Shadow finance is actually MELTING DOWN, as Roubini predicted. “Financial socialism” doesn’t stop the slump


We receive today this regular e-mail by Prof. Nouriel Roubini’s blog system (rge-monitor):

By requesting a status change from independent broker dealer to bank holding company, Morgan Stanley and Goldman Sachs have officially spelled the end of Wall Street as we know it.  Within six months, all five investment banks – Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs – have disappeared or are looking to merge with a commercial bank with a stable deposit base and permanent access to the Federal Reserve’s lender of last resort facilities.  The unraveling of the $10 trillion shadow banking system that started with the non-bank mortgage lenders, SIVs and conduits – now with the seizing of major independent broker dealers and money market funds – is in full swing and gathering steam.

THANKS, SUBCRIME CRIMINALS! Your extra – exagerations, extorsions, exxoneries etc. had such  a beautiful BY-product: FUCKING SHADOW FINANCE IS DEAD. FOREVER? We hope, and we’ll work hard for that.


Lehman is dead: will Paulsson save the Queen? How?


As we already forecasted in March (on reading  Lehman Brothers budgets, Finch data and RGE analysis), and repeated meanwhile in many blog posts (search Lehman  in this blog), the 4th US financial bank is now a walking dead, and after the end of the prospective acquisition by Korea developent  bank, its shares lost 50% in 2 days (43% in a day), then another 40% on Sept. 11. In the last Q it lost another $4 bn.

Sept. 13 update. 

Slate summary: The New York Times and the Wall Street Journal lead with, and the Los Angeles Times fronts, an emergency meeting between major bank heads and the Federal Reserve. Sick of underwriting bailouts, the government is hoping to broker an “industry solution” for the impending liquidation of Lehman Brothers Inc., the ailing investment bank.


Now it is to the couple Paulsson (former financial manager) – Bernanke to act.

We bet it will be another move toward  Financial Socialism (but WHICH move, this time?), although some contradictions might arise within and between the two, Paulsson:

– on the one hand more willing to invest the taxpayer money he doesn’t actually have – JUST STRONGER DEBTS REPLACING WEAKER DEBTS, financial entitlements’ circulation -,

– on the other hand with public relations problems in the “societe’ du spectacle” political scene. In fact, the Naked Capitalism blog (fully quoted below), as well as other observers, think that THIS TIME Paulsson needs to show he is not a Trojan Horse of Wall St. at Washington (WHAT HE ACTUALLY IS, of course: By definition), and therefore he will not play the full bail-out as with Bear Stearns.


deal journal, wsj:

When it comes to banks and thrifts, the Federal Reserve and Treasury have a wealth of legally approved options, including taking over and liquidating assets or creating a “bridge bank.” When it comes to broker-dealers like Lehman, federal regulators have only a hammer, a plumb line and a wrench. They can force a shotgun marriage, arrange a line of credit or put their authority–often referred to as “moral suasion”–behind an industry-led bailout of Lehman.

the deal jo. suggests these potential buyers, BUT (opposite to such optimism) TIME SEEM OVER  for such a market-lead bailout (see again Naked Capitalism, among other observers): 

rge monitor, sept. 10


How Would Authorities Deal With Another Run On A Broker Dealer?           

  • Naked capitalism: Would Paulson let Lehman fail? “The short answer is yes: Unlike Bear, Lehman is not a big credit default swaps protection writer
  • Paulson Chatham House speech, July 2: “We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm” –> For the long term, Hank Paulson envisages separate resolution processes for deposit institutions and investment banks. Bernanke and FDIC’s Sheila Bair also advocate separate resolution processes
  • Paulson at Committee Hearings, July 10: There are however systemically important institutions that need government intervention in case of a run.“Looking beyond immediate market challenges, the trigger for invoking government’s emergency authorities should be very high – such as filing for bankruptcy”


naked capitalism’s LEHMAN DEATH WATCH

today, sept. 11:

The market’s reaction to Lehman’s way worse than expected earnings announcement of $3.9 billion in loses due to $5.6 billion in writedowns was ugly, but even uglier is the lack of much (any?) progress towards getting the firm out of its fix. Yes, dividends are being cut, but the other two key elements, spinning off much of the troubled commercial real estate portfolio to shareholders and selling (well, sort of, as we will discuss) its asset management business.

