of finance are based on a financial principal: an action, a currency, commodity, or ... a loan.The innovation of JP Morgan was two-pronged. First, instead of putting a particular loan into the bowl, put the contract at twenty, No. 9999 signed by General Motors to build a plant - JP Morgan poured some of its exposure to risk if GM goes bankrupt . Put the bowl in the loan was to a financial product key, if I set the exposure to risk of default of the same loan (let alone the whole enterprise) is a derivative of the loan.The specific variety of green leaf that the team of JP Morgan was going to pay before stir, called Credit Default Swaps.Here is how a CDS works: Person A and Person B are a bet on the survival of the individual C. B pays A. A pay B if harm comes to C. B may assign his right to be paid by A to whomever he wants. A can sell its obligation to cover B to whom he wants too. Nobody keeps a trace of where are the contracts.Poured into the mixer all the CDS of JP Morgan. In each jar, now you have a bit of risk if General Motors failed, a little bit of risk if IBM fails, if a piece of Lehman Brothers went bankrupt, a total of 300 companies. Use and circulate.Investors who bought the small bowls have become the insurers of JP Morgan, if n 'of which of the 300 companies went bankrupt.After using the talents of strong math, JP Morgan had recourse to his strengths in banter to persuade regulators and credit rating agencies that their invention was great and safe, precisely because they pool risk. Note the complete absence of stock market watchdog, the derivatives that are not quoted in Chicago are not regulated by the derivation Oversight Agency. (This is like saying that the police take care of the drug when it is sold in pharmacies.) The contracts that nobody keeps track, are sold OTC (Over The Counter, literally putting the on the counter) just like you would sell your books at Gilbert Young.The transaction of sale of CDS on the 300 companies in the stock of JP Morgan was named Broad Indexed Secured Trust Offering, or the acronym BISTRO. Mind you all these terms are there to reassure you: secured (guaranteed), trust (confidence), broad (wide). Bistro bonds were placed in December 1997 with other banks and insurance companies. They won a total success.Even if their loans were still on the books, the bank had got rid of 9.7 billion risk of defaults by its customers poorly. The CDS does not appear anywhere except in off-balance sheet accounting. She had also recovered the cash by touching all the "insurance". In fact, JP Morgan has used the money to redeem its shares on the stock exchange. (When the capital is less diluted, each shareholder receives more dividends and is very happy so he keeps his actions).Second part of the innovation (sic) we stop making crafts, you get into the CDS industry.After the success of Bistro, JP Morgan said he could mount a production line and selling CDS on a large scale. It was enough for that on the one hand the government and market regulators, banking and insurance supervision do not mix its growing business. And the other to manufacture products by brand. You do business with IBM, so you need a CDS IBM. If you have many relationships with Sony, I'll put together a CDS Sony. Etc..Everyone began copying JP Morgan. In 2001, the CDS market represents $ 900 billion. People bought without understanding, but also bought other. In 2007, they had grown to 62 trillion. Yes, yes, 62 trillion.Now that the CDS touched all the major companies in the world, the prion had only to wake up.Chronicles of the financial tsunami: prions of finance-Part Two-(28th episode)Errata:The word "Roman" is a anglicism. The real name in French is actually a chicory and romaine lettuce is. The term also refers to a chicory endive in the region of Brussels.The Derivatives Oversight Agency yesterday I was talking about exists only in my dreams. The agency now called the Commodities Futures Trading Commission and as its name suggests monitors only a portion of the derivatives market: futures on commodities and stock options. It is headquartered in New York with offices in Chicago and Kansas City.October 29, 2008Let us dream the prion sleeping. I would immediately wake up to the suspense, but blow a decade of epidemiological incubation a problem. One has the impression that the disease occurs one day and everyone is very surprised. In fact, Bistro and her little brothers fell sick all the time.I have used until now the metaphor of the salad. I suggest you replace it with the lasagna or tiramisu or even talk like bankers, for each:Loans that are used as reference in a CDS are actually segmented according to their quality. Is a nice ceramic baking dish from Le Creuset brand, you will not attract customers with a flat tin. Deep inside, you put the spray of your loans and less safe. This round is called the equity layer and receives no score because it is so bad and dissuasive. Then you will ask the middle layer, the mazzanine layer, which contains ready reference rated AA to BB, also finely chopped. Finally, you reserved the best slice, the senior layer, which is linked to higher quality loans, which have all been rated AAA. Bistro designers had added a glaze to their beautiful cake: the super senior layer, which had the names of the first order of business, the cream of the crop, this is so to say.Each tranche receives compensation inversely proportional to the risk.Bistro before distributing to customers, we had to go fishing for notes. They would buy even if they do not understand much, if someone who knew has endorsed. Imagine a pharmaceutical company that would change the experimental results until the statistics confirm the hypotheses. It was almost the same. Standard & Poor's was turning the product on its computers and mathematical modeling consistently concluded that Bistro was not worth a pin. There was too much risk. Strong in math at JP Morgan resumed their copy. They returned later having changed a few settings. Still too risky. They left to make other adjustments. Then it was good. Computers Standard & Poor's began to obey the various slices have a maximum risk BB.I skip the episodes but say the problems at once broke out in the mezzanine tranche and the bottom bracket. JP Morgan could not ignore it because they had kept it. Even the higher bands gave sleepless nights to their holders.Bistro II experienced more losses yet. But, without fear and without reproach, JP Morgan launched into the CDS industry; imitated by the entire profession.One of the reasons why the instruments were not as fabulous as expected is the right that entities issuing CDS retained changing loans that were used as references, as long as the new loan and the former had received note. Have you ever bought a car? The seller has an advantage over the buyer, such as banking, he knows what's under the hood. This information asymmetry creates a moral hazard. And banks were not embarrassed to dump their garbage dump in the dish Le Creuset, before it ceases to call triple-A.But as good at banter had done their job to hold government agencies and remote controller, such as defects only revealed in the future as these products were not required to remain on the books of the bank but rather to be sold as soon as possible, it was a great success.Finance with an imagination and an insatiable commensurable, in 2003, she began to make derivatives of mortgages and the securities used, it was the collateralized debt obligations.The CDS and CDOs were all born in the same matrix. Bistro was supposed to vaccinate them against the risk pooling. Instead of realizing that she had invented a new disease, JP Morgan let out a patient zero. Other banks asked him a little saliva and rushed to put it in culture.The billionaire Warren Buffet, also called a straight face, "the Oracle of Omaha" (middle of nowhere in Nebraska, I hope that I would never drink my words), prophesied in a letter to shareholders in March 2002 that "financial derivatives are weapons of mass destruction." He explained how it seemed to protect against the risk to the micro level and how they passed by spreading the macro level.Muriel, said Mickie Siebert, 76, the first woman trader to have worked for himself on Wall Street recalled in December 2002, before the inquiry commission of the U.S. Senate made to clarify the origins of the Enron scandal that was already came to warn of the dangers of derivatives in 1988 and 1998.She then quoted his own words. In 1988, following the 1987 crisis, she said that the stock futures - commonly known as future-"had become the tail wag the dog was" ("Future Have Become the tail wagging the dog"). And to show how the automated trading software on the futures market had caused the collapse of stock prices by 22.6% in a single session. These programs were modified. In 1989, regulators settled a series of circuit breakers that are still used today.Ten years later, in 1998, a hedge fund called Long Term Capital Management failed to blow up the system again using financial derivatives. With borrowed money (leverage of 1 to 100), the fund had to bet $ 1 trillion in Forex on the future value of currencies. The situation was no lack of spice, so to speak, as Robert Merton and Myron Scholes who received the Nobel Prize in Economics in the previous year for their theoretical contribution to the derivatives markets were on the Board LTCM.Then came the Enron scandal in 2002 on the market completely deregulated energy, another Over The Counter market. Enron issued to the number of operations in both directions. Meanwhile, Bush champing at the bit to release the oil from Iraq. These operations in both directions were legal on the OTC market but have been banned in the stock market, denominated as fictitious sales (wash sale).Three crises, three types of financial derivatives, three calls for regulation in the desert. Finally, two because in 1987 there were real changes to preserve the system. It is clear that even devotees of the Exchange does not believe in the ethics of capitalism to prevent abuse.But back to Warren Buffet's letter to its shareholders. He explained how during a buyout, he found himself with a branch derivatives (= products). Because the system counterparts (you agree to cover a risk for someone else) and because it's operations in the future, sometimes distant, reinsurance and financial derivatives as the Hell, it is very easy to enter and almost impossible to get out.Warren Buffett wanted to get rid of this unit, no matter what. Upon his arrival, General Re Securities was the consideration as a buyer or seller in over 23,000 operations. Amount: $ 1 trillion. One of his teams ready for work to unravel the net of these derivatives that bind together so many variables that the chances of the risk occurring are multiplied. In the end, being extremely cautious, the team still lost $ 200 million in 500 trades. 98% of SAR operations and 2% were lethal.Now please, for prion wakes.
Chronicles of the financial tsunami: prions of finance-end-(29th episode)October 30, 2008Custodian banks, investment banks, regional banks, savings banks, they had removed all the CDOs. January 31, 2008, six months after the bursting of the speculative bubble subprime losses caused by this type of financial instrument based on the mortgages amounted to $ 265 billion. The note promised to be even more salt, it was provisioned. Officially, everything was under control. Losses related only 2% of the contracts, maximum.Then came March 2008, the fall of Bear Stearns, caught on the fly by JP Morgan Chase thanks to a gift tax of 29 billion (if you're not billions, you are not of this world) and losses caused by two investment funds. Merrill Lynch (we are all cousins in the business) had lent 90% of the money to buy CDOs. When their value began to decline, the mobile Ralph Ciolli, the manager at Bear Stearns rang. "Hi it's Merrill Lynch and that's a margin call. We'll have to give me more guarantees or deliver cash or liquid on it. "Money, Bear Stearn by searching his drawers, under the mattress, in the inside pocket of all investments. Caught by the throat, he went to hang under a bridge, but the Fed met on the road. Ben Bernanke said, "Go and sell you to JP Morgan Chase." Investment funds were liquidated in June 2008. Merrill Lynch touched the amount of the sell-off of $ 3.8 billion, which affects down the value of its own CDO.Bear Stearns was not the only institution to have worries. Since September 2007, AIG's largest insurance company in the world $ 1 trillion in assets, 116.000 employees in 130 countries losing money, big money, hemorrhaging money in an industry employing 377 people and located in London. People from PJ Morgan came to see AIG Financial Products in 2001 and proposed a partnership, with the reputation of AIG, it would be easy to break into the field of CDO and CDS. JP Morgan would design products, AIG's funding and investment with its vast clientele. The turnover of the unit quadrupled in London six years, from $ 737 million in 1999 to 3,260,000,000 in 2005. In 2002, operating income was 44% of turnover. In 2005, it exceeded 80%. The salary of casino ranged from $ 423 million per year to 616 million, the story does not say how many won the secretary. The portfolio of CDS alone accounted for $ 500 billion and reported in "premiums" 250 million per year. It was easy money as the risk of failure of all these good, solid companies was extremely low.At the end of a quarter of sad memory, September 30, 2007, AIG had to admit she had lost 352 million on CDOs. This led to a chain reaction. Note the quality was immediately lowered. Suddenly, it was more expensive to borrow and all the people who had been content to your reputation as a guarantee you make a phone call. The margin call in September 2007 was $ 15 billion. The share price began to tumble. While the situation worsened in real estate, AIG lost 7.8 billion in the first quarter 2008 and 5.3 billion in the second. It was long time ago quarterly profit of 4 billion! After the collapse of Lehman Brothers, and while approaching the end of the third quarter, the Fed had to offer a loan AIG executives / nationalize 85 billion to prevent the fall of a second asteroid; especially since the collapse of AIG would have caused an automatic loss (because the system counterparties) of $ 20 billion in Goldman Sachs's cousin.So there was only one asteroid to hit Earth this week. The bankruptcy of Lehman Brothers was not only a huge event because of the amount of receivables of $ 150 billion.
