Here’s an interesting development that I missed earlier this month, but remains very relevant: It appears the Gulf Cooperation Council(GCC), a regional group of middle-eastern Arab states have agreed tentatively to create a central monetary council that will evolve into a new Gulf Central Bank representing middle-east Arab states. Not surprisingly, the largest member of the GCC, Saudi Arabia, has won the coveted rights to host the new entity in Riyadh.According to the GCC Secretary General, Abdul-Rahman al-Attiyah, “An agreement was reached on the headquarters of the monetary council, which will be the city of Riyadh”. This decision appears to be the first steps toward a formal structure for the eventual central bank, as well as the larger aim of creating a single common currency among member states. However Mr al-Attiyah also added that “concerning the timeframe, no decision has been issued yet on the currency.” The original plan had been to take a decision on that by 2010, but the GCC has agreed now to extend that timeline.If successful, this will certainly place the Arab Central Bank within the parameters required for membership in the G-20 group of nations– if not also the G-8 — the organizations responsible for guiding principles of the global financial archtecture.If successful, this could prove to be an interesting development in the region with far-flung implications.
Arab Bankers
The GCC includes Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain. Yemen is negotiating to join the GCC by 2016, and there are signed international agreements calling for the integration of Iraq into regional structures including the council, but with no timelines set. This region represents the largest reserves of oil and gas in the world, and so has significant economic implications for the world. With the financial crisis and collapse in the price of oil, bankers in the region feel that a single currency will help to stabilize long-term revenues while improve regional trade and development.
Despite these positive developments, political wrangling has delayed the decision-making process, and it appears there are still unresolved differences. The other strong contender as host, the United Arab Emirates (UAE), is not happy with this decision. Their representatives say they have “reservations.” The Saudi central bank has a balance sheet that is eight times larger than the UAE central bank, and this, together with the Saudi’s political influence globally, won out over the UAE’s credentials of greater accessibility and integration. Stay tuned . . .
Will the President's bailout be enough to combat the shifting tide of the auto industry?
…Drove my Chevy to the levy but the levy was dry.”
Those words ring with such prophetic irony now – that is if the levy had been retaining a history of American automobile prowess. Or that’s at least what one might feel after reading Kendra Marr’s 18 May Washington Post article titled, “As Detroit Crumbles, China Emerges as Auto Epicenter”. In her article, Marr quoted Daimler chairman Dieter Zetsche as saying “The center of gravity is moving eastward” – a sentiment maintained by many journalists in response to Shanghai’s April autoshow.
It seems China, on the brink of exporting Chinese-manufactured vehicles to the United States, has been on the path of eclipsing diminished American brand power over the auto industry for the past 15 years as Marr notes a 1994 plan by the government to triple auto production by 2000 and reduce imports. In China’s most recent auto plan, the “Automotive Readjustment and Revitalization Plan,” the State Council has raised 8 development goals for the industry including plans to gain 10% average growth in the next 3 years on the more than 10 million units of automobiles planned to be produced and sold in 2009.
With increased production goals in sight, many analysts are looking at the decline in Detroit’s automotive prowess as the harbinger of evolution for the Chinese. China has long been known for its “copycat” like production methods, however, the void being made by Detroit’s crumbling is space for Chinese car companies to develop autonomy in ways historically Chinese businesses haven’t enjoyed. Kelly Sims Gallagher of Harvard’s Kennedy School of Government was quoted as saying, “They [Chinese automobile manufacturers] have world-class business and manufacturing capabilities now. What they still lack is technological know-how, systems integration, being able to design new vehicles from scratch and get them to a manufacturing line.” And though there hasn’t been a mad dash to acquire ailing US auto firms just yet, in many ways, a fusion of American systems integration with the sheer economic weight and manufacturing capacity of growing Chinese firms might be the key ingredient for a full, permanent tilt in the automotive scales.