But what would be left? A firm shorn of its best asset, now even more heavily skewed toward fixed income, which by all appearances is suffering not only a cyclical but also a secular decline. The private securitization market is much smaller than it used to be and does not appear likely to return to its former size for a very long time. if ever.

The new (or rather, more openly discussed theme) was can and should Fuld survive? Both the Wall Street Journal and the New York Times have reports on that topic, never a good sign. However, who would take his job? 


The Journal story has some good reporting on how Fuld’s pushing for the best deal and impatience undid some possible deals.

Bloomberg tells us Lehman’s fate hinges on the sale of a stake its asset management unit, But the story contends Fuld is overplaying his hand:

“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”…

Even a successful sale may not be enough to satisfy credit- rating companies.

sept. 10

Lehman Death Watch: Will Paulson Let Lehman Fail?

The short answer is yes, but we need to define fail. (…)

Even though Bear and Lehman are similar in size, their business mix differs in ways that make Lehman dispensable. In fact, Paulson almost needs to let a financial player fail to prove that he is not a toady of the industry.

Reuters labels it “an insolvent firm”.

sept. 9

Merrill. Lehman Trading Operations Valued at Zero by Market

We had noted earlier that the price discussions around the possible sale by Lehman of a stake in its asset management operations valued the rest of the firm at close to zero. A story at Bloomberg has taken this line of thinking one step further.


From Bloomberg:


    Lehman’s market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman Inc. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch & Co.: Take out its retail-brokerage and asset- management businesses, and the investors’ valuation of the rest of the third-biggest U.S. securities firm is zero.

    After being the most profitable business on Wall Street, generating more than $65 billion in pretax profits for the four largest U.S. securities firms between 2002 and 2006, trading has become a black hole. It still accounts for about half of the revenue at the Wall Street firms. Yet Lehman Chief Executive Officer Richard Fuld and Merrill CEO John Thain have been unable to convince shareholders to attach a value to the businesses.

Sept. 7

We were willing to be proven wrong in our skepticism of Korea Development Bank’s pursuit acquiring a stake in Lehman. We had no doubts about the interest; the KDB CEO was the former Seoul branch manager for Lehman and full bore behind a deal. But the reception of the Korean government, which had to approve the deal, was lukewarm at best. It’s rare for an individual to overcome official indifference and inertia. We had noted that the Korean bureaucrats could simply study the deal to death, that would put an end to it with every having to official turn the KDB or Lehman down.

And the rumors about other possible suitors have been simply bizarre.

 (…) so the firm is on to Plan B, discussed earlier in the week, to spin off problematic mortgages into a separate entity. From Times on line: (…)


If the Korean deal falls through, Lehman will press ahead with a sale of its Neuberger Berman investment-management business, estimated to be worth up to $10 billion – roughly equivalent to the entire company’s current market capitalisation.


Obama New Deal on the road: Barack is the candidate, Hillary has a future behind

Illustration by Doug Chayka, The Nation 

8 june update: a superb Hillary gave by far the best speech of her life, in the neoclassic scenario of the Natural Building Museum, Washington. She took up our points below, summarised in a nice image: 18 million breaks in the upper glass to women’s career, broken forever. And finally joined Obama for the Presidentials.

She shouldn’t be sorry: Obama is her angel.

Hillary’s Presidency would have compared to Bill, like GWB to this father: unless she stroke Iran (precipitating the world in a catasrophic oil crisis), she might not have doubled in 2012 (the year the Maja calendar ends …). Angel Barack came to save her, and America first of all, from a last Reaganian-age presidency – at odds with a Great Depression requiring  absolute novelties, a political paradigm shift.

