Wednesday, September 24, 2008

Time for a new multi-national program?

Another day, another stunning piece of news that will save the global financial system for sure, this time. Yes, folks, the irresistable force has joined with the immovable object, and Warren Buffett has invested $5 billion into Goldman Sachs, thereby providing incontrovertible proof that history at least rhymes.

Macro Man will leave the in-depth analysis of the deal to others, and confine himself to the following three observations:

1) The deal says a lot more about Goldman than it does about Warren. The last time Macro Man checked, GS was not in the habit of writing $500 million annual checks (the yearly interest on the preferred stock) and giving away free in-the-money options out of the goodness of their hearts. If they are doing this deal, it suggests that (perhaps unsurprisingly) there was more than meets the eye to the last batch of Goldman results

2) When Warren last did a deal like this, in 1987, it clearly did not mark the bottom of credit-related equity distress, which occurred several years later.

3) Lehman Brothers conducted a similar offering at the end of March, which was over-subscribed. That went well, didn't it...

Meanwhile, the news just gets better and better in Europe. The French INSEE printed a new, below-expectation cyclical low.... did the ifo....
....leading the latter's chief economist to express a view that, at the risk of beating a dead horse, sounds oddly familiar.

Meanwhile, the FT carries a story today that echoes Macro Man's concerns about the European banking system. Given that every large, leveraged debtor has been punished in one way or another over the past year, it seems only a matter of time before European banks come under the cosh.

And indeed, that time might come sooner than you think. With the end of the quarter swiftly approaching, money markets are tightening notably as the three month date rapidly approaches the turn of the year. Despite the recent dollar swap arrangements, there is some suggestion that European banks in particular (and global banks generally) are desperate for dollar funding. It's worth noting that LIBOR funding levels are looking increasingly fictional.

The chart below shows three month dollar LIBOR versus the 3 month ICAP dollar fixing rate. When ICAP launched its fixing rates to great fanfare a few months ago, interest swiftly waned after they turned out to be very close to existing LIBOR fixings. Observe, however, how ICAP has recently started fixing much higher than LIBOR; the true cost of unsecured dollar funding is now close to 4%.
Money market pressures are not confined to the US, of course. Dec Euribor contracts are implying a rate of 5.30%, a premium of more than 1% to the ECB's refi rate. And despite now-consensus expectations of a BOE rate cut before year end, observe how the December short sterling contract has plummeted in recent days.
So clearly, the TARP has yet to save the day, following the the TAF, TSLF, and PDCF on the list of ineffective acronyms (though in fairness the TARP has yet to be enacted.)

Given the troubles in Europe, it would seem that a new, multinational taxpayer-funded program is required to enable ALL banks to de-lever and recapitalize. Macro Man has already devised a rough sketch of how such a program could work, and is available to consult with the G7 to make it happen.

Taxpayers around the world may be curious to learn what such a program might be called: Macro Man would suggest the Special Capital Raising/Extended Writedown Undertaking.


studchan said...

macro man i really enjoy reading your comments.....i was in hk for the asian crisis and i believe the US shd let GS and MS go under just like many of the firms in asia....paulson is protecting his buddies and making us pay for it....they hv been way overpaid for so long...

Anonymous said...

Hi Marco Guys,

you might have seen it before if not, it is pretty amusing as it mocks your favorite chairman Bernanke.

Macro Trading Ideas said...

Interesting article written by Luigi Zingales

If Paulson really think that all this mess is related to a liquidity problem on toxic paper we're in great why do not buy houses directly?

nice, nice money done on Euro govt bonds.. JCT, do you need a Bloomberg to see latest data??

Anonymous said...

I agree with the FT article you cited MM, even though earlier today, I read something stating just the opposite:

mikarsky said...

RE the FT article, they write “Can Europe be far behind?” What logic is that? Why does nationalization and socialism in the US require Europe to follow? Is there anything comparable going on? I take it as a rhetorical element of high journalism. And the Bloomberg article is even better. WHAT parallels are there between imperial Japan and the U.K. financial system in 2008??? Based on this, Afghanistan may soon become the world’s leading economy.

RE the G7 de-levering and recapitalizing ALL banks, I think it won’t be possible. In Europe, it would upgrade the slight credit squeeze into a full-blown crisis. They also can’t take it from the taxpayer because it would reduce spending. (I think it was MM’s British humor??)

Anonymous said...

"What logic is that? Why does nationalization and socialism in the US require Europe to follow?"

If I could hazard a guess: the big Western banks competed in the same markets and followed similar strategies to each other. It is not unreasonable to guess that, at this stage, the balance sheets of the big European banks are not too different to their American pals'.

