Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.
The derivatives time bomb that Warren Buffet warned about several years ago has exploded. Here?s how it?s playing out around the world.
From the US:
The Fed:
?Federal Reserve chairman Ben Bernanke acknowledges he was wrong in believing that there would be limited fallout to financial markets from risky mortgages that soured after the housing market’s collapse.? ***Is this possible? Not his admission of having been wrong, but that he really didn?t know? I knew. Since you?re reading BlownMortgage you knew too***
”I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke says in an article in the December 1 issue of The New Yorker magazine. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” he said in the piece titled ”Anatomy of a Meltdown.”
***Actually no, it wasn?t hard to predict at all. One thing has followed the other in?guess what?predictable fashion. The blogosphere has been plotting the course of the meltdown with stunning precision for a few years***
Almost as an aside, as of early this week, the Fed has now spent, guaranteed or promised about $8.5 trillion. This is up from $4.3 trillion on November 19, which was up from $3.8 trillion on October 31. And now we know that this spending is based on the judgment of someone who thought subprime could be contained.
The Auto Industry:
The WSJ reports: ?Though it?s under pressure to trim costs and update its business plan to get federal bailout funds, Ford doesn?t like the idea of cutting its CEO?s salary. CEO Alan Mulally made $21 million last year; was asked in testimony last week on Capitol Hill if he?d accept a $1 salary, he replied, ?I think I?m OK where I am.?
Via Bloomberg: General Motors doesn?t want the public tracking a private jet used by its executives, and has asked the Federal Aviation Administration to block it from its public service. ?We availed ourselves of the option, as others do, to have the aircraft removed,? said a GM spokesman, though he didn?t say why the automaker, blasted on Capitol Hill for using private planes, took the step.
***The auto industry is a long way from sanity let alone solvency***
Caption: Car dealers stage a protest using this year?s unsold vehicles.
Banks:
There have been 73 mergers and 10 bank failures so far this year plus bailouts for Citigroup (2x), a little help from friends for JPMorgan and Bank of America, and a little something under the table for Goldman Sachs and Morgan Stanley. The FDIC has just added 54 more banks to its watch list, which now stands at 171.
Real Estate
The latest S&P/Case-Shiller Indices are out. What could I possibly add except to say that the chart will have to be redrawn since the Y axis does not go far enough into negative territory to plot next month?s decline.
Caption: If your house fell off this cliff you might be eligible for a bailout.
From Asia:
On November 26, China cut interest rates by 1.08 percentage points to 5.58%, the lowest level in 11 years and the largest one-off cut since the Asian Financial Crisis in 1997. The economy is crumbling and millions of jobs will be lost before Christmas.
It is also the fourth interest rate cut by the Chinese central bank in the last ten weeks. “China is out to save itself,” said Patrick Bennett, an analyst with Societe Generale in Hong Kong.
Caption: Christmas spirit in China: Rioting over toy factory layoffs.
In recent weeks, laid-off factory workers have rioted across central and southern China. Government officials in Beijing have warned that dissent and threats to social stability will be crushed.
***Some things never change***
From the Middle East:
According to the UKTimesOnline, Gulf sovereign wealth funds (SWF) are now investing in their own struggling economies with several Gulf-based banks getting American-style bailouts. Local stock markets have collapsed and some sovereign wealth funds are supporting markets by buying shares of local companies. Investment in the West is being reduced, in particular in the UK and US where the SWFs have lost billions of dollars this year. *** I thought these people had a lot of money?our money, in fact?I guess not***
Caption: Fires in the UAE have spread from the oil fields to the highway: Accident on road between Abu Dhabi and Dubai
Sovereign wealth funds are among the few sources of liquid capital available in the world and many companies have sought cash injections from the Middle East. Fund managers feel they were lured into investing before the full extent of the crisis was known. One fund, the KIA, said two months ago that it had lost $270 million on a $3 billion investment in Citigroup, which was made at the beginning of 2008. Citigroup’s stock has fallen by two thirds since then, and it the bank is now being supported by the US government. *** This sounds like another wrong-headed judgment call by Bernanke. If this was the reason Citi was bailed, it would have been cheaper, way cheaper, to give KIA their money back ***
From Europe:
Things are no better in the EU countries. The Baltic Dry Index, the most reliable measure of international trade, is down significantly. Deutsche Bahn AG, the German railway company, is planning on 40% fewer cargo trains for next year, another leading indicator.
Caption: Car of local bank manager in France who does not know which end is up.
There are only four more weeks left in 2008. We?re headed into a new year, with a new President, but with a number of the same people who laid the groundwork for the world we?re living in today. What else can go wrong? We?ll see, won?t we.
Caption: The ship of state.
Last 3 posts by Morgan
- Subprime Bananas - June 28th, 2009
- Roubini: No confidence in government exit strategy - June 24th, 2009
- Goldman bonuses largest in firm's 140-year history - June 21st, 2009
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