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Economic Meltdown Update
ECONOMIC MELTDOWN UPDATE....Here in the U.S., we've now seen the collapse of Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, and Lehman Brothers, as well as the more-or-less-collapse of Countrywide and Merrill Lynch. In addition, AIG and WaMu are teetering, and perhaps Morgan Stanley and Goldman Sachs too. Current conventional wisdom, speaking in that scarily even tone that airplane pilots assume when both their engines have flamed out, suggests that the U.S. financial system might melt down completely this week. Conversely, the cheery optimists think it might avoid it — for the next few days anyway. I'd guess the optimists are right, but it's not as if I'd be willing to put any money behind that bet.
But here's a question for one of the serious econ-bloggers out there: Have lots of big non-U.S. banks collapsed? There was Northern Rock, but anyone else? Are any European financial systems in danger of meltdown? Why not?
Don't the answer, but would bet not many. beside Northern Rock. You see, most of the world has not had 28 years of the Laffer curve, deregulation, lower taxes to the top strata mantra of the Republican party. Maybe, just maybe, the Republican economic policy since Reagan just doesn't work!!!!
Regulation is needed. Paying the top dog in stock does not align them with shareholders, it just makes them greedy. Has even a country rewarded failure so well?
This is awesome news for McCain.
Obama will be tarred by association with all the black men who run our financial system. Or something.
I think UBS is not in real good shape. Here: http://www.businessweek.com/magazine/content/08_09/b4073030425608.htm?ca...
Northern Rock was a totally different animal. Unlike the business model of most savings and loans (here and in the UK, too) which typically fund upwards of 60% of their mortgage loans using savings deposits, North Rock funded its 10-20-30 year loans largely by borrowing short term in the wholesale markets. This business model is highly dependent on easy and cheap access to smoothly functioning financial markets. The model also exacerbates problems of maturity mismatch and increases risk of a classic run if depositors lose confidence in the bank.
To slightly oversimplify, once funds became scarcer in the wholesale markets Northern Rock had difficulty in funding mortgages and loans going forward while also experiencing difficulty paying its own short terms loan coming due and which it had expected to fund with new borrowing. Also, it appears that some loans (but actually not a particularly significant part of its total portfolio) were very risky, sometimes involving very small or no down payment and Northern Rock funded as much as 120% of the home's value. Their problem wasn't really the quality of its portfolio so much as the failure of its unique business model. I would say the Rock probably qualifies more a "collateral damage" than as a perpetrator.
The problem for the other banks on your list is a combination of massive irresponsibility in overgearing and in creating a system where it is now difficult to correctly value assets----which in turn shuts down trading and lending, which in turns shuts down business activity that depends on access to capital.
That, plus the point which Tigershark makes about "deregulation" and excessive compensation for CEO's and execs, which in turn, leads to excessive risk taking.
Kaus,
Quite snarky but not as sharp as you think since Stan O'Neal, the guy who steered Merrill Lynch onto the rocks and then left with $160 "bonus", was the first African American to head a major Wall Street brokerage firm.
I'm sort of teetering on collapse at the moment too. I suspect in the near future, I'll be announcing a deal with the Federal Government as well. (I think you guys should know as I don't want to rattle my investors.)
Who would have guessed that borrowing more than you can pay back publicly and privately would lead to trouble eventually?
Hmmm...I wonder if it has anything to do with the fact that European CEOs make far less than their American counterparts, and thus are less qualified?
Oh wait...
Some German banks have nearly collapsed, yes, but I don't think there's too much risk of meltdown here yet (though I can't speak with any kind of authority on that). Two big cases stand out, both related to the subprime mess. First, the IKB German Industry bank, which was rescued by the quasi-public KfW bank (basically a GSE, I guess). Recently they sold most of their holdings to Lone Star. The second bank to nearly go under was the quasi-public (again, a GSE) Landesbank of Saxony (think Dresden), which was rescued by the Landesbank of Baden-Württemberg (think Stuttgart, i.e. Mercedes-Benz). Neither of these is on the scale of Lehman Brothers (I guess), but it certainly caused mayhem in the financial world here, judging from the amount of coverage in the normal press.
You might as well go ahead and put money on that bet.
If you're wrong, it won't be worth much, anyhow.
