30.9.09

IMF Gets High With Its Friends

The IMF is in high spirits, for the first time cutting its estimates of the money lost in the financial crisis.

But in a blow to Britain, the IMF has restated its view that the banks and government face losses of £180 Billion or more from the near collapse of the financial system.

Back in April, on the eve of the G20 summit in London, the IMF said Britain faced losses of up to £200 Billion. Howls of protest from Downing Street forced the IMF to recant, cutting its forecast to £130 Billion in what The Times called a "huge embarrassment". The sheer cost of Britain's bailout remains stubbornly high.

IT'S A MONEY CIRCUS

The IMF says asset prices have gone up so the bad debts are smaller. For the first time since the crisis began (excluding its temporary backtrack on the UK), the IMF has cut its estimate of losses from the financial crisis, from $4 Trillion to $3.4 Trillion.

Huge sums of government bailout cash, up to $3 Trillion from the US government alone, have supported asset prices. That has led to a sharp rally in asset and share prices over the past six months.

News that the previously gloomy IMF is getting a little high with its friends is likely to boost the markets even further. It's a virtuous circle but the world's only going round because governments are printing huge amounts of cash. It's a money-go-round, a money circus.

Something’s not quite right.



It's not just about assets versust debts. It’s also about the worth of those assets to companies, individuals and the economy. And whether the price reflects that worth.

Until asset prices (office blocks, plant, equipment, goods, and the securities based on them) reflect their ability to produce value, the economy is not going to function effectively. Companies simply won’t be able to borrow against them.

The government bailouts have stopped that happening. With printed money, they are trying to hold asset prices as close as possible to where they were in the boom, instead of letting asset prices adjust to the future productive needs of the economy.

FRAUD, POWER AND INFLUENCE

The IMF admits this. While “systemic risks have been substantially reduced,” it says “credit, however, remains strained, while household and financial sector balance sheet pressures and ongoing market dysfunctions remain drags on the recovery.”

Why are governments and banks reluctant to unravel the tangled web of overpriced assets? Partly because they cannot. The banks and ratings agencies inflated the value of assets (said they were worth more than they truly were) but to do that they required very complex mathematical jumbles (that's what some securities are) and they simply cannot unravel them.

Partly, they dare not unravel them because to do so would reveal fraud. And some of the people involved, even unknowingly, with these frauds have power and influence.

LOSSES STILL TO COME 

Since mid-2007 banks have written off $1.3 Trillion. That’s the fall in the value of loans and other ‘assets’ based on sub-prime mortgages and other securities they created, lent and bought. The IMF says there’s another $1.5 to 2.1 Trillion still coming in “actual and potential writeoffs”.

Surely, if that had been written off, asset prices would not be where they are? Well, that’s where the bailout fraud comes in. Governments have bailed out banks with huge sums of taxpayer money without requiring the banks to come clean on how much money they lost and where they lost it.

UNPRICKED AND REFLATED

Former investment banks, or FIBS, like Goldman Sachs are claiming to have returned to profit without having to account for the tens of millions they lost with giant insurer AIG, because the US Federal Reserve paid off those losses.

Now if this isn’t the definition of a bubble, unpricked and reflated, I don’t know what is.

At some point the losses on unproductive assets, priced way above their value to the economy, and now largely owned by the taxpayer, will have to be accounted for.

You cannot hide that debt forever. The financial sector has succeeded in concealing the extent of its own losses – admitting to less than half - and blatantly refusing to acknowledge that the rest exist.

Governments, in providing the bailout cash while failing to ask questions, have aided and abetted in covering up the scale of the fraud.

It’s the beauty of off-balance-sheet financing. After all, if you don’t count what you lost, you didn’t lose anything, did you?

29.9.09

Opinion

Don't like uncomfortable ideas? Prefer to play “Let’s Agree”?

Or perhaps your loud opinions put a damper on the party and send guests scuttling for the exits?

