Cardboard Spaceship

Willem Buiter Rips a Good One

Willem Buiter, writing on his FT blog, has laid out what he sees as the principles for financial regulation in future.  He really does a thorough job, and it is worth reading in its entirety. 

It's a bit Year Zero in approach, so the dithering fools that we seem to have allowed to become our leaders will not do it, but he nails the right issues, and has some damn good suggestions. 

He also understands, as many do, that times of crisis can be the time to implement important changes.

"It is necessary, for political economy reasons, to rush new comprehensive regulation of the financial sector.  While it would be better, holding constant the likelihood of the measures being adopted and implemented, not to act in haste, there is now a unique window of opportunity - a period of extraordinary politics, in the words of Balcerowicz - to actually get the thorough regulatory reform we need."

CDO - Collateralised Debt Obligations Melt Down

Found this in the FT, via Naked Capitalism.  (I'll link to Naked Capitalism as it is non-subsciption.)  Collateralised Debt Obligations, rated as AAA, the best rating by the agencies, should have a default rate of near zero according to the classic interpretation of what AAA means.  Turns out to have been a little bit optimistic. 

"The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent."

Given that 450 billion of these have been issued, we can expect to see losses to my mind of 300 billion at a conservative estimate, and up to 440 billion in the worst case.  Remember, this is the stuff rated triple AAA.

The reason that this is interesting, if that is the word to be used for the epochal collapse of the financial system, is that the banks currently have this on the books at a much more optimistic price, so the red ink has not even begun to flow on this.   

Fun with Crayons

Found a link via good old Boing Boing, where an artist called Christian Faur is making very unusual pictures with crayons, or perhaps more accurately from Crayons.  He arranges then in a frame and the ends act like pixels on a computer screen, giving a very interest result.  (He's no one trick pony, his other stuff is also great.)

Keep Calm and Carry On

In light of the current state of the world, I have changed my desktop wallpaper on the computer to the following:  (Click link for a full size wallpaper.) 

This was printed and was to be used in 1940's Britain if the Third Reich ever decided to pop over for a visit.  In the end they decided to go for a winter holiday instead, which turned out to be a mistake. 

Joking aside, it is a nice thought.  Keep Calm and Carry On.  Very British, very Stiff Upper Lip.

Blam! Blam! Blam! One Hit After Another.

RBS in the UK has lost 40 billions pounds, leaving a 28 billion loss after tax refunding.  In return, the UK tax payer is going to shoulder 325 odd billion of crappy debt.  

But, as ever in America things are bigger and better, and the phenomenally exposed and unstable AIG is lined up to make a 60 billion loss, and would like more tax payer money please.

It will get it, because if AIG goes, then the whole CDS (Credit default Swap) market goes with it.  And if that happens, then it's a fire sale. 

Enjoy the show folks, after all you're paying a lot for the ticket... 

A New Line in Consultancy...

Well, I see things occasionally that just make me go "oh-mi-god."  Via that great source of all that is mad in the world, the Exile, comes this gem.

Basically, spent the last twenty years in penny loafers, and now you're going to jail, and would you like to know how to avoid being married to Big Ron, the man with the most cigarettes.    It would seem that Lawrence Levine is your man.  I imagine that distance studying will be an available option. 

Niall Ferguson Interview

Nial Ferguson has a really, really good interview in a Canadian newspaper, the Globe and Mail.  He is an economic historian at Harvard, and funnily enough, it shows.  He is balanced and credible, but still, the news is not that good.  What is really enjoyable though is his ability to see the reality of what is going on and accept and understand it.  To give one example:

"Heather Scoffield (Interviewer:) You speak about the crisis being in its early days, but most policy makers and the International Monetary Fund are predicting a quick end to it. Where do you differ with them?

Niall Ferguson: “I do think they're wrong. I think the IMF has been consistently wrong in its projections year after year. Most projections are wrong, because they're based on models that don't really correspond to the real world. If anything good comes of crisis, I hope it will be to discredit these ridiculous models that people rely on, and a return to something more like a historical understanding about the way the world works.”

“I mean most of these models, including, I'm told, the one that policy makers here use, don't really have enough data to be illuminating … You're going to end up assuming that this recession is going to end up like other recessions, and the other recessions didn't last that long, so this one won't last so long. But of course this isn't a recession. This is something really quite different in character from anything we've experienced in the postwar era. That's why these projections give positive numbers for 2010. That's the default setting. And it just seems to me ostrich-like, to bury one's head in the sand and assume this has to end this year because, well, that's what recessions do."

The Counterargument for Bank Nationalisation

Very thought provoking article in the Wall Street Journal as to why, practically speaking, bank nationalisation may not be the silver bullet that we would have thought. 

Read it here.

It is worth quoting Mr Isaac's central arguments in their entirety, as they are persuasive.

"First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don't.

What's more, we won't be able to stop at nationalizing one or two banks. If we start down that path, the short sellers and other speculators that the Securities and Exchange Commission still refuses to re-regulate will target for destruction one after another of our largest banks.

Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.

Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.

Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today's limits on compensation."

Rather salient points, which makes me wonder the hell we are going to do to get the system rebooted. 

Clinton in China

So the stimulus package is going to about a gillion squagillion dollars, and someone somewhere has to want to take on the USA's debt, not to mention the Eastern European and other debt.  But who?

China has 600-700 billion dollars of American debt already, Japan would come a close second in that race, but has seen it's economy collapse in the last quarter of 2008, and Saudi Arabia, then other big holder, has seen the price of it's oil drop from the hundred plus dollars down to mid thirties. 

Not much wonder Hilary Clinton has the begging bowl out at the end of her trip.  There is one difference between China and the USA.  China is going to have a stimulus of 450 billion, but rather than borrow it, it is going to use its reserves.   Rather a critical difference methinks, spending money saved rather than money borrowed. 

Switzerland Under Pressure due to Eastern Europe Collapse

The ongoing collapse in Eastern Europe could be about to hit the Swiss.  Bugger, we've turned into an Alpine Hedge Fund. 

Not only that, the UBS has caved to the Americans, so there goes our much vaunted banking sector, useful for the taxdodging rich.  Now, the US are looking for the names of many thousands. 

Well. we still have all the scenery we can eat.  Meh.