A central bank has several roles. Its main task is to define and implement monetary policy. This may mean price stability, only, as the ECB or two missions, price stability and growth, as the U.S. Fed. The main instrument available to him is to have the power to set the base rate director, ie the interest rate at which banks borrow and then re-lend. The central bank also has two other roles: it must monitor the banking system and serves as a lender of last resort. If your bank fails, you will not lose the money that was on your account. This task creates the conditions of trust without which the slightest rumor, everyone would run out his money, or as banks make loans based on a multiplier of their deposits, the system would be extremely fragile. The European Central Bank is responsible for the common currency and it inherited the national central banks conduct monetary policy. However, the establishment of legislation and supervision of commercial banks are still largely the domain, jealously guarded national central banks. The third mission has also not been transferred. The European Central Bank is not a lender of last resort. It coordinates the efforts of just the national central banks. It can provide liquidity as yesterday, the 120 billion euros, to prevent a bank from being grabbed by the throat, but this is his first mission, the policy rate. This system is now inadequate. European commercial banks are becoming more and more business outside their home country (in 2006 24% of their assets were held in another country of the EU, against 11% in 1997). Not to mention that only 15 out of 27 countries are part of the euro area. The case of Fortis bancassurance is particularly interesting because it illustrates the new challenges which faced the European financial system. Fortis is a banking group which is principally owned by Belgian and Dutch shareholders, but also Luxembourg and China. The assets of Fortis amounted to 30 June 2008 to 974,000,000,000 euros. For an order of comparison, Belgium has a GDP of 331 billion euros in 2007. Fortis is not only too big to fail but also too big to be rescued by a single country the size of Belgium. This is great since the Benelux has a long tradition of political cooperation and Belgium and the Netherlands have a bilateral treaty that provides for who does what in case of bankruptcy of a transnational bank. Which brings me back to the role of lender of last resort. It is not to save all banks in principle. In fact, central banks hide behind a prudent ambiguity, which aims to distill the confidence without encouraging irresponsible behavior. Clearly, a central bank will eliminate insolvent banks (like the Fed did for the savings banks in 1987) but come to the rescue of illiquid banks (like the Fed did last Friday for Washington Mutual). But the example of the failure of Lehman Brothers suggests that the distinction between insolvent banks (too decayed or depreciated asset) and illiquid banks (liquidity needs and the money exists but is not immediately accessible), this distinction n is not always easy to establish. Lehman Brothers went bankrupt and the week after the Fed and the Treasury, taking the measure of the seriousness of the situation have intervened to save Merrill Lynch. From when a claim she continues to be good and she begins to feel rotten? Just look at what is happening with multinationals such as General Electric who have been forced to borrow from the Fed to fund their cash drawer (the equivalent of "you're exposed to the end of the month ... "). If the credit crunch does not loosen its grip, people will no longer get loans, General Electric will no longer sell its products and not earning more money, the company can no longer meet its obligations. The good will become bad debts. But back to Fortis. Last year, the bank had allied with the Royal Bank of Scotland and Banco Santander to acquire ABN Amro at a price of 73 billion euros. With the combination of the subprime crisis and credit crunch, its share, estimated at 24 billion euros lost 71% of its value. The weekend after the BNP Paribas and ING Group declined the offer for the acquisition, bankruptcy was inevitable due to lack of liquidity. Central banks in the Benelux have played the role of lender of last resort and have bailed out Fortis to the tune of 11.2 billion euros. They are now shareholders can expect to sell assets when they reach maturity, which should bring, perhaps, the benefits to taxpayers in both countries. Just for the sake of the reasoning ... What would have happened if instead of Fortis ABN Amro had been had by the throat to the credit crunch? If the function of lender of last resort is not taken in hand at European level by the ECB, on whom falls the responsibility to rescue failing banks? Would it have been Spanish and Scottish taxpayers to check to save a distant active, scattered all over Holland? Ooh, the European idea was not already the coast ... Unlike the Benelux, the links between Scotland and Spain are cowards. When federal taxes paid in California are used to repair for the thousandth time the waterfront built in Florida, California taxpayers scream but he hopes that the day the San Andreas Fault will wake up and the Great Earthquake of earth- -as-all-the-world-waiting, including me, with my survival kit of the Red Cross at the foot of the bed, destroying everything, Floridians get their hands dirty. Solidarity is because it's the same people, the same country and because there is a federal government transfers to operate. We see the limits of the comparison with the European Union. While preserving the European financial system needs to adapt to the laws of the euro area to the reality of companies increasingly transnational, the extension of tasks of the ECB in the role of policeman of the banking system and lender of last resort risk of encountering myopia and selfishness of economic agents. We often forget that what has changed of the United States in the United States is the military defeat of the "sovereignty" (the term is anachronistic) during the Civil War. Our "ever closer union among the peoples" is also sealed by the blood of two world wars. But the process has not had time paroxysmal. This is his chance and its weakness. Andalusians and the inhabitants of Bratislava, the subjects of His Britannic Majesty and Swedes feel a common destiny, but a little wallet attached. Chronicles of the financial tsunami, 6th component. Billionaire Warren Buffett took advantage of the sales season. He just picked up a piece of General Electric against some lenses, $ 3 billion. This is reminiscent of the financial crisis of 1907 when JP Morgan had helped the U.S. government with his personal fortune. You do not have money, I'll ready! Following what the Fed was created in 1913 to avoid incest. The rest of the world is waiting, hoping and pray that the House of Representatives adopted the new version of Tomorrow bailout the U.S. financial system. Just to send the signal that if they do not move, blood on Wall Street will spread into your street, the stock market today with a drop of 348 points and closing below 10,500 points. The Paulson plan in its first version was spread over two pages and a half and cost about $ 1 billion of the word. Basically, he said, give me the full powers and a check for $ 700 billion and I will draw business. Do not think, pay. The revised version of the Congress had swelled to 110 pages. We had added a good dose of supervision, the right of the State to be a shareholder, a limitation on golden parachutes and so on. But the man in the street was not alarmed enough, or aware of the issues, and a majority of members preferred to do not shine, forty days before the election. The third and hopefully final version, as adopted by the Senate yesterday (thank you to the elect Jews who were willing to move the day of New Year - yesterday was also the feast of the Ait-El-Kebir, but according to my information, there is no Muslim U.S. Senator, I remind you, despite the insinuations of some advertisements para-Republicans that Barack Obama is a Protestant), in short, the new version is 450 pages. It requires health insurers to reimburse mental health (??), gives rebates on capital gains for companies (one wonders who could have make gains this year ...) and other measures to bribe of Representatives. It contains fortunately still the bailout, with some modifications including limiting executive compensation. Buried in 450 pages, a measure was added that deserves some attention. This is the modification of an accounting rule. As my teacher planning law, "Do not be lulled by appearances, it is more technical and more political it is."
Here's the problem: Following the collapse of U.S. savings and loan, in the late 80's, the securities of banks should be recorded at current value (fair market value) rather than their purchase value . This rule is called in English "Mark to market" like playing basketball and must "tag" the other player in the pants, then it is to be pegged at market price. If you combine this rule with the transparency obligation of companies to present their results at the end of each quarter, you get the perverse effect as follows: just before the controls, everyone does rule. After the arrival of the book, it relaxes. Case study: a bank has a portfolio of real estate assets that it paid $ 200 million. Bad luck these titles are for homes in Las Vegas, San Diego, Miami, Detroit and Phoenix, where prices have collapsed. If it sold its portfolio today, he would find a buyer for one fifth of that price. September 30, 2008 arrives, if it is to enforce the law, it must account for these assets to the tune of 40 million. Net loss in capital: 160 million. Of course 100% of people in Las Vegas, San Diego, Miami, Detroit and Phoenix will not see their house seized. Most repay their loans. (IT IS maybe say 20% of people who have problems. I chose the cities most in need. In the rest of the country, the situation is less dramatic. September 1, 2008, the national average seizures was 2.75%, against 30% in 1934.) Where the rub is that a bank can lend only in proportion to its equity. So comes the end of the quarter and law enforcement, the bank has eaten part of his capital. Now, except to recapitalize the bank can not lend on the basis of the 40 million equity remaining. Now nobody wants to invest because everyone is afraid to put money in a company on the verge of bankruptcy. This is the vicious circle. The question that arises is: the publication of results is it the cause of the increased fragility of the bank or does it reflect the real fragility? One thing is certain, the bank can not grant new loans. 55 of the 60 MPs who wrote to the supervisory committee of the Exchange, the SEC, to demand a suspension of the accounting rule also voted against the bailout Monday. One of their reasons is that if we changed the rule would reduce the amount of slate. The other is the lobbying of the banks. Monday we were on September 29, the banks hoped to avoid having to recognize other losses. The rule in version 3 of the text rescue has not been abolished but the SEC was authorized to suspend its application, if deemed desirable. Question: breaking the thermometer does it reduce fever? It is true that accounting is always subjective but the rules are designed precisely to make the less creative as possible. If you allow the separation between asset values and market prices is the door open to rave balance sheets, because one day my assets will be worth what I say. In credit crunch, there is the word credit comes from the Latin, "he believes." You will you believe in Santa Claus when the banks' balance sheets will be covered with silver balls? Chronicles of the financial tsunami, the seventh component
Two days after the Senate, the House of Representatives just passed by 263 votes against 171, the amended bailout plan of 700 billion U.S. financial system. It took four days of psychodrama when it rained non-stop bad news (the unemployment figures, auto sales, housing prices), so that economic agents understand that except to return to barter or to a world where people pay with their cars and homes, the U.S. financial system needed to be saved by and for users. Substantially the same time, Europeans will find themselves in crisis summit in Paris to try to agree on a bailout of their financial systems. Avoided bankruptcy of four major banks in less than a week has put the record straight. In a globalized economy, the beating of the wings of Wall Street triggered a financial tsunami in Europe and they are not dykes verbal well-intentioned leaders who will limit the damage. Analyze two situations in terms of game theory to better understand what is unfolding before our eyes. First the American case: we were in the typical case of a game with two hits with three agents: Congress, Wall Street and the People. Let the following diagram:
The hard lines represent the relationship "needs." The dotted lines represent the relationship "may punish." Congress needs of the people and can punish Wall Street. The people need Wall Street and Congress can not punish Wall Street. Wall Street needs the Congress may punish the people but not the Congress. The Congress is an emanation of the people but their own interests. We can say that it is in a position of agency in relation to the People (where the People is the largest and Congress acts as his agent). This gives the following game: First time: Monday, September 29, 2008: Congress punish Wall Street. Wall Street punishes the people. All are punished. The agents are rational, they understand that this game leads to self-destruction. It therefore leads to a change in behavior: The next move: Congress helps Wall Street. Congress has helped the people while ensuring the inclusion of its interests. The people will not punish the Congress. It has resulted in a cooperative game with a happy ending (sic): the world is not annihilated, he can rebuild. Now the European case: First time: First, the game commits a non-cooperative. Ireland says it will guarantee all assets deposited in six of its banks an unlimited amount. At the same time, the United Kingdom and France are guaranteed their best. In this game, we have two types of players: The Big Country (France, Germany, UK, Spain and Italy) can save their banks themselves. Small countries (Ireland, Belgium, Netherlands, etc.). Are too small to save their banks on their own. The Big Country will not pay for small countries because their people would punish them. Second shot: The President of the Central Bank Européennne and the President of the European Union, itself a member of Big Country are trying to meet a summit that brings together the big countries and small countries in order to establish a cooperative game. The cooperative solution is superior to the non-cooperative solution, but it is unstable. First, because the game has already begun. Secondly, because the smaller countries accept to cooperate if the Big Country help in case of bankruptcy. We're in a game of prisoner's dilemma type:
Petit Pays Petit Pays plays cooperate personal Big Country is cooperating 400 billion plan passed, the large taxpayer paid for everyone. The world is saved. A smaller plan is adopted. Some banks go bankrupt. Cost to the community over 400 billion. Big Country plays personal banks of Big Country are saved. Banks of small countries are going bankrupt. The Little Big eat. The industry is restructuring on a field clearance. Sauve qui peut!
In reality, neither the President of the European Central Bank or the President of the EU have no authority to force the big countries and small countries to cooperate. In addition, Big Country were not all homogeneous behavior. They have their own strategies. In total, I have no crystal ball but I anticipate that the cooperative solution, though the most desirable will not lead one to which representatives of the States of the EU this weekend in Paris.
Well if this is true, why the New York Stock Exchange today, she fenced in a decrease of 1.55% and the CAC 40 was up it 2.96%? It's enough to lose his last certainties. There is a saying on Wall Street: "You buy on the rumors and you sell on the news" (= you buy based on rumors and you sell when the news is confirmed). The Palais Brongniart has closed up shop for the weekend before the bailout was voted in the House of Representatives. Wall Street has opened up 200 points on rumors that the plan would be adopted. When it was certainly, traders took profits. Capitalism is not suddenly become altruistic.