One car company, though, has begun the Eastward migration of auto production with the acquisition of some major American brand power. Italy’s century old Fiat, best-known for its line of efficiency cars, has been an international player in Europe that’s garnered little American attention until its recent takeover of Chrysler and talks for a sizable portion of GM. Ironically enough, it was GM in 2005 that paid an ailing Fiat to abandon a partnership that is now negotiating with this burgeoning titan to takeover its European and Latin American operations. Fiat is now the third largest automobile manufacturer, behind Toyota and Volkswagon, and has acquired major industry weight at minimal cost to itself.
So where are costs being felt in all of these acquisitons?
The American automotive brand. Years of increased international ownership and offshore production of American vehicles, on top of a tarnished reputation, have contributed to the inability of American auto companies to thrive now in an evolved auto market. Of course, Asian car companies like Toyota and Hyundai have been perfecting a mass produced reliable car, with far superior gas mileage and maintenance records than many American brand cars. And Europe, with some cities established centuries before the advent of the automobile and its windy roads perfect for a scenic getaway, has developed vehicles of precision, rather than size, for luxury cars that many American’s prefer to pour millions into maintaining, year over year. However, it hasn’t been the competition from foreign-brand cars so much as it has been competition for foreign-produced cars that has been the undoing of the US auto industry. The “race to the bottom” for lower production costs has done more to give away a competitive advantage of production savvy (including a basic production workforce) than to penetrate these markets with an internationally nimble brand for an evolving product.
GM just released an outline to Washington projecting the proportion of GM cars sold domestically and manufactured in Mexico, China and South Korea will rise from 15% to 23% over the next 5 years. Increased demand for smaller, fuel efficient cars in countries where wages are miniscule in comparison to that of US auto workers has shifted both demand and supply curves for auto production away from US over the last 20-30 years (US auto workers with benefits make around $54/hr compared to $22/hr for South Korean workers, $10/hr for Mexican workers and some Chinese workers make as little as $3/hr). Moreover, GM and other ailing US automakers have been out-positioning themselves financially for years with pension problems and systemic mismangement trends on their home turf well before this economic crisis forced financial bailout or bankruptcy as the only sources of survival.
As the President’s recent National Fuel Efficiency Policy seems to favor the already very low-emission, compact-car producing competitors of these dying US auto firms, the policy is inevitably accelerating the current trend in US auto consumption further away from the American brand of auto production. In the National Fuel Efficiency Policy, President Obama has essentially revised the 2007 CAFE law, requiring an average fuel economy standard of 35.5mpg for 2012 to 2016 models of new cars and trucks sold in the US, up from a 35mpg standard to go into effect in 2020. The creation of this more timely deadline brings under federal purview emissions standards for the protection of the environment and consumer that previously was a source interstate policy conflict. And with a uniformity in laws, automakers that operate more efficiently, both international and domestic alike, will be producing these more environmentally friendly cars for the US. But with the Ford Escape as the lone US vehicle among the top 10 2009 leaders in fuel economy, whatever is left of the US auto industry might not be enough to set the stage for a comeback in US brand automaking. It might be, instead, another chapter in the conclusion of the US auto industry as we’ve known it. Unless international policies in emissions or labor standards are set that mitigate rapid overseas production of both American brand and international brand automobiles, this reorienting of the auto industry Eastward might be for good.
For links to articles used in this post, check out the following:
This article by Niall Ferguson a noted British economic histrian is an interesting read from the Sunday New York Times magazine. He places the global economic crisis in the historical context of the law of dinishing returns. In not so many words, what he is saying in succinct context is that as the size, complexity and factors of the ‘boom & bust’ cycle of an economic system expands, then contracts over time that the expected rate of returns of the ‘boom’ diminishes each time, and the negative shock of the ‘bust’ gets greater each time. By parallel, this also results in declining investor confidence in the global markets over time as the complexity and reasonsing for the explanation of ‘why it happend’ expands or becomes more creative (some — myself included – would say in denial) by bankers, traders and Wall Street insiders. Interesting stuff. . .
By NIALL FERGUSON (NYT, Published: May 15, 2009)
If financial crises were distributed along a bell curve — like traffic accidents or people’s heights — really big ones wouldn’t happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted. According to their value-at-risk models, a loss of this magnitude in a single month was so unlikely that it ought never to have happened in the entire life of the universe. Just over a decade later, many more of us now know what it’s like to lose 44 percent of our money. Even after the recent stock-market rally, that’s about how much the Standard & Poor’s 500 index is down compared with October 2007.
Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.
For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.
Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Read more here.
Forget the fact that they are women. Elizabeth Warren, Chair of the Congressional Oversight Panel (COP) on financial reform, and Arianna Huffington, Founder & Editor of the Huffington Post– the largest online Blog — are two of the smartest people with the clearest insight on the bank crisis that I have seen since tracking these events. Rather than explaining them, I believe they speak best for themselves.
Above, Elizabeth Warren is interviewed on CNBC’s Squawk Box and leaves the three hosts – usually apologists for Wall Street insiders – nearly speechless and dumbfounded. Kudos to her for breaking the issue down in the clearest, simplest terms possible. And below, Arianna Huffington’s most recent post on HuffPo shares the same uncanny insight on the bank crisis. Simply stated, these Ladies ‘get it.’
I spent last week in New York and Washington, speaking with many erstwhile Masters of the Universe and those charged with cleaning up the mess they’ve created. And in both cities I was stunned by how many Wall Street and political insiders were ready to break out the champagne. Forgive me if I keep the bubbly on the shelf.
The insider consensus seems to be that the worst of the hard times is behind us and that the economy is back on track. Or at least on track to be back on track.
Not even the latest employment stats showing that another 539,000 Americans had lost their jobs dimmed the enthusiasm. Call it The New Financial Euphoria.
Only it’s not really new. When I was interviewing Eliot Spitzer last week on Squawk Box, he recommended a book called A Short History of Financial Euphoria by John Kenneth Galbraith, and over the weekend, in between running into more cases studies in financial euphoria, I gave it a read. Kudos to Spitzer, because the book couldn’t be more apt to what we’re facing today.
Written in response to the stock market crash of 1987, the book is an examination of how economic bubbles start and why we never seem to learn the right lessons when they burst. Starting with the tulip mania in the 17th century and going up to 1987, Galbraith explores the psychology behind the boom/bust cycle and how “the extreme brevity of the financial memory,” combined with an ignorance of history, leads to the same reckless mistakes being made again and again and again. Often soon after the last boom/bust go round.
“Financial disaster is quickly forgotten,” writes Galbraith. “When the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery.”
Sound familiar? Credit default swaps, anyone?
For an example of what Galbraith called “the pathological weakness of the financial memory” and a “mass escape from reality,” look no further than Sunday’s New York Times, in which a variety of Wall Streeters, asked whether it is “safe to exhale yet,” offered up delusional gems such as “I’m of the view that this is a bull market,” a bottom “probably has been reached,” and this could be a “lasting bull market” that in a few years might hit October 2007 highs.
One of the problems with this happy talk is that it contributes to running out the clock on the narrow — and narrowing — window for reform.
Back at the end of 2008, the banking class was terrified by the prospect of serious reform of the financial industry. Populist anger was rising, and it looked like the political will to rein in Wall Street was taking hold. But here we are in May and while we’ve gotten some impressive talk from Obama’s economic team about the need to fix the financial system, there has been no real push for reform — only the ongoing express delivery of few-strings-attached taxpayer dollars to Wall Street.
Bank bailouts move forward at warp speed while regulatory reform sputters along in the slow lane. Which is just the way Wall Street wants it. Its motto is: if it’s broke (but you keep bailing us out), why fix it?
That’s where Galbraith’s warnings about the ignorance of history come into play. The last thing Wall Street wants is for Congress to take to heart a history lesson like the one Elizabeth Warren offered when I interviewed her on Squawk Box. She explained how, going back to the time of George Washington, “every 10-15 years we had boom and bust, boom and bust, boom and bust… until we hit the Great Depression.” At that point, as Warren put it, FDR’s economic team decided: “You know what? We can do better than that. We can write a set of rules that are going to make it better than that.” And they put in place reforms like the Glass-Steagall Act, and the creation of the FDIC and the SEC. The result, according to Warren: “50 years of security and prosperity.”