Public shaming and real custodial sentences go a long way to reduce corporate malfeasance. Seriously, why does a Phil Graham even allowed the gall to appear publicly?
Aw c'mon, Kevin!! Didn't Dick Cheney say that 'Reagan proved that deficits don't matter'? Hasn't Donald Luskin explained that what's really happening is that BearStear stock and Lehman stock has simply gotten to be wonderful bargains? And here you are with your elitist class warfare bs!! Shame on you. Drink the KoolAid. It will clear things right up.
Unfortunately, Jerry, you're not "too big too fail."
Offtopic, but I am hopeful someone can explain to me about earmarks.
Within this article in the LA Times, says Sarah Biden asked for $198M for Alaska,
McCain wrong on Palin earmarks
But that Joe Biden asked for $342M for Delaware.
Was there a difference in how they were asked for, or who they went to? Are we upset with the earmarks, or are we not upset with the earmarks and just upset that McCain has claimed she didn't make any?
Kevin, The most notable was IndyMac. Then there was Silver State Bank (McCain's son on the board)
Here's a more comprehensive list:
Bank Name Closing Date Updated Date
Silver State Bank, Henderson, NV
En Español September 5, 2008 September 5, 2008
Integrity Bank, Alpharetta, GA August 29, 2008 August 29, 2008
The Columbian Bank and Trust, Topeka, KS August 22, 2008 August 22, 2008
First Priority Bank, Bradenton, FL August 1, 2008 August 1, 2008
First Heritage Bank, NA, Newport Beach, CA July 25, 2008 July 25, 2008
First National Bank of Nevada, Reno, NV July 25, 2008 July 25, 2008
IndyMac Bank, Pasadena, CA July 11, 2008 July 11, 2008
First Integrity Bank, NA, Staples, MN May 30, 2008 July 25, 2008
ANB Financial, NA, Bentonville, AR May 9, 2008 July 25, 2008
Hume Bank, Hume, MO March 7, 2008 July 25, 2008
Douglass National Bank, Kansas City, MO January 25, 2008 July 25, 2008
Miami Valley Bank, Lakeview, OH October 4, 2007 July 25, 2008
NetBank, Alpharetta, GA September 28, 2007 July 25, 2008
Metropolitan Savings Bank, Pittsburgh, PA February 2, 2007 July 25, 2008
Bank of Ephraim, Ephraim, UT June 25, 2004 April 9, 2008
Reliance Bank, White Plains, NY March 19, 2004 April 9, 2008
Guaranty National Bank of Tallahassee, Tallahassee, FL March 12, 2004 July 25, 2008
Dollar Savings Bank, Newark, NJ February 14, 2004 April 9, 2008
Pulaski Savings Bank, Philadelphia, PA November 14, 2003 July 22, 2005
The First National Bank of Blanchardville,
Blanchardville, WI May 9, 2003 July 25, 2008
Southern Pacific Bank, Torrance, CA February 7, 2003 July 25, 2008
The Farmers Bank of Cheneyville, Cheneyville, LA December 17, 2002 October 20, 2004
The Bank of Alamo, Alamo, TN November 8, 2002 March 18, 2005
AmTrade International Bank of Georgia, Atlanta, GA
En Español September 30, 2002 September 11, 2006
Universal Federal Savings Bank, Chicago, IL June 27, 2002 April 9, 2008
Connecticut Bank of Commerce, Stamford, CT June 26, 2002 July 25, 2008
New Century Bank, Shelby Township, MI March 28, 2002 March 18, 2005
Net 1st National Bank, Boca Raton, FL March 1, 2002 April 9, 2008
NextBank, N.A., Phoenix, AZ February 7, 2002 July 25, 2008
Oakwood Deposit Bank Company, Oakwood, OH February 1, 2002 July 25, 2008
Bank of Sierra Blanca, Sierra Blanca, TX January 18, 2002 November 6, 2003
Hamilton Bank, N.A., Miami, FL
En Español January 11, 2002 July 25, 2008
Sinclair National Bank, Gravette, AR September 7, 2001 February 10, 2004
Superior Bank, FSB, Hinsdale, IL July 27, 2001 July 25, 2008
The Malta National Bank, Malta, OH May 3, 2001 November 18, 2002
First Alliance Bank & Trust Company, Manchester, NH February 2, 2001 February 18, 2003
National State Bank of Metropolis, Metropolis, IL December 14, 2000 March 17, 2005
Bank of Honolulu, Honolulu, HI October 13, 2000 March 17, 2005
IKB was the first institution to go down anywhere in the world.
