Crisis Diary as it unfolds ….

24-Nov-08 to 30-Nov-08: Terror strikes financial capital of India – Mumbai

The Mmumbai-attacksaximum City burns in terror

By far, the biggest news of the week was the terror attacks on Mumbai. Mumbai burnt in the horror that started on Wednesday Nov 26 night and lasted for almost 60 hours leaving almost 200 persons dead, 400 injured, Taj and Oberoi hotels ravaged and a nation of 1 billion deeply pained and outraged. The issue of global Islamic terror network is back at the table. The time when the world is facing the gravest of the economic crisis, the last thing world wants is another war that has potential to unfold itself in a world war. In coming days, the commitment of Pakistan to assist India in fighting terror and the role of US to influence swift action on part of Pakistan are going to be crucial to how situation pans out.

Obama’s economic team

Obama unveiled his economic team packed stalwarts like Geithner, Larry Summers, Paul Volcker. Many of Obama’s team worked for Clinton during second Clinton administration. Also, important thing is there are no left-extremist in Obama’s policy team, which is not such a bad thing.
But is Obama’s team full of too much of ego per capita? Will they ever reach a consensus decision?

This week stock markets took a breather and bounced back a bit. Are we gearing up for some Obama bounce? or some stimulus news stimulated bounce?

Unstable BRICs

Among emerging markets economies, Russia seems to be in really bad shape. Falling ruble, falling commodity prices, drying forex kitty and frozen credit markets, just nothing seem to be working for Russia. China, with its announcement of record rate cut by 1 percent, seem to be panicking about the situation. Record stimuluses, massive rate cuts only point to desperate measures to support falling economy.

Crisis watch for the week:

TED spread 2.18 (prev 2.12)
VIX 55.28 (prev. 80.26)
S&P 500 896.24 (WoW return +11.2% )

November 30, 2008 Posted by | Crisis Snapshot | Leave a comment

More on Citi and new avatar of TARP

Some interesting details of Citi bailout and why this is a sweet deal for shareholders.
Via Stefan Karlsson

The Citi bailout comes in the form of a $20 billion capital injection combined with a guarantee that the U.S. government will cover up to $249.3 billion in losses. Formally, the latter is structured as Citigroup taking the first $29 billion in losses from a $306 billion portfolio, with the U.S. government taking 90% of the rest.
In return, the U.S. government gets preferred shares of $20 billion yielding 8%, as well as a warrant to buy Citigroup shares during the next 10 years at a strike price of $10.61 billion.

So what this means to shareholders?
The crude math works this way. Assuming Citi has upto 306B$ in toxic assets,
Book value of each Citi Share as of Sep’08 = 126b$/5.5billion shares = 22$ per share
If all the troubled assets return 0$,
Book value of each Citi Share = 70b$/5.5 billion shares = 13 $ per share

This is much more that current share price price ~ 6.00 and much much more than the share price when gov’t announced the bailout (apprx. 3.5$). The story with FED bailouts so far has been that in every bailout so far equity was completely wiped out, then why no such provision in case of Citi? In worst case scenario, why taxpayers should end up paying 250B$ of citi’s debt still leaving apprx 70B$ in equity untouched? Beats me.

In other news, today FED announced new 800b$ lending program.
Bloomberg reports,

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

There are two parts to it.
The first 600B$ is nothing but shifting Fannie, Freddie debt on FED balance sheet. They are anyway nationalized and so is their debt. As Paul Krugman points out, it is perhaps really difficult to make sense out of this move.
The second part of it, 200B$ in consumer lending? An attempt to prop consumption spending on borrowed Chinese money? Is it still not sufficiently established that overconsumption on borrowed money is one of the basic problems with US economy? I don’t know, perhaps I am getting something wrong here.

Also, some housing numbers came out today. The slide in housing prices accelerated quarter-over-quarter and housing seem to have resumed its fall in bottomless pit after brief pause last quarter.

November 25, 2008 Posted by | News | , , | 1 Comment

17-Nov-08 to 23-Nov-08: The Citi never sleeps?