Chronicles of the financial tsunami, the ninth component October 7, 2008 "Do not despair Billancourt! "Sartre would have said if he had watched the press conference of Ben Bernanke this morning on Wall Street TV. "You have to hear you guys" would have added that his ghost still squinted a few minutes before the meeting of 27 Ministers of Economy and Finance of the EU, meeting in Luxembourg. The Fed chairman speaks to the equivalent of the French Association of Banks and the Stock Exchange from under 130 points at least 290 points. EU ministers are meeting and continue to decide that everyone can manage very well alone. They do agree on one point: no European bank will fail. You laugh when Rome was under water, do you know what happened to Atlantis? It is true that the principal financial European, London, outside the euro area and German government during the election campaign, the diving has a future in the North Sea. So we tinker and you scoop; French: drain the water from a boat. In the U.S., the Fed invents a fourth mission, in addition to monetary policy, banking supervision and lender of last resort. Since banks do not lend themselves more to one another and that companies can not borrow short term from banks to finance their cash needs, here become lender of first resort. What does this mean and how did we get here? In economics, there are three markets: the market for goods and services, the labor market and capital market. The capital market (in English, financial market) is split between the money market (money market) that provides short-term financing (from one day to two years) and the financial market (capital market) which funds projects longer term. There are several reasons why the money market is used by economic agents. Examples: I am a retail bank, like Bank of America or BNP-Paribas, have a lot of my clients' deposits, it would be a shame they do not relate to me. Another example, I am a merchant bank, like Merrill Lynch or Smith Barney (now I'm backed by a universal bank, but I always do the same job) and borrow short term to long-term investments; much cheaper than borrowing long term to invest long term or short term, for that matter. Another example: I am the State of California and my budget is always passed with three months late because my Parliament is a real mess. In any case, even when they agree, from the time the budget is adopted and when the taxes come in boxes and I'm still short. Last example: I am the BMW of San Francisco, borrow to buy cars and I repay once I sold. Right now, the money market dried up. Holders choose not to pay cash for fear of not being repaid. Agents who need to refinance lender and can not find are strangled. Just one figure: about 24% of the debt of banks to be refinanced each day (!!!) (so far as is known in English overnight rollover). If we remember that there is a leverage by which banks borrow up to thirty times the amount of their capital, it is clear that the sums are astronomical and that things can go wrong very quickly. Given the wondrous conditions, holders of cash fleeing stocks and bonds of companies whose prices are falling and whose very survival is questionable. They rush to Treasury bills, a safe investment and hyper-liquid. As a result, law of supply and demand, the rate at which the U.S. State pays the money that it borrows is at its lowest, almost nothing: 0.29% one month, 0.85% to three months (against 1.7% in September 1). However, if you absolutely must refinance, the rate at which banks lend to each other, Libor is 3.94% for a loan to one month and 4.14% for a loan to three months. (Against 6 or 7% last week, so looks like Charlotte de Turckheim, "it's going much better"). The difference (the spread in the language of bankers) between Treasuries and Libor is a good indicator of lack of confidence and uncertainty of the agents. They prefer the guaranteed% to almost zero as 4% with risk. Another indicator of this fear was the amount of assets deposited by banks with the Central Bank. In Europe, the ECB injected for ten days a staggering amount of cash, $ 120 billion in one weekend and at the same time the banks brought back more than 44 billion euros in deposits to his desk. To overcome this impasse, the Fed is going to lend short-term economic agents. The central bank replaces banks in their role as lender of first resort. One of the reasons why financial institutions have shown a reluctance to lend, of late, because the guarantees that they brought in a mechanism similar to the Mount of Piety were questionable or difficult to sell because the vicious circle of credit crunch, Mr. Bernanke as central banker and a professor of economic history specialist in the crisis of 1929 has just said in his press conference that from now on, the Fed will accept bills of exchange in three months with or without consideration. Today, Rome scoop still under 508 points. In 9447 tons of salt water, the couple always looking Nemo Paulson Bernanke. Chronicles of the financial tsunami, the 10th component Erratum: In the eighth section, I mentioned that 10,000 people gathered in Denver to attend the inauguration speech of Barack Obama. In fact, they were more than 80,000! Accuracy: In the sixth part: if it is unnecessary to actually Muslim U.S. Senator, however, in 2006, Keith Ellison, elected Minnesota was sworn on the Koran when he took office in the House of representatives. October 8, 2008 The tsunami arrived in Asia after falling 10 to 15.5% today and 10 yesterday and 19%, Indonesia and Russia suspend their quotes. Nikkei down 9.4%, the Shanghai Stock Exchange by 3% that of Seoul 5.8%. The tsunami is still in Europe: Frankfurt - 5.88%, London, -5.18% -7.9% today and yesterday. Paris -6.39% Monday after falling nearly 10%. As for Rome, she begins to resemble the inside of a whale. The question is not panic or not panic but what kind of panic? Monday, the day the stock market should have celebrated the adoption of the Paulson plan, the Dow had reached -800 points before recovering to close at -500. Ironically, this improvement last minute was not good news. Since Monday, hedge funds are selling because they are forced to repay money to wealthy clients whose funds are able to "redemption" (remember? After the expiration date ...). The sell mutual funds because retail investors have received their bank statements (the end of the quarter!) And reading the box at the bottom right is painful. When the market rebounded Monday during the last hour of trading, the professionals have breathed a sigh of weariness, give us a good surrender and be done! The capitulation is the technical term for when investors sell because they have lost all hope. This is good, great, a final panic. Monday was the color of a panic, and then damn! at the last minute, you still have people regain hope and who claim that there are good deals to be had in a back and forth Express. If you go to New York, you probably can not visit Wall Street, unless you know somebody (I know no one, sorry) or if your trip takes place after the death of bin Laden, but also that the American flag hangs on the front, I suggest you take a ride in the Financial District. First you will realize that the streets of Wall Street is also close the door that you can get rich through your work. Then if you walk through the neighborhood, you'll come across a statue of a big bull. I give you a hint: it's next to a Duane Reade pharmacy. Another clue: there are Duane Reade pharmacies in all corners of streets, but look for the bull. That's it, you found it? No, it's not a sculpture by Pablo Picasso. In fact, the Christopher Columbus of fortune, the Big Jim older children on Wall Street. Here is how it looks: http://www.panoramio.com/photo/3254126 In English, a bull market is a bullish market says (bull = bull) and a bear market is bearish market. It goes without saying that it is unnecessary to bear statue in this part of Manhattan. So we are clearly in a market oursier (sic). But the statistical point of view, the decline was mostly painful because since the collapse of Lehman Brothers on Sept. 15, it does not finish falling. If not by historical standards, there is still room. It is at least 30% compared to October 2007, when the stock market fidgeted with 14,000 points. Over a century, the average declines in the stock market stampedes 42%. So, give us a good panic and be done. In the meantime, we must expel water from the lungs of the real economy. The British government has just 7 recapitalize its banks, while leaving the distressed assets on the balance sheet. Which by the way is the exact opposite of the Paulson plan. In a concerted drive, the Fed, the ECB, the Central Bank of Canada, the Bank of England, Swedish Central Bank and the Swiss National Bank are to lower their prime rate less 0.5% Director. The Japanese support the idea because their rates are already so low and the Chinese themselves, fell 0.27%. It's hard to believe that this will suffice, but other measures are coming this weekend, at a world summit in Washington special under the umbrella known IMF. The Paulson Plan is also being set up at a speed not at all bureaucratic. In the meantime, each scoop. Less than 200 points today. Capitulation, surrender, to 9246 points, do I finally the mouth of capitulation? Chronicles of the financial tsunami, the 11th episode Thursday, October 9, 2008 A year ago, October 9, 2007, the Dow Jones fidgeted at 14,164.53, its highest level since it was created by Mr. Dow and Mr. Jones, who started a computer index at 15 Wall Street in 1882. This morning, the stock market opened with Dow Jones to 9258.10 points. The index is a basket of the 30 largest U.S. companies had lost 35% in one year and 15% in six days. Another index, which has 500 firms, Standard & Poor's 500 (Henry Varnum Poor was entertained in 1860 to publish a book that traced all U.S. companies to railroads and their financial arrangements), so the S & P 500 was 984.94 points, its lowest level since August 2003, down 37% compared to October 2007. It's not a very happy birthday. Taking a third index, the DJ Wilshire 5000 which encompasses values covering virtually all listed companies in one year, 7.5 trillion dollars in market capitalization destroyed. In French, the word "trillion" is a bit old. A trillion is a million power of three ("tri -") or if you prefer power 10 12. Usually they say rather trillion. But that really used to brew trillions? And as we talk in dollars, it is English that infects us. 7.5 trillion dollars is more than the GDP of Japan (4272 trillion dollars in 2007), or that of China (3.25 trillion) and almost as much as the U.S. national debt (10.19 trillion), which the first two creditors are, moreover, Japan (593 billion in U.S. Treasury bonds) and China (519 billion). 7.5 trillion is almost half the U.S. GDP (13.8 trillion in 2007). By comparison, Bill Gates, Microsoft founder and the richest man in the world weighs only 57 billion. And if we take the Forbes 400 families, that they n'accaparent 1.57 trillion, on their 400. Slightly less than the GDP of France (1.891 trillion in 2006). So the 7.5 trillion was it the wind? The IMF estimates that there were about 1.4 trillion of toxic assets due to the speculative real estate bubble. About half has already been disarmed, the other half remains of the bomb. The Paulson plan is approximately that amount. I wonder if this is how it has estimated the amount of slate. We can see how 1.4 trillion of assets could have rotted the life of at least 5000 companies banks and other participants in the bubble, plus all non-listed SMEs. During that Google or IBM is still generating record profits fall has no reason to be. Yet they fall, they fall, Madame! They do it to fall. In a snowball effect, 7.5 trillion dollars went up in smoke. For a hangover, I have an excellent recipe for onion soup. My advice, you serve at the end of the festival just before the first subway. Wall Street is on the line 3 direction Pont de Levallois.
Chronic financial tsunami (12th part) October 10, 2008 I had gone to bed leaving the grants from midnight to their discomfiture. This morning I turn on Wall Street TV: London, Frankfurt, Amsterdam, Zurich, Paris -7.73% ... I do my tour of the Berezina. Hong Kong, Bombay, Sidney -8.3%, Singapore 8%, 4.1%, Seoul, Tokyo -9.6%. All is well, Madame la Marquise. On the top edge of my screen, in orange the Dow lost 600 points. I put the sound. It's a free fall since the opening. We are below 8000 points. I leave the Dow to its fate and I will brush my teeth. When I return, traders are applauding. I never get used to the ritual which means that at the end of each session, we hear the bell and everyone claps. Especially on days when the market collapses ... It's even more bizarre on the Nasdaq, the technology stocks because it is a virtual marketplace. It is unnecessary trash, just a window on Times Square. Yet in 16 hours, every day, people applaud their computers. Anyway, here it is 6:40 in the morning, 9:40 in New York, why are they cheering? I bite my toothbrush. I reattach my screen and I see beautiful orange digits: 20. The arrow is green and pointing up. Volatility is the measure of a state of instability. The Chicago derivatives provides a hedge against this risk. By buying an option, it acquires the right but not the obligation to do something by a certain date. If the need comes, it is used. Otherwise, it expires and so be it. The market where buying and selling options is a kind of mirror in which the Exchange is planning its future. On the futures market, there is an index of turbulence. This is the VIX, to some extent the fear thermometer. It reflects the instability anticipated by agents in the securities of 500 companies in the S & P 500 (Remember, Mr. Poor ...). Will put our toothbrushes, you're awake? There are two types of options. The puts and calls. Sorry but the official language of the church is English. A put is when you have the right but not the obligation to sell a stock at a certain price. This means that somewhere, someone is obligated to buy you the action, the exercise price, if you decide to get rid of it. A call is when you have the right but not the obligation to purchase one share at an exercise price. Again, someone agrees to sell you back the share at a price determined when you need it. We do not panic, you'll see, I will not make you a trader, but you will be an informed citizen. Another very important thing to understand is that when you buy a stock, the maximum you can lose is the price you paid. This happens when the business fails. When you play with the options, it's very different. Not for you, since you are an investor who holds the option but not the obligation. You, the maximum you can lose the purchase price of the option. However, the person at the other end of the transaction bears the risk of potential loss that tends to infinity. A schedule, it will provide you with the action or you redeem, as applicable, regardless of market prices. She can win but lose much, much more than the price you paid. You multiply this risk by 500 titles and millions of shares and you are welcome to Las Vegas. Under normal circumstances, the change in the course of action is relatively slow and weak. One option cost me a small fee. At present, the future is bleak and darkened by the minute. So, say I am very worried about the future of Morgan Stanley. It is Monday, the course is $ 22. I will try to protect myself by buying a call option, with an exercise price higher and as high as possible relative to the downward path that I fear for the future. One who will commit to cover me for the price I want is here to make a profit and has also the same information as me. In times of panic, the cost of this option tends to increase and the price at which I want to make sure. The cost of the option in my example reach almost $ 22. Plus the cost of the option increases, the volatility increases, which reflects an increase in the VIX because it means that the action will go down and after a while it will again become a good deal. So people will rush to buy it. At that time, those at the other end of calls (obligation to sell) will lose money. As a result, found themselves exposed to volatility risk and should protect themselves by trying to sell or encourage others to sell, sometimes with false rumors. You can play yo-yo all day. Greed and fear are the accelerator and the brake in the brain of a trader. These days, the stock market crisis has become so severe that there has been a fear of falling and fear of ruin. General Motors and Ford will may have to merge. Wells Fargo has eaten the bank Wachovia. Morgan Stanley will survive there? Or will he absorb? The VIX is a barometer of fear and the beginning of the week, he prances over 60, where normally it varies between 20 and 30. Today it reached 74. Thus in the space of a session, it tumbled 700 points, rose to 20, Bush spoke and they fell to -200 to -500 to crumble. It is. We tasted. Then everything is played in the last hour of trading. Brokers must cover their positions, as in a game of musical chairs.
He is 16h, everyone hits very hard in his hands. After two Everest and Kilimanjaro, the Dow at -128, floats on a polder. Morgan Stanley's action, it closed at 9.68 dollars. If only I could be sure, but you will have understood: when there is a lot of volatility, the price of insurance is prohibitive. It was not until next week to see if the sales in free fall this morning was the last stop before crashing. If Monday's stock market goes up and stays in the green, we have today attended a capitulation in the rules. If not, well, all over again.
Chronic financial tsunami (13th episode) October 11, 2008
One thing is sure, the stock market will not go a weekend. Until midnight Sunday, it was peace. It's good practice, we can market, jogging, his laundry, even entertaining friends of Austria and Costa Rica. The weekend also allows me to catch the news behind which I run all week. I was going to tell you about the nasty speculators' s adonnent in short selling as betting on shares falling, I had brought the thing with my column yesterday on the derivatives markets, but a reader asked me a question from Warsaw. After Ireland, Denmark and Germany, the United States plans to guarantee deposits in their entirety as well. This is to avoid that people run out their money from smaller banks and create a risk to the entire system. This risk is all the more real that we live a period of severe credit crunch: banks do not lend themselves more to each other, or few and very short term. How much would it cost the French government to guarantee all deposits held by French banks? You remember the pool in which to bathe Uncle Scrooge? Suffice it to say the government "Bankers, count the pieces in your pool! "So we can sleep in our beds? The Rapetouts had not studied economics. All notes and coins of all Uncle Scrooge in France are only a very small part of the assets of economic agents. The money of a country is the set of values that can be converted into cash. The ticket of twenty euros in your pocket is much more liquid than your life insurance, but both are included. Your home, it is not liquid at all and is not part of the money, even if it has value. To estimate the size and structure of money supply, economists have developed statistical indicators which are called the monetary aggregates. Monetary aggregates comprise means of payment consistent. Hence the diagram below:
This is not our solar system after a nuclear war. These are three concentric circles, the smaller is called M1 and contains the rooms, tickets and deposits, c is to say the checking account. The second circle, called M2, but also includes the first booklets, Codevi roughly every term savings within two years. The third circle includes M1 and M2, and adds the titles and certificates of deposit. Guarantee deposits does this ensure that M1, M2 or M3? Obviously guarantee M1 would not solve anything. Now you want me too and numbers. But then, since the introduction of the euro or the European Central Bank or the 15 national central banks do not publish more statistics by country. The Fed has also stopped publishing the amount of M3 in 2006, which told the gossip that's that you can not report that the state turns the printing press. But you understand and now you can explain to Rapetouts that printing money is M1, not M3. It can still be approximated. Suppose the government chooses to guarantee M3. Based on the idea that money is a veil of the real economy, it would miss the pro-GDP of France in the EU-15. In 2007, M3 was $ 8.5 trillion euros in the eurozone.
France represents 14% of GDP in the EU-27 and 22% of GDP in the euro area. Where M3 is approximately equal to 1.9 trillion euros! We understand that the government will think twice before signing with closed eyes full guarantee of deposits. If we wanted it cheaper, we could not guarantee that M1. The note would amount to 0.85 trillion euros (22% of 3750), but investors are not really reassuring, since M1 contains only coins, notes and accounts. Obviously, 1.9 trillion, or almost as much as the GDP of France is what it would cost the taxpayer if all financial institutions in France were bankrupt at the same time. Unlikely event! Remember that Ireland offered to guarantee its deposits up to twice its height GDP precisely because its GDP is low. So when you see what happened to Iceland, which had wanted to play the hedge fund, we say that someone should translate the fable of the frog and the bull in Icelandic.