This book could cure both ills.

Harry Stein’s “I Can’t Believe I’m Sitting Next to a Republican” is a lifestyle guide for those who outrage.

Yes, it’s published by Encounter Books, which was partly founded with CIA money. But that would put a self-styled "progressive" in good company with half the Third World’s English-speaking leaders, who went to schools financed by the CIA.



Years ago I found myself at an intense gathering of the British Trotskyite group Militant, a cocktail party without the cocktails. At the time Militant was trying to infiltrate, suborn and control the Labour Party. Later the same week friends invited me for drinks with the Monday Club, sort of a Conservative Militant group except they weren't Trots and they liked Champagne.

Friends, at opposite ends of the political spectrum? Quelle horreur! But then I've never been able to understand, much less stomach, political correctness.

Politics is a freakshow and there's as great a variety of political animals as there are beasts in the jungle. So why is mainstream political journalism so po-faced?

Perhaps, journalists should read this book too.

The interview:


It is not fun to be a social pariah. It's so much easier to keep your mouth shut and get along with everyone. So that's certainly a large part of it. But, too, in many professional realms -- academia, the arts, media, social work, mental health, to name a handful -- it is nothing short of dangerous to be openly conservative. I deal with this quite a bit in my book, citing heroic (or, perhaps, if this is one's view, fool hardy) souls who've been open about their politics and dealt with the consequences. I have enormous admiration for these people. As one guy in Hollywood, a line producer, put it to me when I asked him whether his views had hurt him professionally, he said he guessed that they had. But, he added, at the end of his life, "I honestly can't see myself saying 'Gee, if only I'd kept my mouth shut, I could've worked on Spiderman 7."

The book:
The fact is, in key ways, those of us living and working among such people often know them better than they know themselves. Unable as we are to avoid the media they take as gospel—NPR, the networks, The New York Times or its local equivalent—we’re on intimate terms with their most passionately held beliefs and convictions. We know who they admire and who they despise; we know in advance how they’ll react to every controversy, every utterance by a public figure; we anticipate, politically and public policy-wise, their sighs, their frowns, their ups, their downs.

But that's the point: The people he describes also know how their fellows will respond to a set of predefined views on a limited range of issues deemed, in that 60's phrase, "relevant".

This provides a ready supply of safe topics of conversation, much like the previous evening's television soap operas. Nobody says anything off-script in the game of Let's Agree.

They ape a set of stylized responses, masquerading as belief. Yet they reject belief on the pillar of relativism.

Far from radical or progressive they make the Victorians look like firebrands. More tea, vicar?


28.9.09

Lisbon: No Means No

The European Union this week forces itself upon a country that has already rejected its advances.

Just over a year ago the Irish rejected the Lisbon Treaty, which was itself a vaguely named rehash of the EU Constitution already rejected by the French and the Dutch.

At the end of this week, the Irish will be asked if no still means no.

A constitution is supposed to be the guarantee of citizens’ rights. The rights of the individual are supposed to balance the powers of the state.

NEW NAME, SAME GAME

If the Lisbon Treaty, which contains the essence of the European Constitution, strengthened individual rights that would be one thing.

However, it greatly increases the powers of a state, not the nation state in which you were born, but a new super state. And it provides no balancing increase in your individual rights.




The EU is expanding too fast... time for a pause

It has failed to deliver the individual freedoms that the EU claims are "fundmental". While it's broken down the barriers to (especially big) business, the EU has lied about its supposed benefit for individuals.

That's why talk of a constitution, renamed the Lisbon treaty, is a sham.

1) The Free Movement of Goods
Judged on what the EU has done since its origin, it exists to make life easier for big corporations.

Decades after the EU established freedom of movement for goods by companies, it still has not enshrined the same freedoms for individuals. The EU has been slow to consider the problem of double taxation which often affects hire-purchase cars or the house contents when people move jobs across borders.