So it was now Citi’s turn this week. Citi trounced GM in later days of the weeks in bankruptcy news section and by the end of the week, Citi was sitting on truckload of taxpayers money in yet another wall-street bailout by dear uncle Sam. Can they now really deny the bailout to GM? Or Chrysler or Ford or GE or whoever? Every American firm is just too big to fail and Uncle Sam is going to end up owning whole load of crap.
There was across the board agreement between economists that Citi bailout was really bad deal for taxpayers. Citi’s share price jumped 60% on the deal and that sums it up.
Mark Thoma has collected reactions of different economists on Citi bailout here.

The state of Citi’s balance sheet is really painful.
As of Sep’08,
Citi’s Assets (i.e. loans) = 2.05 T$
Citi’s liabilities (i.e. deposits etc.) = 1.92 T$
Citi’s equity = Assets – Liabilities = 126B$ (out of this 25B$ belong to Fed in first capital injection)

This is as of Sep’08. Now fast forward to Nov and we have 300B$ out of 2.05T$ in questionable loans. Result: Citi can go in negative equity by massive -170B$. So Fed had to step in by guaranteeing 300B$ of Citi’s assets. But while doing so they made sure citi’s efficient management continues to get its fat pay check and shareholders are not wiped out.

On the street, there is also a buzz of massive Obama stimulus – somewhere in the range of 700B$. With all this $ flooding all around, is US$ on the brink of collapse?

Crisis watch for the week:
TED spread 2.12
VIX 80.86
S&P 500 800.02 (WoW return -6.71% )

List of institutions went bankrupt/bailed out/taken over:
1. Bear Sterns
2. Merill Lynch
3. Lehman Brothers
4. Fannie Mae
5. Freddie Mac
6. AIG
7. Washington Mutual
8. Wachovia bank
9. Citibank

November 24, 2008 Posted by | Crisis Snapshot | Leave a comment

09-Nov-08 to 16-Nov-08: Invoking god of depression economics

With severe recession staring at the face of most world economies, everyone is invoking one god – John Maynard Keynes. The only word that rules the marketplace … well, actually it’s a two word word .. ‘fiscal policy’.
Paul Krugman suggested fiscal stimulus as big as 600b$ for US whereas Roubini is calling for stimulus of somewhat similar size. There was also the push of coordinated fiscal policy measures in G-20 summit. Monetary policy could not unclog the frozen credit markets soon enough and now falling consumer confidence across the board has accentuated the threat of severe recession.

But can governments really spend their way out of this? Well, some governments can. But US has really hard task cut out in front of her. With big corporates failing right and left, with imminent cutbacks in consumer spending, and with US federal budget in such bad shape, Governmental discretionary spending is not going to come without some serious cost.

With all this pump priming everywhere, things may seem to coming back on track for a while, but will it last? What will be the cost of this in terms of inflation? Will it lead to hyperinflation or stagflation?

We’ll have to wait and see.

November 15, 2008 Posted by | Weekly News | , , | Leave a comment

China takes the lead in race to embrace socialism

China, with announcement of its massive stimulus package, has taken lead – and very gleefully so – in a race to embrace socialism.
New York Times says:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

So when the world is slowing down, China wants to build roads, railways, homes, bridges and be ready with increased potential to rock the world stage again when things get back on track. At least, that looks like the Beijing gameplan. Also, Beijing might be looking to spend its amassed US$ as long as they are accepted and carry some purchasing power in the market place. It’s a beautiful plan in perfect world, but is communist world anywhere near being perfect?
The sheer size of the package, almost 7% of
China‘s GDP, is what surprised most. But it is really unclear how much of this package is on top of already planned spending. If that net factor isn’t substantial, which probably is the case, this announcement is not more than a public statement to show the intent to act.
Never the less. it should be interesting to see how export oriented centrally-planned economy of
China fares when circumstances force it to look inwards and look for domestic growth.

November 10, 2008 Posted by | News | , , , | Leave a comment

03NOV08 – 09NOV08: Barack Obama, AIG, GM and more …

Barack Obama - the only headline of the week

Barack Obama - the only headline of the week


This week undoubtedly belonged to one person – Barack Hussein Obama.