Northern Rock was the second. The issue there was (to shade our colleague's comment) securitization. Other British mortgage institutions have large depositor bases, but NR relied on being able to securitize the mortgages it had just lent. When that market shut down, so did NR.
Dresdner did not 'go bust' but has been sold to Commerzbank rather than to an Asian buyer. However its problem is not specifically to do with the credit crunch.
The Spanish banking system is looking shakey. They had tight regulation (no off balance sheet mortgage securitisation a la Northern Rock) but the collapse of the Spanish commercial and residential property market is spectacular: 50% falls. I don't know the names, but certainly the stresses are there.
One Spanish developer was just refinanced to the tune of $7bn.
Keep an eye on Hungary and Turkey.
This is Stunning to the naive. Those of us who had a basic concept of greed and the ridiculous and repetitive cyclical policies of the Federal Reserve Bank in its attempt to control naturally occurring financial cycles - and then to have the audacity to claim they were in fact under control in the late 1990's knew long ago that this day would come. Instead of a responsible system which fostered and pushed savings over consumption, we were force-fed a glorious pre-packaged marketing campaign where consumption was king. That by consuming like mad-men, we were actually creating wealth. The idea that this mystical and undefined thing known as "GDP growth" trumped all - and was an intentionally pre-defined symbol of "good". Although you won't read it in any of the mainstream "business as usual" press, this is the dagger to the heart of Keynesian Economics. The good news to come from all the mayhem which will surely follow? There will certainly be a push towards more responsible thinking in the economic field. The current system has broken down, as its primary purpose was to serve but the wealthiest of the wealthy while leaving the majority of us behind as their servants. The world must return to responsible fiscal management thru the use of gold and silver standards - and not just rely on the power of the printing press to temporarily eek its way out of fiscal crisis until the final blow - which we're seeing here.
See? problem solved. Oh, and I work on a consulting basis, so if you're listening, Bernanke - here's my card. Drop me a line. We'll do coffee. And I promise not to laugh in your face.
The last comment is good. There is weakness in the French banking market, but they seem to be capitalised for the time being. Swiss were smart and got chunks of Sov. Fund money.
We might guess as Spanish banking failures, la Caixa, given the Spanish lenders are heavily exposed to their real estate market, and it's in an utter melt down.
Much of the US chaos stems from that fine "risk diversifying" set of financial rube goldberg machines, low quality securitisation "credit enhanced" up. The US is dead center. I would guess that the removal of your wall between I Bank and Comm Bank to create Universal Banks, but without the concomitant oversight of the unified institution and risk was part of the problem.
Europe has had the Uni bank system for ages, its reg system is more adapted to that in ways. The US system seems to have merely wished away risk.
My dear little anon,
Was there a difference in how they were asked for, or who they went to? Are we upset with the earmarks, or are we not upset with the earmarks and just upset that McCain has claimed she didn't make any?
Earmarks are just one of the many ways to funnel money to constituents. They are only an issue here because the (spit) Barracuda and her handlers chose to make a big heroic stink (I'm sure you'll pardon the allusion) about shifting a few million dollars in Continental taxpayer revenue from Alaska's "earmarked" pork bin to Alaska's "general funds" pork bin and called it "refowrm". If I was a proper Alaskan supporter of secession, I would be downright pissed at her for bragging this up on the national stage. Typical Sarah. Typical selfish lack of patriotic discretion.
Apart from which, if you want to compare like with like, go fetch the numbers for Ted Stevens and plug those into your textbox.
Now go stuff a book between your ears and stop being tiresome, the grownups are talking.
angry citizen,
The world must return to responsible fiscal management thru the use of gold and silver standards.
Oh, dear. You had me going there for a little while.
... The US system seems to have merely wished away risk.
Any suggested readings in this line?
Re: the pilot on the plane PA:
On a translatlantic night flight in one of those old 4 engine propellor aircraft....
An engine catches fire and everyone watches nervously out the window as the crew does what they can and, finally, the fire goes out, the prop is feathered and engine is out.