2) A Single Market for Services
While multinational corporations, politicians and EU bureaucrats move freely around the EU, individuals often can’t pay into their pensions from a second country, or even open bank accounts in their native country while they are living abroad.

3) The Free Movement of Capital
Expat workers with bank accounts abroad are considered “offshore tax cheats” by EU governments. The EU thinks all countries should have the same tax rates because different rates distort the free movement of capital.

Irish EU Commissioner Charlie McCreevy has said the EU’s long term agenda is to “take control of taxation”. If Mr McCreevy is right, small countries will be forced to match the high tax rates of core European countries like France, Germany and Italy.

To really tax people hard, you have to stop them moving to where the tax is lower.

4) The Free Movement of Persons
Our great-grandparents had much greater freedom of movement than we have, hemmed in by visas, work permits, taxes and restrictions on moving our meager wealth and possessions. Again, the EU’s actions show that it aims to keep workers under the thumb, with their movements, banking arrangements and personal information regulated and monitored.

The EU’s idea of free movement is cheap migrant labour for companies.

For middle class professionals working abroad, the EU’s failure to harmonise financial services means individuals face a minefield of conflicting legislation. Strangely, this has been smoothed away for large corporations.

5) The Free Movement of Knowledge
The European Commission started talking about this fifth "freedom" in 2007. However, far from removing barriers to freedom of thought, the EU is creating new ones.

The EU is funding the development of mass surveillance techniques on a European scale, which Shami Chakrabarti, director of human rights group Liberty calls “positively chilling”.

MERCANTILIST

From the above you can see that the EU is not against regulation. It is against regulation that it doesn’t control. It is not for a free market, but very much the opposite: a regulated market in which Brussels will decide who are the winners.

TOO MUCH CREDIT

People mistakenly think Brussels created the Celtic Tiger. Brussels fosters this misconception.

Ireland’s rapid growth followed the deregulation of the late 1990s, as politicians saw the benefit of liberating business rather than harnessing it for their own ends.

Corporate tax rates were cut to 12.5%, very low by international standards, and income tax to a maximum of 41%. The service sector boomed, especially finance, because it became much easier to do business.

This was not the EU’s doing. In fact, the EU wants to harmonise taxes, which would forbid the low corporate tax rate that drove Ireland’s boom in the first place.

Just last week EU Commission President Jose Manuel Barroso flew to Limerick to offer €14 million in aid, after PC maker Dell closed its plant. Yet, Dell is getting €54 million in EU aid to shift the plant to Poland!

BARROSO MUST THINK WE'RE DUMB


Where you can thank the EU, is for the single currency. The single interest rate, set by the European Central Bank in Frankfurt, was too low for the red hot Irish economy.

Rates were set to levels which favored the sclerotic economies of France and Italy and southern Europe.

In Ireland, cheap loans went in search of a fast buck, driving the real estate bubble.

EU SHARES BLAME FOR BOOM

Even during the downturn, the EU continues to push for a standard minimum wage which would, if adopted, keep unemployment higher than it needs to be.

An economy needs flexibility, so that asset prices can adjust, falling to the level where asset prices reflect the value they produce. That needs a flexible exchange rate, flexible wages.

Europe and the United States were brought close to a second Great Depression by the failure of politicians, regulators and international institutions, the EU among them.

This is not the time to reward failure by giving even more power to those who brought us to this pass.

25.9.09

G20 To Fix The World

The G20 group of developed and emerging nations will become a permanent body to guide the global economy. Fine words from Pittsburgh but what do they mean?

The US and China are leading this round of talks. They’ve got most influence on the two key topics: the dollar (meaning bailout the US and trying to stop Americans living beyond their means) and climate change.

The European Union is largely ignored, with nothing new to say and Germany distracted by elections at home.

A BIT OF HISTORY

The G6 back in the late 1970s represented the leading currencies: The dollar, the yen and the mark.

