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Posts Tagged ‘financial crisis’

Here is an article from Wall Street Journal worth reading.

“President Barack Obama took office promising to lead from the center and solve big problems. He has exerted enormous political energy attempting to reform the nation’s health-care system. But the biggest economic problem facing the nation is not health care. It’s the deficit. Recently, the White House signaled that it will get serious about reducing the deficit next year—after it locks into place massive new health-care entitlements. This is a recipe for disaster, as it will create a new appetite for increased spending and yet another powerful interest group to oppose deficit-reduction measures.

Our fiscal situation has deteriorated rapidly in just the past few years. The federal government ran a 2009 deficit of $1.4 trillion—the highest since World War II—as spending reached nearly 25% of GDP and total revenues fell below 15% of GDP. Shortfalls like these have not been seen in more than 50 years.

Going forward, there is no relief in sight, as spending far outpaces revenues and the federal budget is projected to be in enormous deficit every year. Our national debt is projected to stand at $17.1 trillion 10 years from now, or over $50,000 per American. By 2019, according to the Congressional Budget Office’s (CBO) analysis of the president’s budget, the budget deficit will still be roughly $1 trillion, even though the economic situation will have improved and revenues will be above historical norms.

The planned deficits will have destructive consequences for both fairness and economic growth. They will force upon our children and grandchildren the bill for our overconsumption. Federal deficits will crowd out domestic investment in physical capital, human capital, and technologies that increase potential GDP and the standard of living. Financing deficits could crowd out exports and harm our international competitiveness, as we can already see happening with the large borrowing we are doing from competitors like China.”

Read the full article here.

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Here is a excellent analysis from Willem Buiter´s blog at FT.com.

“The too big to fail problem has been central to the degeneration and corruption of the financial system in the north Atlantic region over the past two decades. The ‘too large to fail’ category is sometimes extended to become the ‘too big to fail’, ‘too interconnected to fail’, ‘too complex to fail’ and ‘too international’ to fail problem, but the real issue is size.  The real issue is size.  Even if a financial business is highly interconnected, that is, if its total exposure to the rest of the world and the exposure of the rest of the world to the financial entity are complex and far-reaching, it can still be allowed to fail if the total amounts involved are small.  A complex but small business is no threat to systemic stability; neither is a highly international but small business.  Size is the core of the problem; the other dimensions (interconnectedness, complexity and international linkages) only matter (and indeed worsen the instability problem) if the institution in question is big.  So how do we prevent banks and other financial businesses from becoming too large to fail?”

Mr Buiter suggests a series of meassures in his article, to read the analogy, please see link below.

  • Become too big to save
  • Restore narrow banking or public utility banking
  • Create mono-product central counterparties and providers of custodial services, central wholesale and securities payment, clearing and settlement platforms
  • Keep a lid on the size of investment banks
  • Tax bank size
  • Use competition policy
  • Restrict limited liability to prevent excessive risk taking and reduce the size of banks
  • Create effective special resolution mechanisms for all systemically important financial institutions

He concludes:

“In banking and most highly leveraged finance, size is a social bad.  Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.

  • Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
  • Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
  • Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
  • Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
  • Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
  • Only permit limited liability for narrow banks/public utility banks.
  • Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem.  That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

In the UK, the otherwise enlightened head of the FSA, Adair Turner, does not see a problem with banks of huge size and with a staggering range of unrelated or conflicted activities.  Of all the parties that matter, only the Governor of the Bank of England, Mervyn King, is clear that ‘too big to fail’ is at the heart of the financial crisis we are trying to exit and will be at the heart of the next financial crisis that we are preparing so assiduously.

The Chancellor of the Exchequer, Alistair Darling takes the cake in the bigger is better stakes.  He appointed “Win” Bischoff, the former chairman of Citigroup (appointed interim CEO for Citigroup in December 2007 after Chuck Prince bit the dust), to co-chair the writing of a report on UK international financial services – the future, published on May 7, 2009.  That’s rather like asking the Ayatollah Ali Khamenei to write a report on who won the Iranian presidential election.  It really is the most ridiculous appointment since Caligula appointed his favourite horse a consul.  You will not be surprised to hear that the report does not consider the size of UK banks to be excessive.