Pilot on PA: Not to worry, we have things under control, we'll just be 45 minutes late getting to Heathrow.
An hour later, another engine catches fire, same drill.
Pilot on PA: Not to worry, etc. we'll just about two hours late getting to Heathrow.
One passenger turns to another, says:
I hope we don't lose the last 2 engines, we could be up here forever.
The European Central Bank is in charge of the money supply and short-term interest rates in the eurozone, but not prudential regulation. Since the ECB has done pretty well on its side, and the national central banks less well on theirs, expect a successful ECB bid for more regulatory power.
50% is a gross exaggeration of the decline in Spanish property prices. I live in Spain and it looks more like 25% - so far.
One difference between Europe and the USA may be that foreclosure and bankruptcy laws are more favourable to creditors over here. Mailing the keys back to the bank isn't an option. Mortgage borrowers have to keep paying even if their equity is negative, as in Thatcher's mini house price slump of the 1980s. Unless they declare personal bankruptcy and lose all their assets and credit rating.
The problems at European banks have largely come about as a result of an exposure to US mortgage assetts, or in the case of Northern Rock, their business model relying on cheap access to wholesale funds which was cut off by the liquidity/credit crunch.
The European mortgage market it regulated (by the FSA here in the UK), so we have not experienced remotely the same degree of irresponsible and fraudulent mortgage lending, and hence have not had the same meltdown of repossessions/foreclosures and plummetting house prices.
For the above reasons, obviously most European banks are relatively insulated from the kind of meltdowns happening with some US banks which are obviously more heavily exposed to US mortgage assetts, and the complex financial products created on the back of them.
Spanish banks ae in serious trouble, as are UK banks. In fact, the Guardian is predicting meltdown for the British economy here: http://www.guardian.co.uk/business/2008/sep/14/economics.redundancy
Since we are transferring all of our wealth to the Middle East, they are doing just fine, those Muslims who hate us so much. At moments like these, aren't you glad that a brilliant, insightful, articulate man like George W. Bush is in charge of the U.S. economy? I sleep so much more peacefully at night, knowing that - and that a 72 year old cancer-riddled, old man who can't operate a computer is waiting in the wings. What a great country this is!
Brazil's economy grew by 6.1% in the last quarter and Bradesco, one of the larger banks there is doing fine.
The U.S. electorate appears ready (maybe, possibly, just might) to install a McCain-Palin ticket that would rival the Bush regime in mendacity, ineptitude, warmongering and criminality. This would be the capstone to the previous eight years of preemptive war, torture and flouting of too many international laws and treaties to count. If this financial meltdown occurs and wipes out much of the wealth and savings of the citizenry and business class responsible for these electoral choices could a more deserving lot of losers be found?
It's a combination of two things, actually 3 things:
1. Leverage
2. Toxic ABS
3. Leverage
I don't know about European based I-banks, but the ones in the US are leveraged at ridiculous levels and they rely on so much volatile, short term capital (i.e repos) that it doesn't take much to push them over the edge.
I work in the banking world and it's a huge racket. Whether it's 5% on an equity offering, or an M&A deal, or massive executive comp, Wall Street gets paid very well because that's just the way it works - and the financial leverage just works to provide justification.
When you need to leverage your equity 25:1 to get a 20% ROE, there's something fundamentally wrong with your business model. But CEO's of sinlge digit ROE companies don't get paid $30 million a year, and that's what they would be if they were capitalized at more sustainable levels.
"I sleep so much more peacefully at night, knowing that - and that a 72 year old cancer-riddled, old man who can't operate a computer is waiting in the wings. What a great country this is!"
Take heart. Sister Sarah is our ace in the hole.
The short answer is that U.S. investment banks were far more heavily exposed to U.S. mortgage-backed securities than non-American firms. There have been a couple of small German landesbanks that have gone under, and UBS is a deep trouble.
The real fear now is that banks that don't particularly have exposure to mortgage-backed derivatives will go down because they're tethered to the U.S. financial system via other sorts of instruments -- credit default swaps, most notably. The whole financial system is like a bunch of climbers hitched together on a cliff, and right now the whole side of the mountain seems to be shearing off. The Fed's response is to try to hitch the falling climbers to other stronger ones, but it's not clear that this isn't just going to bring those institutions down too. No one's been through anything like this before, and so no one really knows how it's going to play out.