Other countries, like France, the UK, Italy, Canada, and most recently, Russia, gave the group more relevance but only the financial crisis that began in 2007 challenged the authority of the core founders.

In Pittsburgh, the US effectively declared it won’t try to run the world on its own. So what’s the plan?

MORE MEETINGS

Washington welcomed the final communiqué: “The G20 leaders reached a historic agreement to put the G20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.”

In plain English, the G20 leaders promise not to be so blind to the financial bubble or whatever it was that messed up their re-election plans.

HOW VERY MBA!

Under the “global compact”, the leaders will set an agenda for the economy. Then, at meetings once or twice a year, leaders will give peer reviews in which they assess how their colleagues are doing.

How very MBA! The G20 ran out of ideas so they called in the consultants. “Er, we’ve got to look like we’re running out of ideas on the economy. What should we do?”

Peer review is how they do it at modern companies like Google. Colleagues assess and critique each other, thus raising the performance of the group.

However, staff at such companies are selected for high educational achievement, practical and analytical skills and, above all, common goals.

Secondly, peer review only works when colleagues have common goals. The US cannot behave as if it has a right to a higher standard of living than the rest of the world, and ask China to subsidise it.

CHINA RUNS OUT OF PATIENCE

What common interest can there be when the US devalues the dollar, through the electronic creation of new currency, and then tries to hand $3 Trillion of electronic bonds to the Chinese in return for more loans?

So far, the US has called its bluff. It thinks when China’s dollar holdings fall in value, Beijing will simply buy more US bonds (buying US bonds = lending money to the US).

However, China has run out of patience. A senior economic adviser Cheng Siwei warned “if they keep printing money to buy bonds, it will lead to inflation”.

Siwei was talking about quantitative easing, the latest wheeze in London and Washington. They say it’s to avoid deflation, to stimulate the economy but it’s just another way to bail out the banks.

Governments order the central banks to print money (actually, they do it electronically) and use it to buy assets from the banks for more than they are worth. The banks are supposed to lend the money to the economy but actually put it back in the vaults of the central bank and earn interest.

WHY ARE BANKS STASHING CASH?

The banks would rather earn 0.5% interest in the central bank than risk lending money to companies and individuals.

If the price of property, business, investments and loans keeps falling, how can anyone say the recession is over?

There are multiple ways to determine recession but one measure, two succession quarters of decline, is simple enough for headlines. Many indicators show the western economies still deep in recession, but by mid-year that decline had slowed.

It certainly doesn’t feel like the recession’s over:
• Lending by US, UK and Euro zone banks to the real economy has fallen every month for about the past six months
• Company defaults, like individual bankruptcies and mortgage defaults, are expected to rise sharply as they exhaust their reserves
• Consumers are spending less, on a narrower range of goods
• The dollar has fallen to its lowest for more than half a year, gold has jumped
• Another 10 million people in advanced economies will lose their jobs next year, on top of the 15 million who lost their jobs since the end of 2007, says the Organisation for Economic Co-operation and Development

Economics Student: “Wait, we’ve got the OECD. So why is the G20 creating another body?
Professor: “You stupid boy. Go to the back of the class”.


BANKS ARE STILL INSOLVENT

So much for the strategy in Washington and London, but why should they care about the Chinese? The Chinese are worried about the west inflating away its debt.

The US and UK chose to prop up asset prices, allowing banks to avoid bankruptcy. Even today, those assets do not cover their debts. The banks are reported to have confessed to $1 Trillion of losses worldwide, only a portion of the estimated $2-3 Trillion that they lost. Many leading western banks are still insolvent. To keep them afloat, the governments have to go on printing more and more money.

Even in the biggest recession since the 1930s, the US continues to spend more than it earns. By mid-year, the US trade deficit was growing again as imports overtook exports. The US only manages that by borrowing from creditor countries like China.

MOVING APART

If China decides to cut its losses and switch from dollars into other currencies, the dollar will fall faster. That will present another huge risk to other nations who rely on dollar loans and investments, or whose currencies are closely-influenced by the dollar.

