Bailout Deal or No Deal?
By Mark Rice-Oxley | 09.26.08
Deal or no deal?
As a game show, it’s a winner. The sight of contestants guessing which briefcase (or box) has the six-figure sum has grabbed audiences on both sides of the pond. As a way of saving the US financial system, it’s proving just as compelling to watch George Bush and Henry Paulson line up the boxes and see if they can find the one with $700 billion underneath.
So far, so bad.
Last night’s failure to settle on a box, coupled with another big bank failure (Washington Mutual), sent stock markets here in Europe and in Asia reeling again Friday as investors fretted about Mr. Bush’s prospects for getting a deal.
“If a deal hasn’t been signed and sealed over the weekend, expect massive market turmoil. Monday will be a bloodbath,” said Martin Slaney, head of derivatives at GFT Global Markets in a note widely borrowed by mainstream media.
The Times (of London) said the White House talks had descended into “a verbal brawl.” Its website exhorts: Watch our video! But alas, there’s no footage of Henry Paulson sinking down on one knee to persuade Democrats not to take their boxes away.
Now that would be worth paying a few bucks to see.
Joining the game of Beat the Banker today in Washington is our very own Prime Minister Gordon Brown. He’ll need to tread carefully when he meets Bush. Britain’s financial system is squealing (more emergency cash was squirted at the money markets by the Bank of England this morning) and could use a swift US bailout for reassurance.
But Mr. Brown also knows this form of state intervention is controversial. Vermont Sen. Bernie Sanders (a left-leaning independent) summed it up in an op-ed piece for the Guardian’s “Comment is Free” site when he said:
“This proposal as presented is an unacceptable attempt to force the middle-income families of the United States to pick up the cost of fixing the horrendous economic mess that is the product of the Bush administration’s deregulatory fever and Wall Street’s insatiable greed.”
But is this fair? Aren’t these the same families who splurged on credit during the good times?
David Maund, an insolvency expert at Alvarez & Marsal, a consulting firm, knows a thing or two about what happens when the numbers don’t add up any more. He summed up the countervailing view – that it’s not just the bankers to blame and that ordinary folks have got to take the hit, too.
“Ordinary people gorged themselves on debt in recent years, over-extending themselves to fund lifestyles that weren’t sustainable,” he told me.
“It’s hardly surprising that it’s all come crashing down around their ears. If people had invested [sensibly] in property or shares over the last 5 years, instead of buying a load of consumable rubbish they didn’t need, then they probably would have done very nicely, and would be hurting a lot less now.”
Deal or no deal?
Or may be we should ask: Can Bush assemble a coalition of the shilling?
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US bailout: A superpower in decline?
By Mark Rice-Oxley | 09.25.08
Will America lose its status as the world’s financial superpower?
There’s obviously a lot resting on President Bush’s Thursday afternoon meeting with congressional leaders – including Barack Obama and John McCain – to hammer out the bank rescue deal. Markets tiptoed through the day here like a heroine in a horror film waiting for the ax to fall.
But those perfidious Europeans are daring to suggest that whatever and whenever the deal, it’s all over for the American financial superpower, which has dominated the global economic landscape for 50 years, if not more.
“The world will never be as it was before the crisis,” German Finance Minister Peer Steinbrueck ventured today. “The United States will lose its superpower status in the world financial system. The world financial system will become more multipolar.”
All of which would be great for Europe. If only it wasn’t so dependent on the US export market. And if only the London, Paris, and Frankfurt stock markets didn’t follow Wall Street’s every move.
Meanwhile, Europe is pooh-poohing suggestions of needing a bailout of its own.
Joaquin Almunia, the European Commissioner for Economic and Monetary Policy in Brussels, is convinced the situation this side of the pond is very different, according to several newswires and the BBC.
“The situation we face here in Europe is less acute, and member states do not at this point consider that a US-style plan is needed,” he said.
French banks are particularly sanguine, the big two insisting Thursday that they are sitting pretty.