However, it has been quiet in the Eurozone so far this calendar year (unlike in late 08 when German banks seemed to be getting just as much of the cane as the US banks). The main difference is how lax the ECB's repo criteria are (for structured assets they have been: senior piece of a true sale transaction, rated by at least one agency at A- or above, and that can clear through Euroclear/Clearstream). So European banks have had less stress funding. But as this crisis evolves from a liquidity/funding crisis to a credit crisis that won't do too much good.

So Euro banks can't be too far behind the US doesn't seem that big of a leap. Of course, there is no guarantee that there will be the same interventionist response in Europe but, seriously, who'd bet on that?


Anonymous said...

Great post, esp the SCR etc naming convention. I file the global events under "Things I thought I would never see #3"-- the US nationalizing buinesses and taking other socialist turns, whilst EU and Asia do not. Things I thought I would never see #1 and 2 are failure of the Bear and LEH and the brush with death of MER.

dismale said...

The European banks are not yet in the same boat (excluding the ones already collapsed), but house prices have just started falling. Some regions are worse than others and finally any European response to a banking crisis will be done mainly on a country basis. Plenty of room for disagreements. That said, the Europeans generally are quite happy to nationalise. Of course, just as Europeans had lots of US debt, it seems likely that US banks diversified too. Luckily they all have EM exposure. Any ideas about how big UBS exposure to Spanish MBS is?

mikarsky said...

Given the slowness of most Euro banks to "catch up" with the more risky US/UK banking style, I think that they are RELATIVELY safer. With often public involvement in banking, some institutions can always borrow. It's almost like a second layer. I would think that Schadenfreude would rule the day, rather than collective attempts to bail out bad banks.

RE exposure to Spanish MBS, how about checking WHO actually bought overpriced houses in Spain? My guess is that a significant proportion was UK buyers. Then check how they financed their 2nd home in Spain and you will end up in the UK again. Just my guess. Funny how the contagion spread by boat to IR and NL and by easyjet to ES.

Charles Butler said...

The apparent flushness of Barclays is a bit perplexing, though. They were among the most aggressive in flogging mortgages on Spanish coastal properties to Brits, especially late in the game when they implied themselves to be some sort of buffer against builder-town hall hanky panky.

In any event, it was more typical to rewrite and pass through to buyers an existing mortgage already contracted by the promotor. I'd guess that most of the cedulas backed by even holiday properties are Spanish in origin.

Macro Man said...

Let's be clear here: the two major differences between US and European banks are the latter's greater leverage and the ability of the Europeans to shift turds to the "commercial bank" side of the balance sheet, where things get marked at par til maturity or default.

I have heard it on good authority, for example, that an asset marked at 60 on Goldman's balance sheet is held at par on that of a major UK bank.

To think that European banks are a model of relative prudence (or even competence is mistaken, in my view. Rather, they are products of an accounting arbitrage- why else did Lehman park its most toxic turds in its European arm?

Perhaps the penny won't drop in Europe (though why has UBS been a regular at the "writedown and raise capital" shop)...then again, maybe it will. (As an aside, a mate in Germany claims that Spanish property was a popular investment there, though I have not verified this.)

In any event, I know which way I'm betting...

Anonymous said...

I am betting with you Macro. If the Colostomy Bag of Omaha can't cover his spy futures bets after going on Bimbo TV with a full frontal. As long as the pigs are on the prowl, including the momo darlings like bidu, fslr and crm, just to name a few. But what do I know, I don't get calls from the Hankster ahead of major financial nationalizations.

Ben Bittrolff said...

Yes. Its true. (News from Bloomberg)

The real question is, who is copying who?

Kazakhstan Plans Paulson Style Bailout: Borat?

Anonymous said...

Well, Goldman is turning into a supposedly re-regulated commercial bank.

They'll not be content with mom-and-pop branch manager sized bonuses.

My prediction. At some point, there will once again be a Goldman Sachs partnership, once again, closed and secretive and very lucrative.

Here's how it will work. Goldman Sachs The Boring Dumb Bank Who Has to Pay Back Loans and Listen To the Government, will end up "hiring" Goldman Sachs Management & Research Partners for doing everything that really matters.

The busboy and the secretary and the interns and the programmers and back office and the risk managers, especially the risk managers, will work for Sachs bank.

The elite work on the side with the Gold.

bengt said...

Head of Swedish Riksbanken says that this crisis will be closed and "in the files" 4 years from now. Considering that all transactions from the Swedish bankblowout(TM) in the 90s aren't closed yet (the state still owns 20% of Nordea, for exampel), he's pretty optimistic, no?