Economists agree with the G20 leaders when they call for reserve-rich countries and oil exporters to boost consumer demand, while over spenders like the US and UK reduce their deficits. That would bring the world economy closer to balance.

However the near term interests of the two biggest players at the G20 are moving further apart, not closer together.

24.9.09

Guinness 250

As Guinness marks its 250th anniversary, lets look at the price of beer.

Actually, let's also look at the fate of pubs. Because 250 years ago Arthur Guinness signed a 9,000 year lease on the St James' Brewery in Dublin.

That gave him freedom to pursue his business, something that's denied to pub tenants today.

PRICE OF A PINT

According to website SaveAFewBob, the price of a pint in 1947, was the equivalent of 4 euro cents. Today that pint will cost you somewhere between 4.50 and 5 euro.

Well, the Irish Central Statistics Office seems correct in its view that Ireland is the second most expensive country for consumers in Europe.

However, as a percentage of weekly pre-tax pay, the price of a pint has been relatively stable since 1970.

Yes, you earn about 140 pints of Guinness a week.

WHY DO I EARN SO LITTLE BEER?

One reason is the huge investment bank-backed PubCos which are running the business into the ground.

These companies bought up old banks over the past two decades, giving them town centre properties from which they could maximise revenues. This is how the old pub gave way to the modern beer hall.

It would have been a very profitable business if the PubCos had not been greedy, taking huge loans to buy ever more properties. Now, struggling to pay their debts, they're driving pub landlords into the ground.

The UK, for example, faces a wave of pub closures as major investors call on Punch Taverns to sell its pubs and settle its debts.

"END THE TIE"

Seven pubs close every day in the UK, or 2,300 in the past year. Of 600,000 people working in pubs, 24,000 have lost their jobs in the past year. And the reason for this, according to the tenants themselves, is the tie.

PubCos enforce high beer prices. They also charge penal rents, extracting more profit from the pubs by forcing tenants to pay extortionate rents.

The Federation of Small Business called for an end to the tie, saying 67% of managers of pubs that turn over more than £500,000 a year earn less than £15,000. That’s not even the minimum wage.

Stupidly, the UK government three decades ago forced small brewers to choose between owning tied pubs or selling them beer. Ministers decided that for brewers to sell their own beer through their own pubs was anticompetitive.

"DOWNRIGHT BULLYING"

The legislation led to the collapse of many small brewers and the buying up of pubs by PubCos. Cheap-to-make lager replaced handcrafted ale at, you guessed it, the same price.

UK MPs on the Business and Enterprise Select Committee this May accused PubCos of "downright bullying".

Sadly, this is largely the fault of civil servants and their poodle MPs. If the UK bureaucracy had intended to hand the industry on a plate to international mega-brewers and investment banker property magnates, they couldn't have done a better job.

Back in 1931 Lady Astor said in the House of Commons, speaking of the political influence of the wealthy brewers: "You might as well call it the beerage as the peerage".

The PubCos have indulged in price gouging and extortion on a level the brewers never did. At least it's not the fault of Arthur Guinness.

Happy Guinness Day!


17.9.09

Politician In My Pocket

That could be the title of Ireland's next entry to the Eurovision Song Contest - if its government persists with proposals to massively overvalue property assets as it bails out the banks.

Trouble is, it won't be the politicians singing for their dinner. They're saving that pleasure for the taxpayer, who'll be picking up the tab.

In plain terms, the higher the value placed on the property assets of insolvent banks, the bigger the bailout for the banks. That is a good thing if you think it will, once and for all, stabilise the Irish banks. However, if asset prices fall further, it puts a bigger hole in the taxpayers' pocket.

Note that NAMA, the National Asset Management Agency, has implications well beyond the nation's borders. Only 2/3 of the loans it holds are Irish, the rest depend on property prices elsewhere.

