Terryorisms

Mr Strauss-Kahn called for a urgent action to “cleanse banks” of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

“The impact becomes negative for debt levels that exceed 60pc of GDP,” said the Fund.

While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

via IMF warns over parallels to Great Depression – Telegraph.

We love 10 step programs. So here an economic perscription by the author who was a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable 1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

via FT.com / Comment / Opinion – Ten principles for a Black Swan-proof world.

(more…)

During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome — a decade-long depression — was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost.

At the moment, the Treasury is working (and working and working) on ways to entice private capital back into the banking and shadow-banking system by offering government financing and guarantees against losses. Every dollar of private capital that can be attracted back into the system is a dollar that the Treasury won’t have to borrow or the Federal Reserve won’t have to print. And only with the return of private capital will the government be able to get back the rescue money it has committed.

As the financiers see it, there’s a big difference between the government that sets tough terms for participation in its financial rescue programs and a government that is a fickle and unreliable partner, that tries to micromanage their businesses and changes the rules of the game with every zig and zag of public opinion

While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.

via Steven Pearlstein – Let’s Put Down the Pitchforks – washingtonpost.com.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino.

via The Big Takeover : Rolling Stone.

(more…)

Proposition 1: The boom in the U.S. was funded almost totally by foreign money.

Proposition 2: Foreign investors preferred to put their money into investments that were perceived as having low risk.

Proposition 3: Today, after everything has gone bad, many of the counterparties on the other side of the toxic assets are foreign investors, directly or indirectly.

Proposition 4: It’s a lot harder for the Federal Reserve and Treasury to resolve a banking crisis where the main counterparties are not American.

Proposition 5: The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization—none are satisfactory.

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.

via A Simple Guide to the Banking Crisis – BusinessWeek.

In the mid-’80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly… until one of them devastated the global economy.

via Recipe for Disaster: The Formula That Killed Wall Street

.