Chronic financial tsunami (14th episode): October 12, 2008 Guess what the stock market that has the best shot out of the game this week? South Africa, less than 9.22% in five days? Israel, -8.42%? No, Iraq, 20%. It must be said that with a budget surplus of $ 90 billion, a monthly cost of $ 10 billion for war paid for by U.S. taxpayers and one of the largest oil reserves in the world, investors have felt the flavor delicious profit. No one's subscription to nullify release today, because the journal publishes the results of the Exchange. However, in the semantics of a post-Marxist, there is a gradation from the small investor learned, the investor, the investor, sunk to the speculator, the profiteer, the gambler. One day in March of this year, the housekeeper of the gallery where I worked complains about the price of "tortillas" these corn pancakes that are the people of Central America what the bread for French, a staple food that is our joy. They have increased by almost 50% in a few months, she explained to me in Spanish. And it continues: Because oil prices, people began to make fuel with the corn. I was quite impressed by his economic reasoning. She tells me that the pastor in his sermon Sunday was explained that it was not God. That people get rich by raising food prices is not new. However, I may surprise you to learn that some people still make money when commodity prices fall, coffee or chocolate, or when markets tumble. This is called short selling. A ... let's see how will I call, speculator? An economic agent will take action to another investor, sell it, hoping its price will fall. Then, once it fell, he may redeem it at a price lower and make it to the person who lent it to him. For example, it takes an action Morgan Stanley on Monday, its price is 22 dollars. He sells it. He gets $ 22. Friday, the action does not cost more than 9.68 dollars. He was right, the action broke the figure. He bought one and makes the lender. He pocketed 12.32 dollars of profit minus the rental price of the share. In fact this example is totally fictitious because since Sept. 19, the practice of short selling (his French name) was prohibited by the SEC, the U.S. stock market watchdog. The ban was adopted after a series of near-bankruptcy of several banks since early September. This did, first, that financial institutions but the violence of his raids traders soon convinced the supervisory authorities of the Exchange to include in its list of nearly 1,000 shares. Scholarships British, German and French have banned short selling as well. Are we doing the devil's advocate: Short sellers say that their behavior, they show their defiance against a company that has problems. In a way, they are the messengers who bear the bad news to the attention of the investment community. They are pricks. They are not drilled the ball. They did not create the problems of Lehman Brothers, they only reveal them. Where it gets complicated is that the raids have redoubled force when oil prices were falling at unbelievable speed They had increased so much, it must be said, reaching almost 150 dollars per barrel, some analysts and announced $ 200 for the summer. Finally, strangled by the current demand in Europe, despite the strong euro and the U.S., despite the oil cars, began to decline. We all liquid, you take his bet and we will speculate elsewhere. Then the raids began on the banks. Well, I feel I n'extirperai not very compassionate of you. The fundamental difference between a speculator and an investor's time horizon line. An investor buys a stock with a view to keep it a while, a business cycle, for example. A tax on savings well made it punishes the speculator taxing its immediate profit and creates incentives for investors to remain stable investor, the company needs time to reap the benefits of its investments. The business of short selling is a bit of a poacher, a little pirate. You run the false rumors, taking precautions that we can not identify you. If you're smart, you sell the shares without having borrowed, since you have three days to adjust your operations. As you save you the rental price. The practice of naked short selling (literally selling unhedged) is prohibited, but things are going well in the barn when the farmer's back is turned. During the days preceding the bankruptcy of Lehman Brothers, the volume of sales of certain securities exceeded the total outstanding shares. As the SEC could not control every operation, it has completely banned short selling. The ban expired last Thursday. Since then, the SEC recommended that mutual funds not to lend or rent their actions to calm the game Speculation Will it increase? The short selling is a perfect example of the problems caused by deregulation. There was a rule instituted after the crisis of 1929 which prohibited to conduct an operation of short selling as the price of a share had not increased. Must make the price tick up so he can make tac down. It worked like a fuse in case of rumor or attempted manipulation. This rule is called the "uptick rule" applied only to short sales. No one prevents you from selling your work if you own it. But in his zeal deregulation, the SEC abolished the rule in 2007. The ban on short selling remains in place on the French until the December 22, 2008 and the UK markets until the January 22, 2009. Rather than banning short selling, perhaps he should restore the rule breaker.
Chronic financial tsunami (15th episode): October 13, 2008 When I recognized the White House Rose Garden on the screen of Wall Street TV, I became very worried. This morning, the Dow Jones was up 400 points. It will ty that Bush starts speaking and everyone starts to sell. There were two desks, like the night before the Mayor's chain. (The Mayor of New York, Mr. Bloomberg's financial information chain, the chain 130 not to be confused with Wall Street that is on TV channel 58). The prime minister Gordon Brown and his finance minister Alistair Darling gave a press conference to explain in detail their plan for stabilizing the financial system. Finally, executives who run! The intelligence of the responses of two Britons seemed even more brilliant in its contrast with the tenant leaving the 1600 Pennsylvania Ave. Sometimes the tenant. The camera is pointed at the other desk. Here, Berlusconi? The tenant welcome him. He continues: Christopher Columbus had three ships, the Niña, the Pinta and the Santa Maria ... The board makes the antenna. Wall Street on TV, even in the pub, you can still see the signs displayed on the top edge of your screen. Phew, we dodged a bullet! The Italian had reached the shores of the Bahamas on Dec. 1 October. The NYSE is open, even if banks are closed for Columbus Day, which falls on a Sunday. Throughout Latin America, we celebrate this day under various names more or less anti-colonialist. In Spain it is called Día de la Hispanidad. Today is also the Canadian Thanksgiving. They thank God, not the Indians have them fed in the first few winters. So what, the New York Stock Exchange dates back to 940 points, closing at London + 8.26%, 11% in Paris and I come out sparkling water? First the reasons of prudence, then the reasons for hope. Trading volume today was low: 1.22 billion shares traded. Is it because half the traders were left with guindailler gnochis watered Asti to Mulberry Street? Or rather, do not we'll just dip a toe now that the water comes over you by the nose? Morgan Stanley, which you remember was closed at $ 9.68 Friday, rose by 86% (!) In one sitting. Now that the short selling no more secrets for you, you know what happened: Sunday night at midnight, the ban on short selling expires. Thursday, short sellers are betting their raid on a collapse of the title. It's going from bad to worse. 22, 18, 15 ... comes the weekend, time out! It is Monday, the third day of the trade, one where you have to cover their positions. There is panic among City speculators who had taken short positions (selling). Mitsubishi Financial will acquire 21% of Morgan Stanley, which is down the level of leverage of 24 to 20 times equity. Now that the sustainability of the company is no longer at issue because Mitsubishi Financial has a strong back, and as Morgan Stanley was clearly undervalued, we see the rally, the hordes of traders running to buy as much as possible of actions in order to hedge in the third and final day of trade. The price goes back to 18.10 dollars. If you had short Morgan Stanley on Thursday, you just lost $ 3 per share. With a low volume, speculators can play yoyo: they take their profits when it goes up, then they shortent other businesses and returning the money. Then rally and profit taking. With a larger volume is more difficult as more expensive. Another example that calls for caution. It is half past twelve in the Paris Bourse. The Europeans have finally managed to agree, it's a fairy tale, the CAC40 back more than 10%. Suddenly the rumor that Société Générale has lost a lot of money, not because of another Kerviel but in real estate and it's going to have to recapitalize. In less than an hour, the action loses 20% of its value. Leaders deny, but insane, insane, there is always something. One day when the stock climbed almost 12%, the action ended down 2%. Why the rumor she took? Because bank transparency has become an oxymoron, like cake or diet an educational program on TF1. Finally, we are in full disarmament of the debt by hedge funds. And there are huge sums. But the reasons for hope are being put in place. This weekend, the Europeans fell to agree on a stabilization plan. The credit policy is shared by Jean-Claude Trichet, President of the European Central Bank, Sarkozy, head of the rotating presidency of the EU and Gordon Brown, whose plan is the brainchild (= the son of his brain) as beautifully said the Anglo-Saxons. This is to recapitalize the banks that suffered losses not only because of U.S. subprime, but also their national bubble. The government will buy shares with their big checks. They also undertake to guarantee interbank lending and inject liquidity to loosen the grip of the credit crunch. Finally, if it is true that everyone will pay the piper, s countries undertake to coordinate their actions closely. The principal value and the main difference of the Gordon plan Paulson plan is to recapitalize the banks right away. Yes, the government becomes a shareholder, which was hard to swallow for Paulson, champion of liberalism and former CEO of investment bank Goldman Sachs. But this will result in capital injections in exchange for "preferred stock" which give you a higher rank to receive dividends but no voting rights. As Gordon Brown said yesterday on TV of the Mayor, "We are not in the business of running banks, we are in the business of Stabilizing the economy" (= our goal is not to find ourselves but to manage the banks to stabilize the economy). So our ideological triumphalism must be tempered by a large dose of pragmatism. The plan also organizes a segmentation in the UK banking sector, with one hand, institutions such as Royal Bank of Scotland, Lloyds, HBOS and Northern Rock will be there to "public service bank" that is easy credit to businesses and households, but the margins of profitability and competitiveness are modest. On the other, Barclays, HSBC and Standard Chartered will have a free hand to raise significant capital markets and go back to conquer the world. In this Nov. 13, I do not sulk my pleasure to share with you the news of the nomination for the Nobel Prize in Economics to Paul Krugman. I studied his textbook on international trade, clear, beautiful and translated from English by a Belgian publisher who sold it at exorbitant prices. The English version related cost 20 pounds at the time. Translation in Boek cost 70 euros. I always thought it was the best illustration that free trade is superior to protectionism. Paul Krugman, Amartya Sen and Muhammad Yunus Kahneman were my personal heroes when I tried to resist the simplistic and pollution and other mental Baker Milton Friedman. Today I'm happy for him.
Chronic financial tsunami (16th episode) October 14, 2008 Tokyo was closed yesterday due to holiday. The second Monday in October, the Japanese celebrate Taiiku no Hi, the day of Physical Education. Americans could use another holiday especially if called Health Sports Day. In any case, his return was in the Nikkei form, closing up 14.2%! The New York Stock Exchange on the other hand is a febrile patient. The charter shows that red line has varied by 700 points during today's session. She had reached 404 points just after opening, was lowered into the throes of a -302 to 15h and it ends down -76 points. European stock markets seem to be going merrily after the announcement of Gordon Brown's plan, despite its stratospheric cost 1.8 trillion euros (a little less than the GDP of France). London rejoiced with 3.2%, 2.75% Paris, Frankfurt 2.70%. The little Iceland would be as big as an ox reopened his place after three days of forced closure. She drove a long Kracher to croak before - 66%.
Following the British example, Bush and Paulson have decided to spend a third of the $ 700 billion appropriated by Congress to acquire more shares in nine major U.S. banks. This morning, Bush sought to reassure that this was unorthodox "to kill non market economy but to preserve it." Hedge funds, on the other with stars in their eyes and imagined that Citigroup Golman Sachs will be holding forth on the Sovietized and chain of the Mayor, "my dream is to compete with a bureaucracy" (= that is the dream if our competitors become round leather ").Let us be modest triumph, there nationalization nationalization. Those of Paulson or Brown are not those of Pierre Mauroy.First, it is not full nationalization. The U.S. Treasury will inject $ 25 billion in four banks: Bank of America, JP Morgan and Citigroup and Wells Fargo. Goldman Sachs and Morgan Stanley will receive 10 billion each, State Street and Bank of NY Mellon, as two or three billion. In the British case, if shareholders do not hand in the pocket, the state could end up with 60% stake in Royal Bank of Scotland who paid £ 20 billion and with 40% stake in Lloyds-conglomerate HBOS for 17 billion bill. The French Treasury will inject as, for example, 1 billion euros in Dexia, but that does not give him a controlling or a blocking minority.Indeed, different countries are to buy "preferred stock", also known as "preference shares" in the United Kingdom. Preferred shares is their French name, give the holder a higher rank for the payment of dividends but they s' no accompanying voting rights. As announced in the British couple in his press conference the day before yesterday: "We are not in the business of running banks" (= We're not there to manage the banks). Ben Bernanke, the head of the Fed today was not saying anything with this formula so Anglo-Saxon: "We are not going to micromanage the banks" (= we will not deal with banks at the microscopic level).Unlike the golden shares, which are actions with a veto and that many European governments have used privatization to keep in control, ability to prevent, the solution adopted today is the State a shareholder liability. In the American case, the Treasury does not even get seats on boards of directors.It does QUESTION therefore ideologically not nationalization, but rather the arrival of a white knight, who happens to be the rule, rather than Warren Buffet or George Soros or a sovereign wealth fund of a country Arabian Nights. In fact Warren Buffet has negotiated more than the U.S. state as its preferred stock in Goldman Sachs report to him 10% against 5% in treasury (9% after five years of presence). But in fact the state did not intend to make old bones in these banks. They can and are encouraged to repay the taxpayer and get him out of the capital.The Fed announced today it will begin to pay from October 27 to certain companies handpicked by taking their commercial paper as collateral. A comparable measure in Britain was announced Monday and will take effect next Monday. The European Central Bank had done the same. Today, the Paris Stock Exchange announced that it would create a market for the exchange of commercial paper and certificates of deposit, always with the aim of reducing the short-term liquidity.The rate-Libor interbank lending are still high, although the overnight rate has fallen to him 2.46875% 2.18125% against last Friday.Europeans can rejoice that they have avoided the collapse of their financial systems but the macroeconomic outlook is very bleak. Of course, interest rates may fall further in Europe, where the Fed has more or less exhausted all its cartridges. But the degree of indebtedness of the States before the 1.8 trillion plan Brown makes room for maneuver in fiscal virtually nonexistent. The economy certainly needs a financial system to function. It also has an urgent need to consumers, otherwise the pump is rebooted, but nothing came of it.Gordon Brown seen as the man who met his fate. However, the risk of inflation, the bursting of the housing bubble and the slowdown in the UK financial sector announced the purpose of difficult months.In the U.S., the Democrats hold their breath until the November 4 presidential. A plan to stimulate the demand for $ 150 billion is under discussion. Nancy Pelosi said yesterday that the middle class could not wait until the inauguration of the next president on January 20 and hoped to pass it immediately after the victory.