On the political implications, it's got to be good for Obama, it seems to me, since it will take the electorate back to thinking about real issues, and not lipstick, moose, and other similar nonsense.
If this financial meltdown occurs and wipes out much of the wealth and savings of the citizenry and business class responsible for these electoral choices could a more deserving lot of losers be found?
But, but , but...
she's a white woman in fuck-me pumps and he's an uppity black man!
I'd guess the optimists are right, but it's not as if I'd be willing to put any money behind that bet.
Why not? If they're wrong you'd be broke either way.
Angry Citizen has it right. Banking interests have spent the last 25 years chipping away at regulations put in place after the Great Depression that were meant to avoid this very thing ever happening again. These guys have bought out any Dem or Rep that got within breathing room of the banking committees - it was a bipartisan effort based on greed. Better that the entire thing implodes and we rebuild the way we did after the Depression. Maybe this time we'll go all the way and abolish the Fed as well.
I'm sure the answer is to privatize Social Security.
Joe
Don't kid yourself-- there is masses of fraud in UK house lending (example: buy to let loans which are reported as owner-occupied properties, another example: the 'discount' offered by developers being included in the Loan to Value ratio (in the loan). See also the self-certificated market.
There will be similar messes in the commercial RE market. Walk round the City and tell me you don't see a brewing apocalypse.
It's a happy notion that we won't be as badly off as the US but I don't think we can assert that yet.
I remember Kevin saying that Obama needs to sell the public on a few core liberal ideas. I think this statement on the current crisis does exactly that.
"The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.
"I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years -- one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It's a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.
"Well now, instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.... This country can't afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market – rules that would protect American investors and consumers."
I think it all depends on the particular laws and regulations governing various kinds of financial institutions in different nations - particular what gets counted as capital assets and how much leverage you're allowed on those assets.
The meltdowns of US companies arise from a) counting various mortgage-based CDOs as safe capital assets, when they turned out to be greatly at risk to a widespread housing market crash, and b) allowing investment banks to borrow up the wazoo against those flaky assets.
In countries with tighter regulation, there's no reason to expect the same kind of problems - though there may be knock-on effects from the chaos in the US market.
A fundamental difference---in Europe there are a whole group of finacial people who carry the weight of history and realize how badly it could all go. In the US, the sky's the limit, we always win, go for broke, push it to the max, there is no limit to growth.
The more "innovation", the more danger.
There's really no reason to panic. There will be bumpy times ahead, but there won't be a great crash or any earth-shattering kaboom.
What will be somewhat disturbing is when we wake up one morning to find that the US is owned by Abu Dhabi and the U.A.E., and that as such our once proud country is subject to the articles of Sharia law that deal with debt-slaves.
Kevin,
You wrote: "it's not as if I'd be willing to put any money behind that bet."
If you have an IRA, retirement account, or insurance from a private insurance company you already have put money on that bet.
Angry,
The consumerism you complain of was a rational response to the way Greenspan twice lowered interest rates to levels so low that it didn't pay to save money (once in the 90's after the SE Asia mess and again to reelect Bush in 2004.)
With interest rates on savings at levels approaching those of inflation, what's the value of saving? Better to borrow money and buy something real that if you saved for it would cost more when you bought it anyway. And if you bought a home, the value would go up a lot faster than any savings account and a lot more reliably than a mutual fund.
Plus, you pay taxes on interest, even if the interest is just covering inflation. You don't pay taxes on the increased value of your home.
Greenspan destroyed the value of secure, fixed interest payments as an incentive to save by his political manipulations of the interest rates. Consumerism was just a rational reaction by consumers who had no other way to reliably build personal wealth. Taking advantage of that need for consumerism is simply what banking and business predators do, like scorpions sting.
Fannie Mae & Freddie Mac didn't "collapse"; they were "siezed". Not too many people noticed that the Treasury didn't put one thin dime into them.
Dan, But had Fannie & Freddie not been seized by the government they would have defaulted. Considering their exposure to sub-prime loans ($5T), both by owning them and securitizing them, the government will be spending trillions of 'thin dimes' bailing the GSEs out, our thin dimes.
It's not like we have anything to worry about. John McCain will get us out of this mess...right after his nappy time.
John McCain isn't the person we need to be President in 2009.