DO THE BUMP

The government takes 'current values' and bumps them up to a 'plateau value' which it deems more consistent with longterm prices.

If that weren't enough, half the Irish loans represent land, which has declined up to 95% in some places with rezoning.

As for yields, it bases them on Dublin, which represents a small fraction of the loan book.

The politicians then manage to capture residential property prices based on a current yield of 3%. As for prices plateauing at a higher level, not much chance of the sunny uplands says the man behind the research.

Which begs the question why use this methodology in the first place?

All credit to Ronan Lyons.

Ronan Lyons has since published his findings in the Irish Times.

15.9.09

Lehman Coverage Ignores Crisis

Absolutely gobsmacked by the media coverage of the anniversary of Lehman Brothers’ collapse.

This has been a classic diversionary tactic, drawing attention away from the plight of the real economy.

Lehman’s collapse was not the trigger for the global financial crisis, and its dangerous practices, such as dependence on short term loans, were shared by other investment banks.

Yes the anniversary of its collapse has been an excuse for politicians from President Obama downwards to voice their platitudes in broadcast and print.

MEDIA GAG THE MAN ON THE STREET

The media have dutifully spun the anniversary into fake significance – fake because their coverage has successfully avoided any mention of the real economy.

BBC World’s coverage at 1200 GMT started with and interview with one Singaporean MP, followed by a UK government adviser saying the economy may be recovering. The reports ignore the real economy. Not one interview with a real person reflecting the job losses and pay cuts, no lives from real businesses, not one reporter "out there". The media effectively gagged the man on the street.

Reporters were safely protected from the people on an empty floor of the New York Stock Exchange, on an empty floor in London’s City Hall overlooking Tower Bridge.. safely away from the real economy.
  
COVERAGE IGNORES REAL ECONOMY

The BBC spent tens of thousands on live links to Asia and the US, talking to no real people except a report from India saying that consumer spending is back where it was before Lehman’s collapse. Reporter Nik Gowing had to go to a diamond trader saying international demand is even higher than it was a year ago (which is patently untrue if you know anything about the diamond market).

The media festival over Lehman’s collapse shows it still hasn’t learned that banks are just a part of the economy. And it reflects the cosy view espoused by politicians that banks are the be all and end all. Pumping trillions of dollars into the banking system is enough, even if it fails to reach the real economy.

Lehman: The Real Story

Tuesday 15th September is one year since Lehman Brothers filed for bankruptcy.

What we’ve learned:

• Politicians and Bankers have an approximate grasp of how the economy operates.
• Very few politicians have a clue about the financial markets.
• Banks don’t understand derivatives so how can the regulators?
• Leaving investment products and trading systems to the IT guy and the math wiz is extremely hazardous.
• Pay for short term results makes that even more hazardous.
• Politicians and the media are wrongly convinced that banks are the most important part of the economy.

1) Remind us. Why did Lehman collapse?
The banks was hugely dependent on short term money but they expanded away from their advisory business to trading on their own account, in derivatives giving them exposure to long dated (and more volatile) securities.

Regulators demanded that banks buy insurance against their derivatives defaulting, but that insurance was with AIG. As author Andy Kessler writes, “The "default insurance" was in the form of credit default swaps (CDSs), often from AIG's now infamous Financial Products unit. Never mind that AIG never bothered reserving for potential payouts or ever had to put up collateral because of its own AAA rating. The whole exercise was stupid, akin to buying insurance from the captain of the Titanic, who put the premiums in the ship's safe and collected a tidy bonus for his efforts.”

Lehman was heavily dependent on the short-term money market. This is how it works: Imagine you are a big financier. You borrow lots of money on a day-to-day basis. Your house is the security. You get a super low interest rate. You use that money to borrow even more. You build office blocks, shopping centers. You’re a tycoon.
Then your properties drop in value. Your creditors panic and demands all the money back at once.