“We see a lot of opportunities,” said Société Générale’s deputy chief executive Severin Cabannes. “We’re taking opportunities on the market.” Perhaps an unfortunate choice of words from the bank that took a 5 billion euro hit from a rogue trader last year.
Rich men, camels, and eyes of needles
It’s not the job of this blog to pass judgment on those who sold dodgy derivatives or drove banks to the wall last week. We’ll leave that to men of the cloth.
At the Church of England, they’re not pleased. Writing in the Spectator, the Archbishop of Canterbury, Rowan Williams, said it was time to make financiers play by the same rules as the rest of us.
“It is no use pretending that the financial world can maintain indefinitely the degree of exemption from scrutiny and regulation that it has got used to,” Dr. Williams wrote.
The Archbishop of York John Sentamu was even more scathing, calling short-sellers “bank robbers.” “We find ourselves in a market system which seems to have taken its rules of trade from Alice in Wonderland,” he said.
That, one presumes, would make the proceedings on Capitol Hill the Mad Hatter’s Tea Party.
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Hong Kong billionaire follows Buffet
By Peter Ford | 09.25.08
Hong Kong’s richest man followed Warren Buffett’s example on Thursday, wading into troubled waters to pour on a little oil – and probably make a bit of profit at the same time.
Li Ka-shing is a flamboyant self-made billionaire with a reputation for funding good works. In what might be seen as an expression of his charitable nature, he let it be known on Thursday that he had made “a personal investment” in the crisis-struck Bank of East Asia.
That’s the bank which had been besieged by thousands of frightened customers on Wednesday in the region’s first major bank run since the world financial crisis broke last year.
The Bank of East Asia is the fifth largest bank in Hong Kong, Asia’s financial hub. It’s the kind of institution whose fate has major consequences for everyone else in the system. So when panicked depositors lined up to withdraw their money and the bank’s stock plunged by seven percent in a day, that made people nervous.
Li Ka-shing’s very public vote of confidence, buying shares in the bank on Thursday morning, shored things up. The stock price rose more than three percent. Hong Kong financiers breathed more easily, and Mr. Li made a tidy little sum in a few hours of public spirited investing.
Around Hong Kong, Li’s known as “Superman” for his golden touch. He is the 11th wealthiest man on the planet, according to Forbes magazine.
This investment echoes Mr. Buffett’s purchase of $5 billion worth of Goldman Sachs on Wednesday. That move reassured many observers, from Main Street to Wall Street, who thought that if a man with Buffet’s investment acumen is buying, perhaps there’s a light at the end of this tunnel.
But you can bet that Buffett has done his sums. He would hardly have coughed up $5 billion if he didn’t think he would reap a handsome profit when the dust has settled.
Messrs. Li Ka-shing and Buffett did not get to be among the richest men in the world without learning that altruism can pay dividends.
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Can Warren Buffett’s $5 billion investment turn the tide?
By Mark Rice-Oxley | 09.24.08
Can Warren Buffett’s $5 billion investment turn the tide?
Or at the very least, help my pocketbook.
The value of this blog – at least what I get paid for it – has plummeted more than 6 percent in the last week.
If you’re sitting in London, the plummeting dollar versus the British pound (and almost every other currency) is a pretty good barometer of global uncertainty over what lies ahead.
The reason, as the always-brilliant commentator Nils Pratley makes clear, is that no one knows just how Treasury Secretary Henry Paulson’s plan will pan out. In particular, how will those toxic assets contaminating banks’ balance sheets be valued?
Fifty cents on the dollar? Twenty cents? Two cents?
“If prices are set low, banks will be pushed into fresh write-downs and again find themselves looking for new
capital,” Mr. Pratley writes in the Guardian. “If they are set high … the dollar could come under pressure.”
That will hit us exporters in the U.S. hard. We were just getting used to a nice uplift in the greenback after a steady six-year descent when suddenly this happened.
The impact was clear in Wednesday’s markets: oil moved above $108 per barrel (oil is a hedge against the falling dollar), stocks weakened with dollar exposure, and the Rice-Oxley household saw a return to rationing at their breakfast table this morning.