Call it Destiny Athens-style,  Providence Jerusalem’s style or Spinoza’s necessity: a synthesis of the two.

5 June UPDATE: with Primaries over, Presidentials now fully on, the Subcrime crisis takes the hegemony of the narrative and the political fight; Iraq and foreign policy in 2nd place (and also an economic issue: see our blog sub-title inspired by Joe Stiglitz). 

FIRST OF ALL: a look back to the primaries. A fine observation by Matt Bai, a brilliant pen at Sunday Times, the NYT magazine, has underlined a conflict of paradigms between the two strategist:

the Pollster (mark penn) vs the Ad Man (daniel axelrod)

No wonder the latter won: a systemic approach overweighted a piecemeal one:

Mr. Penn, on the other hand, is a pollster, and pollsters tend to look at campaigns as a series of dissectible data points that either attract voters or drive them away. Get a health care plan and an economic plan that 70 percent of people say they view favorably. Pay attention to words that move the dial in focus groups, like “real solutions for America” or “ready to lead on Day 1.”

Mrs. Clinton’s relentless focus on pragmatism and specificity, as well as her willingness to shift slogans, are not simply a result of her own personality but also of Mr. Penn’s strategic outlook, which values testable ideas and phrases over more sweeping imagery and themes.

New Socialism looks at America as a model of democracy

Comments stress that:

a) Hillary has not lost: Obama won, by charismatic leadership (aggregating a coalition external to the traditional Dem electorate, that now needs to be reunited –  a novel coalition of blacks, young people and liberal professional sorts, rather than their traditional blue-collar and TU base), and a successful funds raising machinery from ordinary people donations, based on mastering web 2.0 politics and marketing.

b) She definitely broke upper barriers to women– although not at her immediate advantage; and didn’t lose for being a woman: mostly for voting the Iraq war,  having Bill always at her side, and conducing an unimaginative campaign, that instilled many doubts about her supposed “experience” and managerial capabilities. “Hillary has always been a policy wonk, a functionary attuned to bureaucratic process, but she has never shown executive ability, which makes her quest for the presidency problematic.” (Camille Paglia, April 29, The Telegraph

c) The US are at a secular cross-road: not only far away from slavery and near-apartheid; closer in time: away from an Afro-American culture of closed identity and opposition. The one expressed by a wrong prediction, in the instant book A Bound Man: Why We Are Excited About Obama and Why He Can’t Win – by old-fashion Black intellectual Shelby Steele. “Assimilation, not blackness, is the road to success” he writes. It is worth noting that these Afro-American pundits stood on Hillary’s side, while Kenyan young professionals are now organising a web-worldwide campaign for Obama, independent form Obama’s organization (like Irish people were proud of Kennedy).

d) A LESSON FOR THE WORLD (see this week’s leader, The Economist): no other democracy choses her leaders in such an open and massively participated process, that the dual competition has stressed so much: Barack and Hillary, each one of them has often collected more votes than all the Republicans together. Hillary: no one ever arrived no. 2 in Primaries with so many votes, in % and absolute number. Compare it with all the other countries: they will look like gerontocracies (Italia: non è un paese per giovani – see our June 2 post below), mafia regimes and disguised fascisms: WHAT THEY ARE IN FACT. W AMERICA !!!

e) Deeprecession’s own comment: the new socialism has NOTHING in common with always-Zarist and monocratic Russia, or Mao and Deng’s Chinas. New Socialism looks at America as a model of democracy, with further, minor improvements towards a mix of delegated and direct democracy (Hanna Arendt), but without populism (always associated with false forms of direct democracy: see e.g. the idiot in Italy, Beppe Grillo).   


Election Won’t Lift Economic Clouds

June 5, 2008; Page A2

John McCain and Barack Obama, understandably, are focusing mainly on how to win the White House in November. But it’s none too soon for the candidates and their economic advisers to contemplate the economy that the next president will inherit in January 2009.