You go from big businessman to insolvent in 24 hours. The trouble is, so do the people who lent to you. That’s the Lehman story. It was a huge borrower of short term money.

The trouble is, the Fed didn’t understand that. The timeline shows that the Fed and the US Treasury did not realize the impact that Lehman’s collapse would have on the US financial system.

2) Why did Lehman matter?

Lehman traded lived on short term money, called commercial paper. This is money that companies, municipalities, churches, insurers don’t need right now. It could be a company’s payroll. They don’t need the money for two days so they lend it to a money fund that lends it to investment banks.
Now, Paulson didn’t appear to understand the consequences. When he was discussing the possibility of Lehman’s bankrupty the weekend before it happened, he was talking purely to investment banks. The likes of General Electric, which has a huge money market arm, were not in the picture. Yet on the day of Lehman’s collapse, Paulson and Tim Geithner, then head of the New York Federal Reserve, hurriedly met with Jeffrey Immelt, head of GE.

The government issued state guarantees for GE Capital’s borrowings, totaling $126 Billion.
As the commercial money market ground to a halt, investors panicked. Several money funds came close to collapse.
Lehman was also a broker to the hedge funds. They lost confidence in other prime brokers like Goldman Sachs and Morgan Stanley, pulling their money out.
They money exited emerging markets, hammering economies in Russia and eastern Europe.

3) Why did the US government let it fail?

Days before the Federal Reserve and US Treasury had saved Fannie Mae and Freddie Mac. Half a year earlier it had bailed out Bear Stearns.
Former US Treasury Secretary Henry Paulson says he had NO POWER to save Lehman. Remember that.
When the US government refused to extend a loan to Lehman, its chief executive Dick Fuld told his lawyer “I don’t understand.” He repeated the phrase again and again, “It doesn’t make sense.”

Two days later, the Fed bailed out American Insurance Group for $85 Billion. The Fed had no regulatory authority AT ALL for AIG. It was an insurance company. Not a bank. That didn’t stop the Fed and US Treasury taking unprecedented steps.
Yet former Treasury Secretary Paulson says he had NO POWER to save Lehman.
Weeks earlier, records show he thought bailing out Lehman was not “acceptable”. That’s very different. Paulson now insists he was fully aware of the consequences of letting Lehman collapse.

Well, look at those consequences:

A) The dollar jumped when investors panicked. Money that had been flowing into emerging markets, pushing up the oil price, property prices, shares – suddenly that cash was pulled out, stuffed into the cattle trucks and hauled back to the United States.
Result: the dollar shoots up. As companies rush to repay their dollar loans, the USA experiences an INFLOW of cash. Very useful when the banks won’t lend.
Other currencies from the British pound to the Russian Rouble are pushed down, their economies destabilized. Soon they will be deep in recession.

B) The world’s biggest insurer AIG owed $15 billion of that to Goldman Sachs, so when AIG was bailed out two days after Lehman’s collapse, that was effectively a bailout for Goldman Sachs. Former US Treasury Secretary Paulson was the ex-boss of Goldman Sachs.

C) Competition. Lehman was a formidable competitor in its day. With Lehman gone, banks like Goldman Sachs and JP Morgan would get a greater share of both business and fees. Goldman executives conceed this is precisely why the bank was able to report record revenues in the second quarter.

D) After Lehman, banks were considered “too big to fail”. Bankruptcy was ruled out, even if they were crooked. No banks would fail. The taxpayer would pay, and keep paying.
It also was used to justify the $700 Billion bank bailout – the Emergency Economic Stabilisation Act, passed two weeks later.

4) So what was the real story with Lehman?

The surviving big banks are very profitable. Especially the one that both previous and current Treasury Secretaries worked for: Goldman Sachs.

They’re profitable and they haven’t changed. They’ve avoided any massive new regulatory oversight and they’re trading with the same short term borrowings, in the same instruments as before the crisis.
Lawrence MacDonald, whose book A Colossal Failure of Common Sense came out in July 2009, says the bank was not in substantially worse shape than other major Wall Street banks.