Chronic financial tsunami (17th episode, More pain, no gain):October 15, 2008Immediately returned to Austria, the friend I saw Sunday has just been fired. The shareholders of the SMEs in the wood industry have lost a lot of money on the stock market and seek to cut costs. Bertrand is the first casualty of the crisis around.The plan was announced in Europe Brown two days ago and the aggiornamento of the Paulson plan yesterday were supposed to produce a "confidence shock" and stabilize the economy. Apart from the Tokyo Stock Exchange that still sparkled + 1.06%, the rest of the markets began to eat. It's like this technique of interrogation of suspects, authorized by the tenant's leaving 1600 Pennsylvania Ave., The "washboard". You drown Thursday, Friday drowns you, then you remove the head of the water Monday and Wednesday you nigga Hong Kong -4.96%, Frankfurt: -6.82%, Paris: -7, 16%, London: -7.16%. , Sao Paolo: -13.6%.What our leaders are going to be able to announce to reverse the trend? An asteroid? The landing of aliens? I'm not in New York but anyone who reads me from Manhattan, please, go check, I would not be surprised if the big bull next to the pharmacy is surrounded by traders, bumping his head on the pavement . You will not be confused with the homeless, the police of Mr. Bloomberg yesterday.Ben Bernanke said this morning before the Economic Club of New York "Crisis Will End When trust IS restored" (= The crisis will end when confidence is restored). The CEO of Bank of America which was called as his eight other colleagues in major banks by Mr. Paulson launched the CEO of Wells Fargo who was reluctant to accept public money, "Anyone who does not Have a healthy fear of the unknown Is not Paying Attention "(= anyone who does not have a healthy fear of the unknown is not paying attention to what is happening). The barometer of fear, the VIX ended today at 55.1. It's 22 days away that oscillates above the threshold of 30, already considered a high range. It is also the seventh consecutive day that ends at over 50. Some hope, however: the puts (option conferring the right to sell at a fixed price) on the bank stocks were at a good price, which proves that traders do not anticipate a decline.Oil prices continue to slide him from session to session: -5% -17% in today and six quotations. This is good news and bad news. Good, because all developed economies are oil and therefore a fall in oil prices below $ 75 as now, or even $ 50 as the commander a more realistic balance between supply and demand reduces the cost of dependence for importing countries. But the decline also reflects the pessimistic expectations in the productive sector.On currency markets, funny things are happening within and between members of the Triad.Japan sees the course of his money back. Interest rates have been very low, 0.5%, many people, famous for Hegde household funds borrowed in yen and investing had gone elsewhere in Asia. Since the intensification of the crisis, we backtracked and the carry trade is the name of the phenomenon comes home. Increases the demand for yen. On the futures market, options for short the yen fell 50% over a month. This shows once more that the yen is a good safe haven in Asia.The European currency fell by 17% against the dollar since July. European companies make a lot of business outside the European Union. They are therefore exposed to currency risk. Ex: I am EADS, I produce in euros and I paid for my dollar Airbus. Changes in foreign exchange rates make the profitability of foreign operations uncertain, unless I cover myself with an options market.Since the collapse of Lehman Brothers and the guardianship of AIG, IT IS the world's largest Forex, the foreign currency market. I do not have recent figures but to realize the importance of this phenomenon, suffice it to say that in April 2007, it traded each day to 3.2 trillion dollars. The lack of liquidity produced sudden changes in foreign currencies much stronger than normal, even while ensuring becomes prohibitive. (Since it is unnecessary lot of suppliers and the demand has increased because the exchange risk has increased, the cost of insurance explodes). You recognize me? I volatility.European companies may find themselves on the wrong side of the fence, such as facing a sharp decline in Asian currencies and Latin America. Against the dollar as the lack of liquidity was evident, pulling the dollar up but disrupting European companies. The European Central Bank to deal with the failure of the private sector began to auction off dollars. When selling the latest, 70 banks participated. The request was for 88.6 billion dollars. Only 20 billion had been met.Since yesterday, the Fed and European Central Bank announced an agreement to exchange currencies (currency swaps) unlimited. I'll lend you as many euros as you need, you lend me the dollars will be made when the accounts will be out of the woods. Again, this is to loosen the stranglehold of credit Chuncha. We see here that Professor Ben Bernanke has learned all the lessons of the crisis of 1929 and he implements them at the head of the Federal Reserve.The dollar, he, has a triple effect. First he becomes the safe haven of choice for many people outside the United States. Second, U.S. investors repatriate their own capital, because it is better to wait for the tsunami of cash holding the dollar shares on the Bovespa, Bolsa or the Hang Seng. Finally, the decline in oil prices gives less envy those who are paid in dollars to sell since they are worth more.So I do not know if the Martians are coming to our rescue but may ¬ be if Barack Obama is elected, he will propose to fight against unemployment by going to build dams on Mars. Hope the earthlings do not discover that they are indigenous to unfair competition in terms of wages.
Chronic financial tsunami (18th episode)Erratum: about the 15th episode: M Bloomberg me that his eponymous chain is broadcast on channel 128 and not on channel 130.
Thursday, October 16, 2008:I present to you Joe the Plumber. It's not a song by Vanessa Paradis. There really is and is not Polish. He shouted at Barack Obama during his campaign and with his small company that knows no crisis, he embodies the American dream of success through work and effort. Sarah Palin in his debate against Democratic running mate had already done a lot of nods to Joe six packs who drinks beer and lives in a small town, away from the polluted air of the elite. Last night, the last of three presidential debates, McCain was buddy-buddy with the plumber. So, gentlemen candidates for the French way, to quote Antoine Pinay, or Main Street, what do you do for all that is not returned to driving taxis at night listening to the rumba?"Start a recovery plan at European level would lead us very automatically in some countries to take leave with respect to sound rules of the Stability Pact" Europe, says Juncker, head of finance ministers of the Eurozone. This phrase makes me shudder because it reminds me of the narrowness of view, the ideological blindness of the Hoover administration after the 1929 crisis. It is true that in the words of one of my friends, Luxembourg, is not a nationality, it is a profession.The government, all governments have to make two levers of economic policy.Monetary policy itself has two dimensions: the external value of money (you can devalue or let its currency appreciate) and its internal value (you can lower interest rates make money cheaper and encourage investment or can be overcome if we are afraid that the runaway inflation).Fiscal policy in turn allows for the deficit is to boost the economy by supporting the demand either by promoting investment. It can also raise taxes selectively for reasons of social redistribution. Alternatively, you may decide to invest public money in a particular sector as strategic, such as the fact the U.S. government in the military-industrial complex through the Department of Defense, the DOD for short.In 1929, when the crash occurred, the government Hoover continued his merry way fiscal and monetary policy has contracted. In the name of a dogma that Keynes analyzed in detail, the Hoover administration did nothing. Three and a half years later the situation had become so dramatic that Roosevelt had set up a recovery plan unprecedented millions of Americans out of unemployment and poverty. Here I have an idea for you, Ms. Juncker: for Christmas, why you do not offer your husband a copy of the "Grapes of Wrath" Steinbeck and a paperback edition of "Gatzby the Magnificent"? It reads a line in the Thalys. You can even leave it on the seat.The European currency was born of a pact of blood from one part of Germany which had a strong currency (and very bad memories of hyperinflation that led to Nazism) and other countries who remained anemic after speculative attacks against the snake in 1992-1993. Germany has said, I give you the strength of my money, if you promise that 't will never be inflation. England said "thanks, no thanks aim! "(= No thank you). All the others have said, "Thank you, oh thank you! "The convergence criteria were supposed to be temporary and prepare to merge the economies. The ECB inherited monetary policy. As for fiscal policy, it remained the preserve of states but it was so well corseted that Germany had nothing to fear from the soft budget constraints. Then the stability pact gave the convergence criteria of a permanent nature.I call it, I cut my hand and I focus the other behind his back.Sometimes the crisis of 2008, all the world's economies are on the brink of recession, food prices increased by 6.1% year on year in the United States, 12.7% UK, 7% France. Everywhere, unemployment is rising and if you can call it progress. Instead of understanding that we can not manage the business as usual because one is not a usual situation, Mr Juncker, as a character in Scott Fitzgerald served us tea with cookies and we Gourmet on healthy-rules-of-covenant-of-stability. Where is your healthy fear of the unknown? Obviously some do not pay attention to what is happening around. M. Junker, give me your mobile number, I'll give it to Kenneth Lewis. It will explain everything to you.The Vix has now exceeded 82 points. The Dow Jones closed at 401 points. After the fall of 700 points yesterday, it is unnecessary to send enough good news to the house. The FTSE: -5.35%, the CAC 40: -5.92%, DAX: -4.91%. The casino economy Casini and everyone swallows the salt water.
Chronicles of the financial tsunami: Drips wealth (19th episode)October 16, 2008It's going much better! Have not you noticed? The Dow ended its best week since 1982, up 9%. Big deal, you say: in 1982, the U.S. floundering in an economic slump, which proves that we must have a healthy distrust of percentages.Calculators and close our eyes open, I did not say open your TV.I do not do my shopping at Wal-Mart, the barbarians of the consumer. Where they go, nothing grows back. But at Trader Joe's, the Leader Price's bio, the caddies are less full and people come with lists. On Grant Street, the shiny Gucci store is empty. No one pushes the door in Hermes. Tory Burch has languished in the alley chic Maiden Lane. I pass my old gallery. I recognize the pictures on display, they were already part of the stock, forgiveness of the collection, before leaving in June. Ah, here is a lady with bags of Loehman's, Tati brands.Robert Reich, former Labour Minister and advisor to the Clinton candidate Barack Obama summarizes the economic philosophy of the Bush years to a formula: "Trickle-down economics" (= ridges running down the wealth). It was already the old idea of Reaganomics (= the economy of the Reagan era, inspired by Milton Friedman and the Chicago School). Make the rich richer, they consume goods and services. It will employ an army, wealth trickles down the social ladder.My middle-class world and that of the other America, the one that gets up early and has no health insurance intersect with the beautician. Sonia is Brazilian. She lives in the United States for thirty years. She is raising her two daughters, the youngest is 15. With much effort, in 2003, she managed to buy a little house in Richmond, a suburb many colorful and always makes the headlines when there are problems, and there all the time. Richmond is a bit of Creil the Bay Area. As she blows on the wax, I asked her if she was able to refinance their variable rate loan. Unfortunately Bank of America did not accept. From quarter to quarter, his monthly payments continue to rise and revenues fall. This effect of scissors cut his sleep.Libor, the rate at which banks lend to each other is an acronym for London InterBank Offered Rate. It is published every day at 11:00 by the Central Bank of England. There is a daily Libor, a one-month Libor, a three-month Libor. There are dollar Libor, Libor for euros. All holders of variable rate mortgages maintain intimate relationships with Libor, as Monsieur Jourdain with prose. Because of the credit crunch, Libor rates have increased significantly. The 3-month rate now stands at 4.6% against 2.88% on September 17. Certainly, the drop in daily shows a glimmer of progress. He had reached 6.88% on October 3 and again was close 5.09% 9. Friday, it closed at 1.67%, its lowest level since September 2004. But the variable rate borrowings are secured to the three-month Libor. Meanwhile, Sonia will do as his neighbors and put his house up for sale.Robert Reich proposes a new economic philosophy after November 4th: he calls the "trickle-up economics." It is to rewrite the economic laws of gravity. If America who gets up early and has not for health insurance was health insurance and better wages, if America gets up early to pay less taxes and if the dripping of money paid a little more, the rich go up the slums to the sky. It is not by impoverishing the rich that will enrich the poor? In the platform of Barack Obama, 95% of voters will not experience tax increases. To tax households earning over $ 250,000 a year, he said "spread the wealth" (wealth = share). The rich will not do very poor. And the middle class can sleep at night, with his shield under the pillow.
Chronic financial tsunami (20th episode):October 20, 2008The Dow Jones closed at 9265 points today, up 4.6%. Tomorrow? As Paul Krugman said in an interview in El País this weekend, the U.S. stock market, and by extension others, may well continue to pique his seizures "manic depressive". Until the situation has stabilized, I suggest you take a trip and go see how the emerging pay the price of the financial tsunami.Ukraine, Pakistan, Argentina and Hungary are on the brink of insolvency. Behind the heterogeneous nature of this list and to the geopolitical consequences very different, there is a common mechanism: foreign investors withdrew their marbles. These states were able to develop precisely thanks to the influx of foreign capital, the same formula that enabled Spain and Portugal to take off economically in the 80's. But the sudden change of situation puts the future of these economies at risk.Consider the Hungarian crisis: Hungarian central bank had set a 8.5% interest rate that is the basis for loans in forints. Hungarian commercial banks had begun to offer loans at rates more competitive, by borrowing abroad. In August 2008, 49% of business loans were denominated in euros, Swiss francs or dollars. On the same date, 62% of consumer loans were granted in foreign currency.Suddenly the tide turns, investors sell their assets, get rid of the local currency and want euros (or to other countries of dollars): the forint collapses (-12% in two weeks). Consequently aggravating the credit crunch: the euro are becoming scarce. This is the effect of scissors.The European Central Bank went to the aid of Hungary by providing a loan of 5 billion euros to turn the Bank of Hungary to lend euros to commercial banks that lend themselves more. This is particularly dramatic because Hungary is a member of the European Union but not in the euro area. The ECB has done a cost-benefit calculation: 80% of the assets of the country were in the hands of foreign investors including Austria. So if we can avoid the lack of liquidity (the debt is payable because the assets are not available) from becoming insolvent (debts are not payable because the assets were rotten), 5 billion euros c It was small price to pay. We limit the contagion effects to the euro zone, already in bad shape.Romania and Lithuania are in similar situations, while Latvia and Estonia are close to the case in Iceland have wanted to play the hedge fund. What about Poland? And to rescue Pakistan and Ukraine?Another viewing angle: one would have thought that the collapse in 5000 ruined index points in the U.S. economy would benefit the big emerging markets: BRIC, Brazil, Russia, India and China.The decoupling theory has a hard time. She argues that the United States are no longer the locomotive of the global economy. Europe is most of his business in his area. Japan is an economic giant. China has a huge domestic market. Brazil has to trade with India. All roads do not lead to Rome.In fact, the BRIC economies is seriously slowing down.Russia has been a great stock market panic (-73% from the record of May), compounded by concern about Putin's foreign policy on its steps. $ 30 billion left the country since the war in Georgia. As foreign investors withdraw, the valve closes the easy credit. While the income from energy makes Russia a rich country, but the drop in oil prices bodes well for tomorrows less. The flight against the ruble is not the result of foreign local people hoarding dollars and outside the financial system. Foreign exchange reserves of the central bank are at their lowest since the currency crisis of 1998, with only $ 66.9 billion.Russia has developed a plan to rescue its banks $ 160 billion and nationalized four of its banks. It will repurchase shares on the stock exchange with a nest egg of $ 175 billion. The Government states that it is unnecessary crisis in sight. Growth instead of 8-9% in previous years would be limited to 5% in its most optimistic estimates.If the barrel stays above $ 70, the budget deficit will not know. Except that the power politics of Vladimir Putin requires a gargantuan increase in military spending. We can finance with a gross size of the Urals at $ 150, but $ 50? Russia is facing a debt of $ 180 billion coming due in late 2009. With $ 50 a barrel, Russia would experience zero growth. You've thought so hard that I heard you: we need a good war ...Tomorrow, China.