Then came the push for deregulation — which gave us the S&L crisis, then Enron/WorldCom/Global Crossing, and now the current economic meltdown, which Nassim Taleb calls “vastly worse” than what happened in the 1930s. “This is the most difficult period of humanity that we’re going through today,” he told a conference in Singapore last week, “because governments have no control.”
And that’s just how Wall Street wants to keep it.
So far, Washington seems unwilling to offer much pushback. The problem is that reform is not in the DNA of those in charge of the administration’s economic policy. And real systemic change is not going to happen without at least one person on the senior economic team who will single-mindedly make that a priority.
Instead we get Larry Summers (one of the architects of the dismantling of Glass-Steagall) and Tim Geithner, who actually talks the talk of a reformer, but walks the walk of a Wall Street true believer.
There he was last week on Charlie Rose, claiming: “We are being dramatically more aggressive than I believe any serious government has ever been, certainly in generations, in responding to financial crises. So if you look at the scale of action, look at the quality of initiative we’ve taken, I think it dramatically exceeds even the best-managed crises we’ve seen before.”
And there is no question that he is right in terms of the scale of the administration’s response. But all this scale and aggressiveness have been geared towards saving the current system — not reforming it. The result is that we are on track to return to where we were when all the trouble started — to the demonstrably flawed status quo.
Back in March, Geithner told Congress that the financial system had failed “in fundamental ways” and that fixing it would be accomplished not by “modest repairs at the margin, but new rules of the game.”
But where is the urgency to push through these new rules? Where is the evidence that Geithner and company are willing to go toe-to-toe with those who see regulation as their mortal enemy?
When Rose asked Geithner about the “army full of lobbyists with huge amounts of money” who are determined to undermine what Geithner promised would be the “most sweeping changes in financial regulation that we’ve seen in decades,” the Treasury secretary replied: “It’s going to be hard for them, because again the people are watching.”
But the people were watching when the Senate voted on cramdown legislation that would have given relief to the millions of Americans who are, or soon will be, facing foreclosure — and the lobbyists won. As a Times editorial put it: “When the time came to stand up to the banking lobbies and cajole yes votes from reluctant senators — the White House didn’t. When the measure failed, there wasn’t even a statement of regret.”
This is all the more significant because of the precedent it sets. Wall Street has seen that it can count on enough Democratic Blue Dogs to scuttle even modest, utterly sensible reform. And that the administration won’t put up much of a fight to save it.
I am at heart an optimist. But being among the giddy revelers at last week’s White House Correspondents’ Dinner in DC and the Time 100 party in New York, I felt like a prude at a 60s love in.
Indeed, there is something in the current DC/NY culture that equates a lack of unthinking boosterism with a lack of patriotism. As if not being drunk on the latest Dow gains is somehow un-American. You can see this in the way those who accurately predicted the bursting of the most recent bubble were viewed, branded as “naysayers,” and “prophets of doom.”
This too is nothing new. In his book on financial euphoria, Galbraith writes about how, in 1955, after offering Senate testimony suggesting toughening stock buying rules, he was inundated with angry responses: “The postman each morning staggered in with a load of letters condemning my comments, the most extreme threatening what the CIA was later to call executive action.”
Yes, it’s more fun to hop a ride on the Happy Days Are Here Again bandwagon. But it won’t be fun when it ends up back in the same ditch — or, worse, rolling completely over the cliff — because we didn’t make the necessary repairs when we had the chance.
And, yes, it’s not fun feeling like Cassandra. But remember: Cassandra turned out to be right and the cheerleading Trojans very seriously wrong. And very seriously dead.
The other problem with “the pathological weakness of the financial memory” is that it causes us to forget, along with the Trojan War and the last economic crisis, all the things we could have done with the massive amounts of money we spent bailing out the banks — things like foreclosure relief, job creation, infrastructure repair, health care reform, and improving education.
It’s time to stop pretending that the Wall Street economy is the same as the real economy. The Wall Street economy may be showing signs of life — thanks to the hundreds of billions we have poured into it — but the real economy isn’t.