But rivals succeeded in pushing Lehman out of the market. Short selling shows this.
When you borrow shares and sell them, you must have shares lined up to replace them. Otherwise it’s called naked short selling – manipulating the share price by driving them down too low. This happened with 32 million Lehman shares – a very suspicious number that the Securities and Exchange Commission has not investigated.

The Wall St Journal did investigate the short selling and found the major short sellers were the other banks. With friends like investment bankers, who needs enemies?

Since the collapse of Lehman, banks like Goldman Sachs have seen profits jump, mainly because there is less competition.

But, throughout this crisis, central bankers and politicians have overestimated the importance of the investment banks. Even when former Treasury Secretary Henry Paulson allowed Lehman to go bankrupt, the record of whom he met with and talked to shows he thought it was an investment banking issue.

He missed the importance of the money market beyond the investment banks, the network of school districts, hospital trusts and companies whose cash flows support the economy.

Those corporate cash flows account for 70 per cent of US corporate credits, compared with just 30 per cent from banks.

Ironically, when politicians steeled themselves to let a big bank collapse, they chose the wrong bank.


5) Could Ben Bernanke be telling the truth?


If the Fed has not lost much money, it is because it has not lent to basket case banks.
Federal Reserve Chairman Ben Bernanke has argued that the Fed didn’t have to tools to save Lehman Brothers. The bank had no collateral, no assets against which to lend. The Federal Reserve’s total lending reached $1.5 Tln at the height of the crisis. Former Fed governor Alan Blinder thinks it could lose up to $30 Bln of that. Much less than the $700 Bln of money that politicians secured for the Troubled Assets Relief Programme, much of which has not been accounted for.


6) So what has changed since Lehman?

There was supposed to be a new banking model – more dependent on taking deposits and doing bank things like lending to business.

However the government bailout money – and state guarantees that are even more important – have allowed US investment banks to go back to their reckless ways. The appetite for easy riches hasn’t changed on Wall Street. It’s why people work there.

Wall Street has lost 10% of its workforce or 30k jobs in the past year. Moody’s expects another 20k over the next 2 years. So its been streamlined but the bonuses have not declined.

If there is less business, there is significantly less competition.

The bundled loans and so-called insurance – the junk that Wall Street traders knew was junk (they coined the phrase toxic waste) – is harder to market because the consumers that Wall Street sold it to, the pension and investment funds, have been badly harmed by the previous toxic explosives offered by Wall Street. Their fingers weren’t burned. They were blown off.

The structured credit market has shrunk. Despite battered prices, investors are still scared. Banks won’t lend to each other.

Mortgage loans packaged by WS fell to $169 Bln this year less than a quarter of the $775 Bln this time two years ago.

THE REAL ECONOMY

In Europe the credit crunch actually worsened over summer. Bank lending shrank for the 5th month running. This will hit small firms who cannot issue bonds. Banks insist it’s because of falling demand. No one believes them. Money that the governments are pumping into the economy is being deposited at the central bank. Banks think that earning 0.5% at the central bank is less risky than lending into the fragile economy.

It was unfair that Wall St got bailed out, just as bad that the incompetent US car giants got bailed out. But now loads of people expect someone else to subsidise their purchase of a new car, and university leavers are complaining they have to compete with people who have more skills and they want the government to create jobs of suitable status. It’s what one US writer calls a Confederacy of Wusses.
That’s the entitled. Spare a thought for those who don’t get to claim something for nothing.

More than 16 per cent of working age Americans find themselves on the US Bureau of Labour Statistics broadest measure of unemployment. In states like Oregon, that rises to 22%. Even in Silicon Valley, home of the IT industry, the number of jobs was already down 16% so far this decade BEFORE the crisis struck.

There is a huge story about the real economy, wholly ignored in the media coverage of Lehman’s anniversary.