Chronicles of the financial tsunami: Emerging II (21st Episode)October 21, 2008After the ceremonial pomp and precision calligraphic deployed at the Olympic Games in August, many expected that China spans the corpse of Wall Street and ascended the throne in September. The average growth rate above 10% over 30 years, foreign exchange reserves of $ 1.9 trillion in late September or twice reserves Japanese trade surplus of 30 billion per month, the rise seemed irresistible. So what? Where is the Emperor?Chinese growth will slow in the third quarter at around 9%, falling below the 10% mark for the first time since 2002. In 2009, it should be around 8%. These rates would be the envy No matter what government the G7. But with a population of 1.3 billion people, China can not succeed in its transition to become a modern country without continuing to grow exponentially.Chinese growth is export-driven as evidenced by the ubiquity of Made in China labels in stores. While China is the banker of the United States, owning much of the U.S. public debt (519 billion dollars, after Japan, $ 593 billion), Europe has taken over from the States United as the first customer in China. The value of EU-China trade represents 110% of trade China-United States in 2008 (against 65% in 2001). There are many reasons for this prevalence, the principal: the strength of the euro. The euro traded at $ 0.89 in 2001, $ 1.40 last year, $ 1.60 in August, $ 1.30 today.The financial tsunami triggered in September 2008 by the nationalization of reinsurers Fanny Mae and Freddie Mac and the bankruptcy of Lehman Brothers plunged the world into a very serious economic crisis. Now that the U.S. is under water and drink the cup of Europe, the volume of Chinese exports is expected to shrink. For example, several Chinese producers of textile products and toys went bankrupt this week.China is not likely to drive growth around the world through its imports even before the crisis erupted, it accounted for only 6.4% of final demand in Asia. But can it replace the shortfall due to lower exports by turning to the satisfaction of its domestic market?On paper it is royal. You have a population of 1.3 billion people (I hesitate to use that word in the land of Confucianism, replace it with potential customers) and seventy years of communism: the fridges to us, pretty scooters, the 'atomix and Dunlopillo!Moreover, according to government figures, the retail trade is booming: 17.9% in September against 13 or 14% a year earlier.The building also has experienced a boom, since at the end of the 90s, the Chinese government has made privatization of urban housing. He transferred ownership of the state to their occupants. The Chinese cities overnight found themselves rich in their homes. Speculation ensued. Construction contractors have purchased land to build more densely. Shanghai today has more skyscrapers than Manhattan.But in recent months, the housing market seems to have reached a plateau. Housing starts have slowed. Potential buyers are waiting because they anticipate lower prices. Similarly, the latest figures car sales, airline tickets and other major purchases reflect a slower growth.In fact, China may well count 1.3 billion population, its middle class is 60 million. She arrives at the 100th rank in terms of income per capita. Even taking into account the purchasing power differentials (a bowl of rice is cheaper in China and San Francisco), China accounts for only 10% of the global economy, against 30% for U.S. and 25% for the European Union. In 2007, when 1.3 billion Chinese consumed 1.2 trillion worth of goods and services, 300 million Americans engaged them, to 9.7 trillion dollars of consumption (nb: as the destruction of the environment does not come subtraction of GDP, I do not know if he should call it progress, but I digress).So China's domestic demand is simply too low to replace a faulty application or European American.Only structural reforms will eventually develop the domestic market. This week the Chinese government announced a land reform that will transfer the ownership of land to the peasants. This should lead to a restructuring of the plots now too small to accelerate the rural exodus and encourage the development of intensive agriculture. He has also run health coverage for all its people.The structural reforms will take time even if the road of the future. Meanwhile, close neighbors, especially South Korea, but also the Middle East and Latin America are having to worry about, the ones who were privileged opportunities in the Chinese market. As for the Western countries managed to export to China, like Germany with its machine tools, they will also experience a decline in orders.10-20000000000 of dollars have left China since the beginning of the financial tsunami. Chinese banks have little concern for credit crunch. The trade surplus, $ 29.4 billion in September are back in the circuit of dollars month after month after month without swimming and China 1.9 trillion dollars of foreign exchange reserves.The Shanghai stock market is down significantly, however: - 30.43% in three months. That of Hong Kong - 46.99% in 52 weeks. (The difference between the two is that foreign investors can not freely invest in Shanghai.)The Chinese government in turn could use his vast fortune to lend $ 500 billion in U.S. government to finance a second stimulus package. By helping its main trading partner in the storm pass, it would protect the engine of growth, its exports. It would be a kind of New Deal made in China.
Chronicles of the financial tsunami: (22nd episode)October 22, 2008Argentina announced it would nationalize its pension funds. Apparently this has little to do with the global financial crisis. Apparently only. This measure is to return in the public regime dismembered by the ultra-liberal Menem problem. The stock market plummets. The public is concerned.President Cristina Kirchner is elected the Peronist party, also called Justicialist, which through different periods of Argentine history has sometimes been anchored on the left - as now-right now-mostly. Raul Menem who had occupied the Casa Rosada from 1989 to 1999 and has ruined the country with a mixture of corruption and incompetence was also a "Justicialist." The two share a populism that they have inherited the party's founder, Juan Perón, President twice (1946-1952 and 1973-1974) and his very famous and charismatic first wife, Evita.Cristina Kirchner succeeded her husband in October 2007 as President. Since their accession, and following the end of the financial crisis of 2001, in which Argentina was declared insolvent vis-à-vis the rest of the world, the couple has continued to enjoy rising raw materials for the country reduce debt.Argentina is a real breadbasket, with meat, soy, corn and coups. Only one president in the twentieth century has completed its mandate, Raul Alfonsin (1983-1989). With a past full of dictatorships and corrupt practices, Argentines maintain skepticism of good quality facing the public.If you walk in Buenos Aires, it is not uncommon to see tagged on the facades of banks the words "thieves" and "hustlers" in memory of the way between 2001 and 2002, investors have been robbed. First, by limiting the amount of payouts then converting unilaterally and without warning the assets held in accounts in dollars. Finally, the peso was devalued by 28% by another Peronist Eduardo Duhalde, before decamping to the Casa Rosada by helicopter to avoid lynching. Banks do not even bother to remove graffiti. They know that the hands raging would return the next night with spray paint.The past does not pass and commodity prices fall dramatically. In this context comes the declaration of the President ten to nationalize pension funds:Created in 1994 by Menem in ultra-liberal euphoria, back when the peso was pegged to the dollar and therefore overvalued, with a rate of 1 to 1, the Argentine pension funds have attracted three million contributors.There are two ways of financing pensions. Contributors is today paying the pensions of retirees of today and tomorrow's contributors pay the pensions of today's contributors: the PAYG system. Or contributors to invest their money today and when they retire, they retire with an output of capital or as a pension, the pension system is funded. France and the United States have mixed systems, with a mandatory part and optional part. In many emerging countries, people do not have to contribute and if they choose to do is often pension funds.In Argentina, the economies of the three million contributors were allowed to recreate a local capital market. Since the cessation of payment of 2001 and until it pays its debt, Argentina has been ostracized by the international lenders, including the IMF.There is much to say about how unfair that Western banks have left successive leaders, starting with the military junta (1976-1983) mortgaging the future by letting the debt get carried away. But as the Arabs say, Lifête mete: The past is dead.In all cases, institutional investors had injected the money raised in treasury bills (55%) and the stock market (11%) who had prospered in recent years with returns of around 13% year. But then, this year's pension funds have lost 40%, which told the President that "the pension money is in the hands of speculators."Mrs. Kirchner argues that it is taking measures in the same spirit as the U.S. and European governments are nationalizing banks.The goose that lays the golden eggs has thirty billion dollars in assets and received 5 billion in annual contributions. By nationalizing the assets, the government is spared having to pay the Treasury that were the assets of the "Goofs" and gets a lot of cash, approximately 30% of the total, 10 billion dollars.Ten billion is half the sum that Argentina has to repay its creditors next year. Otherwise as he recalled the IMF last week, beware! If Argentina had not had such a bad payer, it could refinance the debt to Western banks. But the Paris Club, representing the creditors cheated in 2001 is no longer the lender.So, in order not to miss the deadline and be able to return to the concert of world capital, the government has to raid $ 30 billion of private savings, unilaterally and without warning. Inevitably, this brings back memories.The other half of the amount due will be waived due to foreign exchange reserves and customs duties, hoping that the price of raw materials does not continue to decline. If the cash used to pay the debt, it will no longer serve to support the local economy. This is what is called crowding. It's not that the temple speculators tremble (the Merval lost 11% today), it is especially after a decade of looting and destruction, the possibility of re-industrialization the country away for lack of investment. Without trust, without any legal intertemporal decision is possible. It navigates to and it does not emerge from underdevelopment, in fact we go ahead.Evita cries from his balcony. Speculators on the Chicago Mercantile Exchange released their umbrella.
Chronicles of the financial tsunami: (23rd episode)Erratum: yesterday, for the first name of former President Menem, Carlos Saul had to read and not Raul, as I wrote.October 23, 2008I have temporarily hijacked a jet on the tarmac waiting to take you back to Ezeiza in Washington. For two days, a parliamentary committee examining regulatory mistakes that led to the crisis. Yesterday she had invited the CEOs of the rating agencies Moody's, Standard & Poor's (yes, the same as the index values of 500 New York Stock Exchange) and Fitch to come how triple-A rated bonds had could turn into pumpkins rotten one day in August 2007. Today was the turn of Alan Greenspan, the former oracle, forgiveness Fed Chairman (Ben Bernanke before), John Snow, the former finance minister (before Hank Paulson) and Christopher Cox the director in office of the Securities Exchange Commission, the stock market watchdog, to answer for their actions.First table yesterday, the chairman of the board reads an email between two employees of S & P:- In fact, the deal is anything.- Yes, I know. The model parameters do not capture half the risk.- Should not note such a thing.- Here, there is even the bonds issued by the cows- But there is too much risk. Personally, I feel uncomfortable to give my approval. [1]The rating agencies role is to assess the risk of default of an issuer of debt. They are the heart of the information system that allows investors to make rational choices da without having to spend hours and days visiting businesses, to read all schedules off-balance sheet after taking night classes to accountant . The work is delegated to specialized institutions which note issuers, the triple-A (excellent risk-free investment) to D (dedicated to the investment loss). For a detailed schedule of ratings, see here:
http://upload.wikimedia.org/wikipedia/commons/c/c3/Main_Credit_Ratings.pngThe agencies also publish notes of "perspectives" on the likely evolution of transmitters and a "watch list" of issuers with a rating may be lowered surreptitiously. All this analysis is the seal of seriousness, independence and impartiality.How about if the filmmakers paid critics and their articles were then used as advertising? There would be a conflict of interest ... This is exactly how things work up to now. Indeed, the rating agencies are paid by bond issuers. (A more healthy is that agencies are paid by investors).
"The story of the credit rating Agencies Is A story of colossal failure" (= the history of credit rating agencies is a story of colossal failure), exclaimed Mr. Waxman, the chairman of the commission investigation. "The rating Agencies broke this bond of trust, and Federal Regulators ignored the warning signs and DID nothing to Protect the Public" (= the agencies have violated the public trust and the institutions responsible for regulation have clogged ears and n 'have done nothing to protect people), the MP continued to thunder.In fact, in 2006, delirium deregulation, the SEC had sought to instil more competition among agencies, which has only create more negative effects: the agencies making up the notes to gain market share to competitors.A former S & P explained yesterday that a better modeling of the risk of mortgage loans was not adopted for budgetary reasons. S & P already controlled 92% market share of securities linked to mortgages in the United States. Investing in a better model would not generate an increase in profit.The most amazing were the stories of CEOs of the three agencies, S & P, Fitch and Moody's, which share the market. Block, they have denied responsibility for the subprime scandal. Gin and a long list of safeguards that exist within their institutions. "We are not alone in being surprised by the drop in home prices" said the CEO of S & P. We were plunged in 2002 in hearings before the criminal court after the collapse of Arthur Andersen, the company that had advised of his right hand and certified the accounts of the left hand of Enron, Wordlcom and many others.Second table: Mr Alan Greenspan, former chairman of the U.S. central bank from 1987 to 2006 said this morning before the inquiry: "I'm shocked, shocked, to find gambling here" (= I am shocked, shocked, to find that gambling, here).No, actually, that's Captain Louis Renault in Casablanca. Written evidence that the banker had read before parliamentarians said he was "in a state of shocked disbelief" (= in shock and disbelief). But he added: "We are in the Midst of a once-in-a century credit tsunami. "(= We are in the midst of a credit tsunami, such as occurs in a century).Greenspan attributed the excess in the market for real estate securities with excessive enthusiasm, insatiable demand from investors and their lack of critical approach to the opinions of rating agencies. He acknowledged that would not be outside of the crisis as the property prices would not stabilize. He considered that overall the markets have functioned well, even whether to regulate credit default swaps (which will soon be a separate column). When the Democrat Waxman asked him straight in the eye: "Did you wrong regarding the benefits of deregulation? "The old oracle said," Partly. "Tomorrow I will take you to see what looks like a partial error in Brazil.