International cooperation is necessary if we are to solve the too big to fail problem.  I am not holding my breath.”

To read the full article, click here.

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Here is a good excerpt for Mercury News.

“One of the world’s pre-eminent venture capitalists, Michael Moritz of Sequoia Capital, has picked winners like Flextronics, Cisco Systems, Yahoo, PayPal and Google by focusing on small teams or individuals that on first glance might appear to be unfundable. In a rare interview, Moritz spoke with the Mercury News about one of his latest long-shots, a call-center company founded in India, how he picks companies to back, and the silver lining in the financial meltdown. Following is an edited transcript.

Q How has the financial crisis reshaped the economy and affected the way you pick winners?

A I think tougher circumstances just serve to shine a brighter light on everything. The manner in which we pursue the business hasn’t changed.

Q Has it affected the way you view your portfolio companies?

A I think the managements of companies all across America understand that the sooner they don’t have to rely on the kindness of strangers to support their operations, the better off they are going to be. Again, I don’t think that is a startling new insight. It’s just when money is harder to get and credit is tight and investors are less giddy, I think companies and managements become much more disciplined. It means the people who start companies in times like these are people who are genuinely interested in starting companies. You have to be very determined to venture out into atmospheric circumstances like the ones that we’ve been through in the past nine months. Which means that the pretenders and posers and people who are really much more interested, if they are honest about it, in becoming rich than starting a company — those sorts of people will stay on the sidelines and wait for the weather to improve.”

Read the full interview by Elise Ackerman at at SiliconValley.com here.

Others covering this story: Reddit, Trading markets, MATR.

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Here is a worrying story in regards to investments in the cleantech sector. As the bailout programs makes their way around unfit companies, cleantech investments have taken a dive.

One may think that boards and investors are looking to cash in on this crisis before orivate equity is put up. Here is  some quotes from a IBT article posted this week.

“Cleantech companies received less than half venture capital (VC) investments in the first quarter of 2009 than they did a year ago, but the industry looks forward for government funds for recovery, according to industry analysts.

During the period through March, venture capitalists invested in 24 clean energy deals raising $227 million, a decline of 63 percent in capital and 48 percent in terms of deals compared to the same period of 2008, according to an Ernst & Young LLP analysis.

“Despite the intense challenges of raising capital during the past four months, government initiatives and corporate commitments are points of light for cleantech companies,” said Joseph A. Muscat, Americas Director of Cleantech, Ernst & Young LLP.”

A quite possible reason for this might be the government plan of putting the TARP funds to use in this sector as well.

“Government funding from the U.S. stimulus package is expected to pour more than $100 billion dollars in direct spending, loan guarantees and incentives into cleantech in energy, water and environment, Ernst & Young noted.”

Read the full article here.

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We wrote about this topic yesterday, the bailout was just a bandaid – the real issue is the fundamentals. The recent stress tests uncovered some uncomfortable truths in regards of cash, GMAC among others might need bailout or face bankruptcy!

The ever so humble (not) Paul Krugman today wrote a good Op-Ed in NY Times. Here are some selected quotes explaining the situation very clearly.

“I won’t weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn’t have the resources to make a really careful assessment of the banks’ assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn’t.

But focusing on the process can distract from the larger picture. What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.”

He continues;

“After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.

But it’s important to see the strategy for what it is and to understand the risks.

Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they’re still at levels that would have been considered inconceivable before the crisis.

As a result, the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.

Can the economy recover even with weak banks? Maybe. Banks won’t be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.”

Read the full article here.

Others covering this article can be found here: Economists View, Brooks and Krugman, NewsTrust, One Penny Street, Relevant Science.

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