“Don’t tell me about the stock market,” wrote Bob Herbert last week. “Don’t tell me about the banks and their perpetual flimflammery. Tell me whether poor and middle-income families can find work. If they can’t, the country’s in trouble.”
And that trouble is only growing worse, even if the media are full of Wall Streeters over the moon because the Dow just went up 100 points.
There aren’t going to be reasons for optimism — or cause for celebration — unless “the new rules of the game” Geithner promised are moved from the realm of rhetoric to the arena of action. The window for reform is closing.
Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair said mis-managment by bank chief executives, and their Boards of Directors may cause some of them to be replaced in the months ahead as the FDIC, U.S. Treasury and Federal Reserve Bank regulators scrutinizes the mis-management and balance sheets of financially troubled banks and ‘Too big to fail’ lenders. “Management needs to be evaluated,” Bair said today on Bloomberg Television’s show, Political Capital with Al Hunt, to be broadcast this weekend. “Have they been doing a good job? Are there people who can do a better job?”
You're so fired!
U.S. regulators last week released stress-test results on 19 banks and ordered 10 including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. to raise $74.6 billion in capital to withstand a “deeper and more protracted” slump than forecast. CEOs of Citigroup and Bank of America, which got a total of $90 billion in U.S. aid, remain on the job, while top executives at Fannie Mae, Freddie Mac and General Motors Corp. were ousted after getting federal bailout help.
The FDIC released a statement after the interview characterizing Bair’s comments. Bair said management changes “could happen” based on capital-raising plans submitted to the government. “She did not refer to CEOs specifically,” the agency said in an e-mailed statement. “Bair also did not suggest the federal government will remove the bank CEOs,” the statement said. Asked in the interview, “Why are some of these other banks’ CEOs still there?” Bair replied, “I think the review needs to go with both the management and the board as well, absolutely.” Bair also indicated there will be an evaluation process for bank management as part their required capital plan.
Chief executive officers at American International Group Inc., Fannie Mae and Freddie Mac were ousted by the Bush administration after the U.S. took control in September. General Motors CEO Rick Wagoner was forced out in March after the Obama administration rejected GM’s recovery plan.
Regulators have a “continuing obligation” to offer sound guidance and steer banks that need government aid to a point where they can eventually operate without taxpayer money. “So to the extent that it means oversight of adequacy of management and boards, I think that’s absolutely appropriate for regulators to do,” Bair said. Read interview transcript here.
Source: Excerpt reported from Bloomberg By Alison Vekshin — May 15
The fact that government regulators are gaining firmer control of capital markets is true not only in the U.S., but in fact that reality is de pase in most other developed markets around the world. Much of the regulatory and government controls being implemented are partly the product of the re-tooling of the global financial archticture agreed upon by world leaders at the London G-20 Summit. It may take regulators and legislators several years to fully implement in their respective nations. But I think the reality of the new regulatory regime in global capital markets is sinking over at the Wall Street Journal (WSJ) — the status-quo standard bearer of the U.S. financial industry. Even the bank oligarchs and hedge fund managers — some of whom continue to resist the changes — are beginning to capitulate. That’s why I found this article in today’s WSJ by Mark Gongloff of particular interest.
Those programs have helped return markets to near normal. Lending has resumed, and many key rates are back to where they were before the peak of the crisis. But in cases where the government has pulled back its support, markets have trembled. Given that history, officials will likely err on the side of intervening too much and for too long.
Once again, comics and the artisans of comedy are the best truth-tellers. The Comedy Central’s Jon Stewart proved brialliant earlier this year in calling-out CNBC’s so-called ”ahead of the curve” financial “news” personalities for their abscense of accountability in the lede up to the banking crisis and the global economic crisis that followed. Now, Saturday Night Live (SNL) deadpanned U.S. Treasury Secretary Timothy Geithner and the reality behind the ruse of the bank stress tests. Your hard-earned money may be more at risk than you’re being led to believe. There is, afterall, truth in comedy. The video clip is eloquent in its simplicity. You must see it!
And when you’re finished viewing the video clip above, check-out this article in today’s New York Times titled, After the Stress Test.