Chronicles of the financial tsunami: emerging IV (24th episode)October 24, 2008"Crisis? Ask Bush is his, not mine! "According to President Lula, the effects of the tsunami were to be" almost imperceptible "in Brazil. On 24 September, he accused in Sao Paolo, "the casino's financial system where some have played roulette and lost. "But he wanted reassurance:" We will not allow that Brazil is a victim of these games of chance. " It is true that exports to the United States account for only 2.5% of Brazil's GDP against 25% of Mexico's GDP. Yet the dams have dropped.American portfolio managers had invested in Brazil with money borrowed on the basis of the assets they held in the United States. This is known to shop on line. This mechanism, BA-ba's investment banker, you can leverage the clout of your money by using the leverage.However, if the assets that serve as collateral depreciates, for example because you were given to subprime-backed securities or shares whose price has fallen sharply, one day you will receive a phone call. In a margin call or margin call, the broker requires you to give more guarantees in the balance or any liquid. The combination of margin calls and redemptions from your rich clients, if you are a hedge fund or your small savers if you are a pension fund, all very concerned marks the end of the game. Farewell, veal, turrets, deer and partridge, you have to sell and return empty-handed.In three weeks, three billion dollars left the country and the real lost 25% of its value. But it is important to understand that the capital outflow is totally disconnected from economic fundamentals here in Brazil. The core indicators are healthy Brazil: The growth is around 5-6% per year. Unemployment is around 10-11% with a large informal economy. The public debt amounts to 35% of GDP is less than half that of France. And inflation is severely opposed by the President of the Central Bank, Mr. Meirelles has assumed the position along with Lula, a former lathe operator, a former trade unionist arrived at Alvorada Palace, the palace of the dawn.Between 1980 and 1994, prices increased by over 100% per year, Brazil has even been an abscess of hyperinflation (2000%) in the early 1990s. When Mr. Meirelles has arrived, pranced inflation to 12.5% and interest rates to 25%. He immediately raised the rate to 26.5% which caused an outcry. He was accused of stifling growth. The government has let it happen and with great mastery, he managed to reduce inflation to 2.96% in 2007.Interest rates have cheap the growth of consumption. Domestic demand grew at a rate of 8.5% per year. To us, fridges, pretty scooters, and atomixers feijoada! In June the country reached 100 million credit cards, for a population of 190 million, up 17% over 2007. But domestic production, it has only grown by 5% in 2007. Even the most from the use of production capacity, the rate of domestic investment is too low relative to the size of the population. It is said that growth comes up against the production frontier.Brazil is the world's largest exporter of beef, steel, ethanol, and the importance of manufactured goods. This imbalance causes a deficit in the trade balance and create inflationary pressures, not more than 5%! shouts the central banker.Finally, for the moment, the falcon Meirelles has other problems. Most Brazilian companies did not anticipate the rise of the dollar. So they had borrowed in U.S. dollars when they are paid in local currency, peso, euro or yuan. Foreign exchange loss makes the scarcity of dollars even more dramatic. Thus, taken in reverse, the Mexican retail chain Controladora Comercial Mexicana SAB has gone bankrupt.To prevent this can 'home, after Meirelles injected liquidity since late August, put the package yesterday by announcing $ 50 billion in the form of currency swaps with other central banks. This is to defend the external value of money and meet the needs of dollars of business choked by the credit crunch.In the hope of attracting foreign capital or curtail their departure, the Finance Minister has also eliminated the IOF tax of 1.5% on foreign capital and 0.38% for loans denominated in foreign currencies; the Imposto Sobre Operacoes Financeira was a kind of national Tobin, named after the Nobel Prize in Economics in 1972 who had imagined a small amount of tax that would kill the speculation by taxing capital movements but does not deter.Public banks were also allowed to come to the aid of private competitors lower and absorb them.Following the example of Peru and Chile and the difference of Argentina, the country has gotten rid of the ball of the external debt. He became a net creditor with the rest of the world. His nest egg amounts to more than $ 200 billion of foreign reserves.Yet in two months, the real has lost a third of its value. Evil echoes a refrain in the piping of international capital. It rhymes like a nursery rhyme but it rips like a scalpel Brazilian economic fabric, "High Yield Is No Shield Against Deleveraging" (= high yields no longer protect against the disarmament of the debt).It is even more unfair that Brazil 's was kept out of American investments and rotten Lula re-elected with 60% of the vote in 2006 has really applied the philosophy of "trickle-up economics" (dribbling wealth from bottom to top).In 2002, he promised to respect its commitments to the IMF and give land to 400,000 poor families by 2006. He kept his word. While the incomes of 10% of Brazil's richest grew by 7% between 2001 and 2006, those of the poorest 10% rose by 58%. The amounts allocated to social programs are four times larger in terms of GDP that Mexico has a population yet only about half that. The number of Brazilians with liquid wealth is greater than $ 1 million has jumped from 19% last year, ranking the country third behind China and India in the list of the new millionaires. Nationalized banks granting many micro-loans to hundreds of thousands of people. The Bolsa Familia provides small grants 45 million poor Brazilians to help them buy food and cover their basic needs. With a budget of $ 5.6 billion it was the most effective instrument, in addition to the minimum wage law to raise people above the poverty line in Brazil as measured by monthly income less than 80 dollars. Unlike Argentina, here are middle class and uses.Alan Greenspan and Dick Fuld, the CEO of Lehman Brothers are three small towers and then leave. Latin America poses a tourniquet on his veins slashed.Chronicles of the financial tsunami: a housing so expensive (25th episode)October 25, 2008If you missed the first fifteen minutes, you wonder why people are clinging to a raft, they drift away from the lake and shout in an unknown language "subprime, subprime! ". Rather than rewind the tape, I invite you to eat a salad.The restaurant entrance is flanked by Doric columns. We read on the front: "Put Your Mouth Where Your Money Was" (= put your mouth where before you put your money). In the Belly of the banker, you have to wait when there is no reservation.A banker had taken all his mortgages and was torn with your fingers to make a big salad. Inside you have the lettuce, arugula, romaine, spinach leaves. When he had finished mixing all the pieces had become so small that it was hard to recognize them. He then served in small glasses. Customers loved it. The whole world wanted. There was a queue outside the establishment, worse than Berthillon on the Ile Saint-Louis.Other bankers said they were "Hey, what is the recipe? Let's copy it! ". Any finance began to make great salads, ripping them into small pieces and serve them to the starving populace high.One day, a Reuters dispatch falls: some of the sheets are stained with an undetectable E. coli and radioresistance. You eat it, damn it, you die.Then all the bankers of the earth no longer wanted to touch the bowls of salad. Fields of lettuce, arugula, romaine or spinach began to rot. Nobody wanted to raise, even with gloves. In any case, customers would strike salad.E. coli is the subprime mortgage, made to people who clearly could not repay. The bowl of salad is the bundle of loans. The act of tearing them and serve them in a glass is what is called securitization.The waitress above. The room is paved with colored marble. The oval windows bring light. It weaves between the tables and we mean that in the corner. The safe was turned into kitchens. She's waiting for us on the menus. While you are asking me to translate some words, I tell you that my salads, I like the best show on American television: Charlie Rose on PBS, daily from 0:00 to 1:00 in the morning. This show is so famous that it is included in the films. A recent example: "Elegie" with Penelope Cruz in a scene from Isabel Coixet, the professor, a renowned intellectual is a fake interview with Charlie Rose. Thursday night, the real Charlie Rose had invited David Smick, author of a book under the nuts, The World is curved just released. This is the best explanation in plain language I heard on the genesis of the crisis, and if you speak English, I invite you to listen to the full interview:
http://www.charlierose.com/shows/2008/10/23/2/a-conversation-with-david-smickBut while we attack the salad, I start you dissect the American dream: the manicured house in a suburb without sidewalks that call evil tongues Suburbia, as if out of the city, you go abroad . The three garages, family room, and all the other rooms you've never heard the concept: the den (part of the father, literally the den), the entertainment room (the TV room), the library ( the library), covered with false bindings.United States, 75.5 million households live in their homes and own them. With declining home prices, which in some areas up to 30%, 12 million households or 16% are found to owe the bank more than their house is worth. In 2006, the figure was 4%. In 2007 it was 6%. Among people who bought the last five years, 29% are in this situation.June 30, 2008, 9.16% of mortgages on one to four homes were in default or had reached the stage of entry. In 2007, the figure was 6.52%, a record for forty years. Most of the loans now in default were issued between 2006 and 2007, when the Bush administration has pushed because he wanted a nation of small landowners, but without the social housing policy, that Fannie Mae and Freddie Mac agree to give security to files less good, while prices continued to climb.There were several categories of loans: conforming loans that met the all requirements in terms of personal contribution and proof of income and did not exceed $ 417,000 ($ 625,000 in expensive areas). Then there were the non-conforming loans, which for one reason or another did not meet the criteria. The amount was higher than the maximum guaranteed by Fannie Mae and Freddie Mac, they are then jumbo loans. Either the person could not provide all the supporting documents, these are called Alt-A loans (as Alternative A). The nickname had found that their bankers are most telling: "liar loans": loans liars. Then there were the loans to people with insufficient income, the subprime hard and fast. Loans compliant and a large portion of the loans were jumbo loans without history. E. coli is lodged somewhere in the Alt-A and subprime. But the unconscious hands tore the salad.You can not believe they could lend to people who could not repay. It's like a priest who would specialize in people who have no soul. The list of dirty trick is unquenchable, I do not choose one. They were advertising on the radio.Here's how running a negative amortization loan (negative amortization) you buy a house beyond your means. The monthly payments amount to $ 3,000. It is spacious, it's yours, it costs $ 600,000. $ 3000 is what you earn with overtime and bonus. No problem. You will repay $ 2000. $ 2000 per month, you are well you cope? We'll just rent the room next to the garage. It gives you a variable rate loan. Alan Greenspan may well keep the cheap money, in fact, your rate is quite high because you are considered at risk. Do not think, sign. In any case in two years, you can restructure the loan. You sign, you move, you are happy as hell. Finally, you also live the American dream. You have three jobs and no health insurance, but every month, religiously, you repay your two thousand dollars.Every thirty days, an additional $ 1000 added to the debt principal. So two years later, you need $ 624,000. The estate agent told you that the house would be worth $ 800,000 then. Except that no luck bankers are striking salad, all fields are rotting and no one wants to finance the cultivation of green leaves. Your house is now worth far Suburbe $ 450,000.But I have $ 624,000! For you, like 12 million Americans, the dream is over. The other 64 million households owning learn the bad news and are not affected: 24 million have paid off their homes and continue to pay 40 and accumulate capital.The decline in property prices has made housing more accessible, but the tightening of the criteria of banks that few can enjoy. At the same time, why buy now? A majority believes that prices will continue to decline. The game of thousand dollars, they wonder how Lucien Jeunesse stabilize property prices. Paul Krugman, half laughing, half-serious suggestion to lower supply by destroying the houses. Republican McCain proposed that the state bought the house depreciated by paying the full price and banks offering loans at market prices to borrowers strangled. This is the premium irresponsibility. A candidate Barack Obama has a moratorium and a renegotiation on a case by case basis.
Chronicles of the financial tsunami: the Three Bears (26th episode)October 27, 2008The week ends with Dow Jones to 8378 points, a level even lower than October 10. A 8451 points there seventeen days, the stock market was thought to live his Waterloo. In retrospect, this was it that a Trafalgar? Fear does not start, the VIX stood at 87.3 Friday, before closing at nearly 80. And if we had it all wrong. And if it was Stalingrad, 1812, a long and endless quagmire?How long will continue for the process of capitulation? Friday, displayed the reason for so much pessimism was precisely the global awareness that we were in recession, ie a phase of no growth or faiblissime. The cause just as real in this endless fall is that buyers have the cash but are on strike.So where are we? First the losses of European banks are only now being understood. In addition, stock markets in Asia cashing the bad news of a Western demand atrophied. Finally, the United States, the dollar rises, currency refuge while the presidential election just eleven days left in abeyance.Remember the Bear and the Bull? The bull (= bull) was the symbol of the bull market (bullish market), the scholarship that goes. The bear (= bear) embodied a bear market (bearish market) or depressed. The menagerie market has a variety of species. When the bull hibernate, depending on the year, three types of bears emerge from their den. None are stuffed, but some may be more fear, others more difficult.The bear cycle (cyclical bear) is a market where the variation between the zenith and nadir around 20 to 25%. It's a black bear, we are very scared but it is not dangerous.The bear secular (secular bear) is a market in which lower the highest point and the bottom is a drop from 45 to 50%. This bear-there is a formidable predator.The bear devastating (Devastating bear) is the grizzly of the market value. The fall reached 75% to 90%. The collapse of Japanese stocks in the 90 current or liquidation of Chinese stocks held by non-residents (called "A shares" held by the Chinese ones are called "B shares" and do not mix) are examples Recent devastating bear markets. The other example is the memorable crisis from 1929 to 1933.The current crisis seems to be the second category with a net decrease to -45%. The economic history since World War II taught us that we can touch the bottom of ways. Sometimes it was a capitulation to a wagon Rethondes. Sometimes the end of a market oursier (sic) is done without fanfare, in a dry slow and inconclusive, as in December 1974.The crisis of "point.com" after the bubble burst related to technology stocks in April 2000 was part of a speculative process. The agony was prolonged due to an external shock, the attacks of September 11. So it's not a very good example.Let's say the bears are causing cyclical slowdown but growth eventually leave. In the case of secular bears, the growth trajectory is deflected. Polar bears are devastating secular uncontrollable; growth is completely dislocated.A bear becomes devastating when the government does not intervene, or too little or too late. We have just witnessed a bloodbath in the rules on the Chinese stock market type-A. One example among hundreds, China Mobile, the largest mobile phone company in the world, with 400 million subscribers has seen the share price fall by 75% in one year. The government felt that after being arrested has crossed the chasm of -65%.During the Great Depression 30 (the Great Depression, as they call the United States), the central bank began to tighten monetary policy at 1928-1929. After the crash, there was a credit crunch. Fearing the onset of inflation, the Fed has continued its merry way and even more contracted the money supply by raising interest rates.In general, the metamorphosis of a secular bear a bear following a devastating big bankruptcy that threatens the entire system.During the Great Depression, the asteroid that fell on the Stock Exchange called the collapse of Bank of United States, December 11, 1930. At the time, when a bank put the key under the door, there was no deposit insurance. (The FDIC in the United States will be precisely established in June 1933 to address this kind of disaster). 500,000 depositors lost all their money.The rest of the story is sad and painful. The recession became a depression. The government has been reached that in 1933, is 3 ½ years after the fall of the asteroid. 25% of Americans were now unemployed. Deflation had ruined the economy. In Europe, the Nazis had the opportunity to take power legally.The fall of Lehman Brothers September 15, 2008 is the equivalent of the collapse of the Bank of the United States. It has caused irreversible effects in the system.But the authorities reacted in a manner very different from 1930. The Fed has injected liquidity immediately. By making short-term loans, to businesses and banks, its balance sheet has tripled in size within weeks. During the Depression, he had contracted by 25%.If the Democrats win, there will be a stimulus package, estimated at between 150 and 300 billion dollars. The budget deficit could reach $ 1 trillion in two years (7% of GDP), to descend slowly. While Bush inherited from Clinton a budget surplus, the deficit of the United States is not alarming in itself. It amounted to 162 billion in 2007, 455 billion are planned in 2008, representing 3.2% of GDP.The combination of two arms, monetary and fiscal, should stem the secular bear and prevent it from turning into bears devastating.Remember at the end of World War II, the budget deficit accounted for more than 10% of U.S. GDP and the debt / GDP ratio exceeded 100%. You do not kill a grizzly with flies.