Barack Obama created history when he became first African American to become president of united states. What this mean to the crisis at hand? If anything, he is a welcome news for economy. Perhaps, he is just the kind of guy the economy needs at the moment. His temperament, his willingness to work in bipartisan manner and more importantly his left ideology which will empower him to use Keynesian stimuli unhesitatingly and nationalization of big corporates if needed.
Other than the news on political front, GM and AIG were center of attention once again. GM is standing on brink of bankruptcy and so are the other
US automakers. Any of them going bankrupt would signal the death for AIG, which is anyway a dead man walking even otherwise. Soon AIG will feel pressure to post collateral for all its outstanding CDSes and will soon run to Fed for another bail-out package. Large scale nationalization seem to be only.
China announced a huge stimulus package and many governments are expected to follow the suit. Are we overdoing the deflationary pressures? Will this lead to global hyperinflation never seen before? Nobody knows. But this should prop commodities market and augurs well for commodity economies and currencies like Aussie, kiwi and loonie.

That’s it for this week.

November 9, 2008 Posted by | Weekly News | , , | Leave a comment

Up until today .. Paradise lost?

What exactly is global financial crisis?
The financial crisis triggered by bust in US housing bubble spread across the entire US financial sector and went on to cripple the global economy.

How did we get here?
US housing market ballooned during 2003 – 2006.
– People bought houses on borrowed money, even though they did not have enough income to support such loans. This became popularly known as Subprime mortgages. When house prices started falling, loans became costlier, people abandoned their loans and houses.
– Financial institutions who lent this money (Citi, Lehman, Goldman Sachs, Hedge Funds etc.), mortgage insurers who guaranteed these loans (Fannie Mae, Freddie Mac, AIG etc), houseowners whi had to abandon their loans and homes – more people lost in this trade. So who earned all this money? Home builders and stakeholders in real-estate industry who sold the houses, material suppliers and commodity producers who supplied raw material at higher prices – few people earned large sums of money taking other side of the trade.
– So if money only changed hands why the whole system is affected? Money went from banking system to private hands. Banks lost the capital and ability of credit creation in multiples. Part of the money went outside US in the form of investments and consumption of imported goods and commodities. Result of all this – credit crunch due to contraction of capital in banking system, worsening global economy partly due to cyclically high interest rates and partly due to capital losses in US housing markets, dying exports, falling commodity prices and lack of investments.

Who to blame? (consensus list of various economists and market comentators)
– excessive deregulation of US financial markets, specifically complex Over The Counter (OTC) derivatives contracts
– originate-to-distribute model of mortgage securitization where the risk is assumed by the party who is not the originator of the risk
– lose credit policy by Alan Greenspan, keeping interest rates too low for too long
– Enormous Leverages taken by non deposit taking financial institutions like Bear Sterns

Where do we stand today?
On a brink of severe global recession, which will probably last until early 2010.

Indicators of the extent of the crisis
US unemployment at 6.5%, world moving behind US in lockstep.
– US institutions going bankrupt/taken over/bailed out: Bear Sterns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia bank
– US Gov’t is investing in private sector on massive scale. Also buying troubled mortgage assets under 700B$ TARP (Troubled Assets Relief Program)
– Emerging market stock indices down 60% from peak
– S&P500 down 35% YTD
– TED spread (measure of credit crunch in USD lending) reached peaked 500 bps and after intervention by several central banks still stands at 250bos. The normalcy level for TED spread is 50 bps.
– VIX, volatility index which is a measure of fear in financial markets and generally fluctuates between 20-60, reached its highest level of 80 and is above 60 for several weeks in a row now.
– Countries probably already in recession (successive 2 quarters of negative growth)
US, UK, New Zealand, Australia and several economies in Europe.
– Emerging markets slowing down. Growth estimates for
China down to 8% from 12%, for India down to 6% from 9%.

Paradise lost? …. or did it ever exist? Who knows!

November 8, 2008 Posted by | Crisis Snapshot, Uncategorized | , , | Leave a comment