In global markets around the world, the free market is being challenged by the rise of ‘State Capitalism’ — a system in which the government, through direct investments and regulatory reforms to check the excesses of greed & volatility, becomes the leading economic actor. With the announcement last week of the results of the bank stress tests, the ‘nationalization‘ of U.S. banks, in some form, seems inevitable. Embrace the future: the financial capitol of the world has shifted from New York, to Washington, D.C. Is state capitalism the future of 21st-century capitalism..??
Ten of the nation’s largest financial institutions fell short of the capital requirement required by the stress test. Bank of America alone required an additional $34 Bn. These results also leaves the door open for bank regulators to dictate terms and conditions if they seek additional federal bailout dollars — including the possibility of the U,S, government becoming the largest commom equity shareholder. Of course, the bank industry oligarchs are scrambling madly to aviod the consequence of their self-inflcted reprobation. In the final analysis, the federal government is the only entity left standing in the ruins of the global economic crisis able to reign in the excesses of unregulated risk-taking and un-checked economic volatility. But State Capitalism is not new, and it’s most likely what 21st-century American-style capitalism will look like. In fact, it’s been around a while, and believe it or not, the U.S. has used it successfully in the past. for instance, think of well-known government sponsored enterprises (GSEs) that were, until recently, publicly traded corporations such as Fannie Mae and Freddie Mac; or subsidized private operations such as our national postal system or our national passenger rail system, Amtrak. Think also that all within the last century the U.S. government had a regulatory and ownership stake in the nation’s telecom, railroad and airline industry until “deregulation‘ – another term for ‘privatization‘ — of those industries occured. Interestingly, all of those industries are still closely tethered to government subsidization, err… I mean taxpayer funding.
But wait, it get’s more interesting. We in the U.S. are behind the curve. State capitalism, it turns out, is prolific elsewhere in the world — even among developed, free-market allies such as Britain, Japan, Germany among many others. Other nations such as China, Russia, Saudi Arabia, Venezuela — and probably eventually Cuba — haved used state-sponsored capitalism with great effect and economic success either currently, or in the past. For instance, Saudi Arabia’s state-owned oil company, the Arab-American Oil Company (Aramco); Russia’s Gazprom, Venezuela’s Getty Oil company, Britain’s BP (British Petroleum) and China’s Sinopec Oil) and China Mobil (telecom) all owe their present success and vialbility to the government’s stake in these private enterprises. Some of them, like BP and China Mobil are good performing, publicly traded stocks in recent years.
State Capitalism
With the Obama administration’s stake — taxpayer investments, if you will – in the Bank and Auto industry, what the current U.S. adminstration is doing, it seems to me, is to re-establish the U.S. as a global leader, rather than a follower, in the emergence of 21st-century capitalism. One of the ways the administration is trying to do this, under the not-so-able stewardship of U.S. Treasury Secretary Timothy Geithner, is the development of the Public Private Investment Partnership (PPIP) — an excellent example of state-sponsored capitalism. The program will provide $1 Tn in taxpayer dollars to hedge funds and Wall Street fund managers such as PIMCO, BlackRock, et al, to invest in the deeply discounted bank toxic assets; and in return the federal government splits the upside (return on investment) at some unspecified point in the future. Small investors will be able to puchase shares in these funds. Let’s hope it works; there’s a lot at stake. Similarly, much of the discussion, as well as the outcome of the London G-20 Summit last month centered on re-structuring the global financial architecture with a greater regulatory, as well as participatory role for central banks and national (ie, state) governments. Another prime example of the emergence of state capitalism in recent years have been the growth of Sovereign Wealth Funds (SWFs) — large pools of investment dollars controlled by the government or central banks that are invested in global capital markets. With the tremendous international capital flows that these funds can produce, some are concerned that intentional, harmful economic effects can be inflicted by unfriendly or politically-driven state actors. Current global market capitalization of SWFs are estimated at approximatley $4 Tn — approxiamtely one-eighth of total global market value.
Gary Shilling on Bloomberg: bank stress test analysis.