Chronicles of the financial tsunami: prions of finance-Part-(27th episode)October 28, 2008When I lived in France, I gave my blood three or four times a year. Having followed the case of contaminated blood the onset of AIDS until the trial to compensate victims, I always wanted to serve the community with my precious liquid O negative. The Nobel Prize in Economics for 2005 was awarded to Kahneman (still alive) and Tversky (posthumously) for showing that the act of giving can be rational and that due to the fact that whoever gives far poorer well-being increases a sense of heart-warming (warm glow). Unaware of my impure altruism, one day I see a truck of blood in the streets of San Francisco. I knock on the door.It makes me sit there and hands me a long questionnaire to fill out. Fifteen minutes later, the lady offered me cookies and said, "Sorry, we can not take you." My anticipation of the warm glow hanging from his lips, I look at her incredulously. "You have lived in Europe in the 80's and with the mad cow disease, we can not take any risks. "I try to explain that in my rebellious youth, redundant, I was a vegetarian. Nothing to do. She tightens cookies. I leave with my good feelings shoulder.If only the U.S. government and the police Wall Street and Chicago ("Washington", as they say in the U.S., making a wholesale price) had demonstrated as much care, the crisis of 2007-2008 n 'probably would not have happened.Here, go to the bistro.After the 1997 Asian crisis, JP Morgan realizes that it has granted many loans to poor debtors. John Pierpont Morgan, the banker who in 1907 had a score of colleagues trapped in his library on Madison Avenue until they solve the financial panic, had fallen asleep on its laurels. Clearly, the bank was losing money with some large customers to whom she could not say for reasons of loyalty bancoter to go elsewhere.The problem was that the loans remained on the books for decades. Until they were expired, the equity was reserved and could not do other more lucrative. She also provided lines of credit (ie, promises of loans), for which she was poorly paid but during another crisis could all be activated simultaneously, causing heavy casualties.The mission was given the code name "Transformation of credit." It brought together bankers, strong in math and good at banter.Their idea was to combine two things that had never been: Securitization - hydrochloric acid - and credit derivatives - aluminum.Securitization, you will recall, is the act of mixing different kinds of salads and tear them into small pieces and then serve in bowls just waiting around. Securitization (Securitization) was not invented by JP Morgan. In fact, she has earned Robert Merton and Myron Scholes in their Nobel Prize 1997 for research published in 1966.People love this kind of bowls because they guarantee an income by spreading risk over lettuce, arugula, romaine and spinach. So if the price goes up and spinach than lettuce drop roughly balanced and that you continue to earn on your investment. The consolidation gives you some security, hence the English name of the securities (securities).Derivatives also existed. During our visit to Chicago Edge Of Exchange, we played with the action of Morgan Stanley to the tune of calls (option gives me the right, but not the obligation to buy) and puts (option gives me the right, but not the obligation to sell). Then in the queue for taxis at the airport in Guarulhos, en route to the Bovespa, we talked about how companies can protect themselves against exchange risks by buying puts or calls on the currencies in which denominated contracts. Similarly, when we say that oil prices go back down or they actually talking about future barrels which will take possession two or three months later. The same goes for the rest of the raw materials.Like the T-shirts and action figures of The Simpsons who have reason to be that the existence of the television cartoon, derivatives of finance are based on a financial principal: an action, a currency, commodity, or ... a loan.The innovation of JP Morgan was two-pronged. First, instead of putting a particular loan into the bowl, put the contract at twenty, No. 9999 signed by General Motors to build a plant - JP Morgan poured some of its exposure to risk if GM goes bankrupt . Put the bowl in the loan was to a financial product key, if I set the exposure to risk of default of the same loan (let alone the whole enterprise) is a derivative of the loan.The specific variety of green leaf that the team of JP Morgan was going to pay before stir, called Credit Default Swaps.Here is how a CDS works: Person A and Person B are a bet on the survival of the individual C. B pays A. A pay B if harm comes to C. B may assign his right to be paid by A to whomever he wants. A can sell its obligation to cover B to whom he wants too. Nobody keeps a trace of where are the contracts.Poured into the mixer all the CDS of JP Morgan. In each jar, now you have a bit of risk if General Motors failed, a little bit of risk if IBM fails, if a piece of Lehman Brothers went bankrupt, a total of 300 companies. Use and circulate.Investors who bought the small bowls have become the insurers of JP Morgan, if n 'of which of the 300 companies went bankrupt.After using the talents of strong math, JP Morgan had recourse to his strengths in banter to persuade regulators and credit rating agencies that their invention was great and safe, precisely because they pool risk. Note the complete absence of stock market watchdog, the derivatives that are not quoted in Chicago are not regulated by the derivation Oversight Agency. (This is like saying that the police take care of the drug when it is sold in pharmacies.) The contracts that nobody keeps track, are sold OTC (Over The Counter, literally putting the on the counter) just like you would sell your books at Gilbert Young.The transaction of sale of CDS on the 300 companies in the stock of JP Morgan was named Broad Indexed Secured Trust Offering, or the acronym BISTRO. Mind you all these terms are there to reassure you: secured (guaranteed), trust (confidence), broad (wide). Bistro bonds were placed in December 1997 with other banks and insurance companies. They won a total success.Even if their loans were still on the books, the bank had got rid of 9.7 billion risk of defaults by its customers poorly. The CDS does not appear anywhere except in off-balance sheet accounting. She had also recovered the cash by touching all the "insurance". In fact, JP Morgan has used the money to redeem its shares on the stock exchange. (When the capital is less diluted, each shareholder receives more dividends and is very happy so he keeps his actions).Second part of the innovation (sic) we stop making crafts, you get into the CDS industry.After the success of Bistro, JP Morgan said he could mount a production line and selling CDS on a large scale. It was enough for that on the one hand the government and market regulators, banking and insurance supervision do not mix its growing business. And the other to manufacture products by brand. You do business with IBM, so you need a CDS IBM. If you have many relationships with Sony, I'll put together a CDS Sony. Etc..Everyone began copying JP Morgan. In 2001, the CDS market represents $ 900 billion. People bought without understanding, but also bought other. In 2007, they had grown to 62 trillion. Yes, yes, 62 trillion.Now that the CDS touched all the major companies in the world, the prion had only to wake up.Chronicles of the financial tsunami: prions of finance-Part Two-(28th episode)Errata:The word "Roman" is a anglicism. The real name in French is actually a chicory and romaine lettuce is. The term also refers to a chicory endive in the region of Brussels.The Derivatives Oversight Agency yesterday I was talking about exists only in my dreams. The agency now called the Commodities Futures Trading Commission and as its name suggests monitors only a portion of the derivatives market: futures on commodities and stock options. It is headquartered in New York with offices in Chicago and Kansas City.October 29, 2008Let us dream the prion sleeping. I would immediately wake up to the suspense, but blow a decade of epidemiological incubation a problem. One has the impression that the disease occurs one day and everyone is very surprised. In fact, Bistro and her little brothers fell sick all the time.I have used until now the metaphor of the salad. I suggest you replace it with the lasagna or tiramisu or even talk like bankers, for each:Loans that are used as reference in a CDS are actually segmented according to their quality. Is a nice ceramic baking dish from Le Creuset brand, you will not attract customers with a flat tin. Deep inside, you put the spray of your loans and less safe. This round is called the equity layer and receives no score because it is so bad and dissuasive. Then you will ask the middle layer, the mazzanine layer, which contains ready reference rated AA to BB, also finely chopped. Finally, you reserved the best slice, the senior layer, which is linked to higher quality loans, which have all been rated AAA. Bistro designers had added a glaze to their beautiful cake: the super senior layer, which had the names of the first order of business, the cream of the crop, this is so to say.Each tranche receives compensation inversely proportional to the risk.Bistro before distributing to customers, we had to go fishing for notes. They would buy even if they do not understand much, if someone who knew has endorsed. Imagine a pharmaceutical company that would change the experimental results until the statistics confirm the hypotheses. It was almost the same. Standard & Poor's was turning the product on its computers and mathematical modeling consistently concluded that Bistro was not worth a pin. There was too much risk. Strong in math at JP Morgan resumed their copy. They returned later having changed a few settings. Still too risky. They left to make other adjustments. Then it was good. Computers Standard & Poor's began to obey the various slices have a maximum risk BB.I skip the episodes but say the problems at once broke out in the mezzanine tranche and the bottom bracket. JP Morgan could not ignore it because they had kept it. Even the higher bands gave sleepless nights to their holders.Bistro II experienced more losses yet. But, without fear and without reproach, JP Morgan launched into the CDS industry; imitated by the entire profession.One of the reasons why the instruments were not as fabulous as expected is the right that entities issuing CDS retained changing loans that were used as references, as long as the new loan and the former had received note. Have you ever bought a car? The seller has an advantage over the buyer, such as banking, he knows what's under the hood. This information asymmetry creates a moral hazard. And banks were not embarrassed to dump their garbage dump in the dish Le Creuset, before it ceases to call triple-A.But as good at banter had done their job to hold government agencies and remote controller, such as defects only revealed in the future as these products were not required to remain on the books of the bank but rather to be sold as soon as possible, it was a great success.Finance with an imagination and an insatiable commensurable, in 2003, she began to make derivatives of mortgages and the securities used, it was the collateralized debt obligations.The CDS and CDOs were all born in the same matrix. Bistro was supposed to vaccinate them against the risk pooling. Instead of realizing that she had invented a new disease, JP Morgan let out a patient zero. Other banks asked him a little saliva and rushed to put it in culture.The billionaire Warren Buffet, also called a straight face, "the Oracle of Omaha" (middle of nowhere in Nebraska, I hope that I would never drink my words), prophesied in a letter to shareholders in March 2002 that "financial derivatives are weapons of mass destruction." He explained how it seemed to protect against the risk to the micro level and how they passed by spreading the macro level.Muriel, said Mickie Siebert, 76, the first woman trader to have worked for himself on Wall Street recalled in December 2002, before the inquiry commission of the U.S. Senate made to clarify the origins of the Enron scandal that was already came to warn of the dangers of derivatives in 1988 and 1998.She then quoted his own words. In 1988, following the 1987 crisis, she said that the stock futures - commonly known as future-"had become the tail wag the dog was" ("Future Have Become the tail wagging the dog"). And to show how the automated trading software on the futures market had caused the collapse of stock prices by 22.6% in a single session. These programs were modified. In 1989, regulators settled a series of circuit breakers that are still used today.Ten years later, in 1998, a hedge fund called Long Term Capital Management failed to blow up the system again using financial derivatives. With borrowed money (leverage of 1 to 100), the fund had to bet $ 1 trillion in Forex on the future value of currencies. The situation was no lack of spice, so to speak, as Robert Merton and Myron Scholes who received the Nobel Prize in Economics in the previous year for their theoretical contribution to the derivatives markets were on the Board LTCM.Then came the Enron scandal in 2002 on the market completely deregulated energy, another Over The Counter market. Enron issued to the number of operations in both directions. Meanwhile, Bush champing at the bit to release the oil from Iraq. These operations in both directions were legal on the OTC market but have been banned in the stock market, denominated as fictitious sales (wash sale).Three crises, three types of financial derivatives, three calls for regulation in the desert. Finally, two because in 1987 there were real changes to preserve the system. It is clear that even devotees of the Exchange does not believe in the ethics of capitalism to prevent abuse.But back to Warren Buffet's letter to its shareholders. He explained how during a buyout, he found himself with a branch derivatives (= products). Because the system counterparts (you agree to cover a risk for someone else) and because it's operations in the future, sometimes distant, reinsurance and financial derivatives as the Hell, it is very easy to enter and almost impossible to get out.Warren Buffett wanted to get rid of this unit, no matter what. Upon his arrival, General Re Securities was the consideration as a buyer or seller in over 23,000 operations. Amount: $ 1 trillion. One of his teams ready for work to unravel the net of these derivatives that bind together so many variables that the chances of the risk occurring are multiplied. In the end, being extremely cautious, the team still lost $ 200 million in 500 trades. 98% of SAR operations and 2% were lethal.Now please, for prion wakes.
Chronicles of the financial tsunami: prions of finance-end-(29th episode)October 30, 2008Custodian banks, investment banks, regional banks, savings banks, they had removed all the CDOs. January 31, 2008, six months after the bursting of the speculative bubble subprime losses caused by this type of financial instrument based on the mortgages amounted to $ 265 billion. The note promised to be even more salt, it was provisioned. Officially, everything was under control. Losses related only 2% of the contracts, maximum.Then came March 2008, the fall of Bear Stearns, caught on the fly by JP Morgan Chase thanks to a gift tax of 29 billion (if you're not billions, you are not of this world) and losses caused by two investment funds. Merrill Lynch (we are all cousins in the business) had lent 90% of the money to buy CDOs. When their value began to decline, the mobile Ralph Ciolli, the manager at Bear Stearns rang. "Hi it's Merrill Lynch and that's a margin call. We'll have to give me more guarantees or deliver cash or liquid on it. "Money, Bear Stearn by searching his drawers, under the mattress, in the inside pocket of all investments. Caught by the throat, he went to hang under a bridge, but the Fed met on the road. Ben Bernanke said, "Go and sell you to JP Morgan Chase." Investment funds were liquidated in June 2008. Merrill Lynch touched the amount of the sell-off of $ 3.8 billion, which affects down the value of its own CDO.Bear Stearns was not the only institution to have worries. Since September 2007, AIG's largest insurance company in the world $ 1 trillion in assets, 116.000 employees in 130 countries losing money, big money, hemorrhaging money in an industry employing 377 people and located in London. People from PJ Morgan came to see AIG Financial Products in 2001 and proposed a partnership, with the reputation of AIG, it would be easy to break into the field of CDO and CDS. JP Morgan would design products, AIG's funding and investment with its vast clientele. The turnover of the unit quadrupled in London six years, from $ 737 million in 1999 to 3,260,000,000 in 2005. In 2002, operating income was 44% of turnover. In 2005, it exceeded 80%. The salary of casino ranged from $ 423 million per year to 616 million, the story does not say how many won the secretary. The portfolio of CDS alone accounted for $ 500 billion and reported in "premiums" 250 million per year. It was easy money as the risk of failure of all these good, solid companies was extremely low.At the end of a quarter of sad memory, September 30, 2007, AIG had to admit she had lost 352 million on CDOs. This led to a chain reaction. Note the quality was immediately lowered. Suddenly, it was more expensive to borrow and all the people who had been content to your reputation as a guarantee you make a phone call. The margin call in September 2007 was $ 15 billion. The share price began to tumble. While the situation worsened in real estate, AIG lost 7.8 billion in the first quarter 2008 and 5.3 billion in the second. It was long time ago quarterly profit of 4 billion! After the collapse of Lehman Brothers, and while approaching the end of the third quarter, the Fed had to offer a loan AIG executives / nationalize 85 billion to prevent the fall of a second asteroid; especially since the collapse of AIG would have caused an automatic loss (because the system counterparties) of $ 20 billion in Goldman Sachs's cousin.So there was only one asteroid to hit Earth this week. The bankruptcy of Lehman Brothers was not only a huge event because of the amount of receivables of $ 150 billion.
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