Shall we blame the Other Paulson?
Short sellers took over from teens in hoodies as the nation’s public enemy No. 1. In Britain, there’s a grand witch hunt on for the villains who wreaked havoc in the markets last week.
The Financial Times identifies US hedge-fund manager John Paulson (no relation to Henry, we hope) as placing a cool billion pounds (give or take some spare change) bet against four of the five biggest British banks. He made billions, it says, predicting the subprime loan implosion.
According to the FT: “Paulson took pre-emptive action to defend the short positions from what is likely to be a barrage of criticism from politicians and the popular media, saying the firm ‘empathises’ with the tough position facing financial companies.”
Ah, so that’s all right then. It may be a while before Mr. Paulson can repeat the feat, however. Prime Minister Gordon Brown said Wednesday that after the current ban on shorting financial stocks expires in January, we should expect new rules for the game.
“It is right to stop the short-selling because it is a problem in a difficult economic situation that we have put a moratorium on for four months,” he told BBC Radio. “We will be reviewing it over the next four months and I think you’ll find new rules come in for the future.”
There was relief that not every billionaire is profiteering from the credit market mess. Or is he? Warren Buffett’s decision to take a $5 billion stake in Goldman Sachs was well received by traders and gave European markets a lift. What’s good enough for the Sage of Omaha is good enough for me, appeared to be the general sentiment.
Meanwhile, central banks are not the only entities pumping liquidity into the markets. Criminal gangs, presumably worried about the rapid contraction of the money supply and the effect this might have on national income, are doing their bit for queen and country. The BBC reports that a surge of counterfeiting has doubled the number of fake one-pound coins in circulation.
At the rate this is going, we might need every last one of them.
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Five lessons from Paulson, Bernanke hearings
By Peter Grier | 09.23.08
Here are some of the things we learned at the Senate Banking Committee’s big hearing Tuesday on the Bush administration’s proposed bailout of the US finance system:
1. Treasury Secretary Henry Paulson is fine with oversight after all. The three-page outline of proposed actions the White House sent Congress last weekend contained nothing of the sort. But that does not mean he wants to act as the unfettered bailout czar of America, Secretary Paulson hastened to tell senators. He had just thought it would be “presumptuous” to tell Congress how to do its oversight job.
“We need oversight . . . we need transparency. I want it, we all want it,” said Paulson.
2. Congress wants to ding some Wall Street executives, as an inspiration to the others. Paulson and Federal Reserve Chairman Ben Bernanke said they shared lawmakers’ outrage, but that punitive actions against Masters of the Universe might discourage them from joining the rescue program. Committee chairman Sen. Christopher Dodd (D) of Connecticut responded that that was just tough.
“Almost any plan we talk about is going to deal with executive compensation,” he said. “Count on it.”
3. The administration wants all its bailout money up front. At one point, Sen. Charles Schumer (D) of New York suggested that maybe it would be prudent for Congress to approve authority for bailout money in batches. Would Paulson be OK with just, say, $150 billion to start?
No, he would not. That would be a “grave mistake,” said the Treasury secretary. The markets might interpret a constrained bailout as no bailout at all.
4. Taxpayers may get a return of some sort on their $700 billion. The bailout fund will be used to buy distressed assets that are now trading at fire sale prices, said Bernanke and Paulson. In the end, the plan is to hold them and, once prices stabilize, sell them back into the private market.
“There’s going to be a substantial amount of recovery. Whether it’s the full amount is hard to know,” said Bernanke.
5. Nobody appears to know exactly how this is going to work. In particular, there’s as yet no specific plan about how to find the price the government should pay for assets that at the current moment no one else will touch.
If the US pays too little, the selling institution won’t get the support it needs, pointed out Sen. Robert Bennett (R) of Utah at one point. If it pays too much, there will not be any upside for taxpayers when the government itself finally sells them off.
“You have defined the problem,” said Paulson. “We believe we are going to get the right group of experts and come up with a solution.”
Any experts out there got their own solution?