According to reports from the New York Times (NYT) here, and the Wall Street Journal (WSJ) here, the Federal Reserve with the backing of the U.S. Treasury, directed at least ten of 19 of the nation’s largest banks to bolster their balance sheet capital ratio levels by $75 Bn while effectively blessing the stability of several others, marking for the first time a bold line between some of the nation’s stronger and weaker banks. As a result of the government’s two-and-a-half-month examination of the U.S.’s 19 largest financial institutions, one firm, Bank of America by itself needed an additional $34 Bn in assets to bolster its balance sheet against a ‘worse case scenario, At least half a dozen — J.P. Morgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., American Express Co., Bank of New York Mellon Corp. and Capital One Financial Corp were among the passing banks.
Feds to Banks: 'I own You.'
A bank stress test is a commonly occuring examination or audit by regulatory agencies. A ’stress test‘ demands that banks model the worst-case economic recession, a so-called “stress scenario,” and then calculate if they have sufficient capital reserves to cover possible losses. The government has given the banks six weeks to come up with the additional capital on their own, or they may have to accept additional TARP funds. If that occurs, the government may require additional TARP funds be common equity shares, making the U.S. government the largest shareholder — one way of ‘nationalizing’ banks. Ostensibly, if the banks do well and stock share prices increase in the next 2-3 years, with the U.S. holding common equity, it could be a budget bonanza for the government helping it to pay down the burdgeoning federal deficit. And like the governments tough position with Auto industry executives, the Federal Reserve and the FDIC issued a joint statement that appears to lay the foundation for holding bank CEOs and senior executives accountable.
Several investment banks issued remarkably bullish research reports today on banks who did poorly on the Fed stress test. For instance, Raymond James and Morgan Stanley, among others, issued reports on certain banks indicating a tripling of share price from roughly $8 to a target range of $25 per share in the next three years, or so. Smart investors would do well to consult a qualified advisor — other than Kudlow or Cramer – before rushing out to buy any bank stocks.
Today’s ‘Cinco de Mayo (May 5th) Wall Street Journal (WSJ) reports that ten of 19 of the nation’s largest banks failed the Fed stress test, and will require more capital or face the possibility of insolvency or receivership (i.e., ‘Nationalization’). The Obama administration announced the stress tests — a process of examining banks’ ability to withstand future losses — back in February. At the time, the news sparked concern among investors and depositors that the results would be used to shut down or nationalize some of the country’s weaker or functionally insolvent financial institutions. the U.S. government is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector. One of the affected banks, Bank of America, announced plans over the weekend to raise $10 Bn in fresh capital.
The precise banks affected remains under discussion, but will be announced on Thursday. It could include Wells Fargo & Co., Bank of America, Citigroup Inc. and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days.
Representatives from Wells, Bank of America and Citi declined to comment.
But Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner assured investors that none of the banks undergoing stress tests would be allowed to fail and that all would have access to government funds if needed — despite the soured public mood toward Wall Street’s oligarchs. In addition, some critics indicate that U.S. Treasury Secretary, Timothy Geithner, who was previously the New York Federal Reserve president, is too intimately tied to Wall Street’s banking oligarchs and is losing the battle of wills to the Wall Street lobby contrary to the public will. Leading economists ranging the political spectrum — from Niall Freguson to Paul Krugman (see video here) – have provided compelling analyses indicating that the Obama administration’s bank bailout plan is doomed to fail; and two of Sweden’s successful bank nationalization architects have criticized the plan leading many — myself included — that bank nationalization is simply an inevitability. To these eyes, it appears we have taken the long, slow meandering road as Japan did in the 90’s, rather than the shorter, more direct route taken by Sweden just last year. As the say in Spanish: ‘El tiempo dire…’
If financial crises
The FDIC released a statement after the interview characterizing Bair’s comments. Bair said management changes “could happen” based on capital-raising plans submitted to the government. “She did not refer to CEOs specifically,” the agency said in an e-mailed statement. “Bair also did not suggest the federal government will remove the bank CEOs,” the statement said. 
Is state capitalism the future of 21st-century capitalism..??