The article focuses on 3 issues: housing, energy and credit crunch. Our view is much more pessimistic: January 2009 will not yet be the worst point of the US crisis, even less for the global one. But this leaves room for a timely policy affecting both the crisis itself and distributive issues (Robin Hood policies).

        June 4. Barack Obama, although still unofficially, is the Dem candidate today. As more superdelegates joined him, the Illinois senator on Tuesday locked up the 2118 delegates he needs for victory at the August convention. See his mail to supporters from StPaul: barackmail_stpaul_080604 The Nation has opened an oL vote for suggesting Obama’s ticket. Until now: 21% Jim Webb equal to  Bill Richardson, 18% John Edwards,9% Hillary Clinton, Kathleen Sibelius and gen. Wesley Clark, 6% only Al Gore. Obama’s rally in St Paul, yesterday night

More than 20 000 people filled the stadium to hear Obama — its largest crowd. An additional 15 000 watched on giant television screen outside. Somewhere among the crowd in the arena as Obama spoke, Greg Adkins quietly shed a few tears.

“It was great, and it was historical, and it was really significant,” said Adkins, an engineer from the suburban town of Stillwater who is African American. “I’m a lifetime Republican, and I was touched and moved.” As the crowd filed out of the arena, he still occasionally dabbed at his eyes. “That certainly touches me that he’s African American. That really speaks deep in my heart,” he said. “I hope it speaks to the African-American community that “yes, we can’.” – © Guardian Newspapers Limited 2008

The political group we cooperate with, (see picture above), joined the Obama camp on February 1, when Edwards (closer to the TUs, more representative of a traditional, old Lib politics, although presenting the better and more radical political program among the dem candidates) retired. It was a daring, good and timely decision: for the first time ever, MoveOn was taking position in Primaries. History calls, we answer. We think Obama is already the President IN PECTORE, although the battle will be hard, since:
1) America is fully into the Subcrime recession,
2) badly needs a New Deal
3) and Obama is the only man that might and will deliver it.
There is a sense of destiny and Spinozian necessity in all this. We’ll fight hard, but Obama New Deal ALREADY belongs to History, translating people’s fears and hopes into a wide-ranging set of policies to fight the Subcrime recession, and avoid its degeneration into a depression. Obama new Deal will be written in early 2009, when Subcrime will hit hard: shadow finance collapse still on (after the weakest Lehman, financial sanctuaries under attack and Fed protection challenged), dollar plunging, unemployment jumping in the US. Global crisis abating any decoupling barrier and resistance: during 2009 even Germany, then China and lately, perhaps even India will be affected.
OBAMA NEW DEAL’s first financial and fiscal proposals, will be approved by the US legislative powers in Spring 2009.
As for its international components, they must and  will include, among others:
a) a reshape of Bretton Woods institutions, that will take a few years, charging them of new tasks in order to: regulate global finance (IMF), promote a coordination of Keynesian measures prioritising the poorest and the unhealthy  (WB), counteract- discourage  “beggar your neighbour” protectionism (WTO), and coordinate carbon policies (a 4th, new World Authority: the WCO, Word Climate Organisation, with effective powers). 
b) An immediate change from  G8 to G12: inclusion of Brazil, China, India and South Africa. G12 will immediately deal with the $ fall, that Fiat’s Chairman Marchionne has just defined (in an interview at Trento’s Economics Festival) a “criminal” competitive policy.
c) Global “Robin Hood” policies, making pay the Subcrime crisis to Subcriminals. We are very happy that our 

slogan, has been independently adopted by an Italian minister we usually don’t agree much with (although he recommends Marx and Gramsci!): Mr Tremonti, applying a Robin Hood Tax to Oil Companies. Actually, in this CC blog, we had copy-left, not copy-rights on Robin Hood policies !!!  
June 5 update: listened at Focus Economia (radio 24);  it seems that Tremonti oil tax will target windfall profits along the chain, and create a fund to support the hit categories: a True Robin.