Monday, September 29, 2008

Roundup: September 29

The TARP failed to pass in the House today.


Three banks to rule them all: Citigroup, B of A, and JPMorgan now control over 30% of U.S. deposits; the cardinal rule of US bank regulation, that no single bank should control more than 10% of deposits, looks set to pass into history. For all the talk of Wall Street and Main Street, precious few have questioned a bailout strategy that, when the dust settles, will leave an anointed few institutions at the head of a vastly more consolidated banking system -- profit-taking institutions with implicit government guarantees and formidable market power.

The Federal Reserve has increased the size of the TAF by $150bn, and extended its currency swap lines with other central banks by $330bn (to $620bn). The Fed will also hold two special TAF sales in November for a total of $150bn. Money markets are still frozen, however, with Across the Curve reporting there is virtually no term lending available.Tomorrow is the end of many banks' fiscal years, and the end of the calendar quarter; it is also pay day for many corporates which are finding the commercial paper markets closed. The FT reports banks are looking at invoking "market disruption" clauses in their agreements on undrawn credit facilities in order to charge higher rates, as suspicion that Libor is failing to reflect actual funding costs grows. Treasury today opened its Temporary Guarantee Program for money market funds.

Wachovia endured a partial nationalization-cum-takeover by Citigroup, which agreed to buy it over the weekend in a deal brokered by the FDIC. Citi will pay around $2bn for Wachovia's stock ($1/share), will assume its senior and subordinated debt (about $53bn), and, crucially, will take over Wachovia's $312bn loan portfolio, including loans inherited from Golden West. Citi will only be liable for $42bn of losses on the loan portfolio, and the FDIC, in exchange for $12bn of warrants, will insure the rest of the portfolio. Citi will cut its dividend to help finance the deal. AG Edwards is independent again. Paulson said that a failure of Wachovia would have posed a "systemic risk." Charlotte may have seen its days as a financial center pass.

Fortis has been given a EUR11.2bn capital injection by the Benelux governments in exchange for 49% of the bank's operations in their countries. Fortis has been weighed down with debt ever since the ABN Amro buyout last year. Fortis is the largest non-government employer in Belgium, and the largest bank. Willem Buiter has his eye on the prize: this is the most important news today, as it shows Eurozone authorities can work together effectively in a crisis situation. Fears of EMU collapsing after bank failures should be at least slightly allayed.

UK mortgage lender Bradford & Bingley failed over the weekend. Its branch network and retail operations have been bought by Banco Santander, but its 40bn pound mortgage portfolio will be at least partially nationalized and may be merged with the government-owned remnants of Northern Rock. A shocking 85% of its mortgage book was made up of buy-to-let or no-doc loans.

Glitnir Bank, Iceland's third-largest, has been nationalized. Mitsubishi UFG will buy 21% of Morgan Stanley (common and convertible preferreds), with protections against dilution below 20%, for $9bn. German mortgage lender Hypo Real Estate has received emergency loans from the Federal Republic to the tune of EUR35bn, in advance of a rescue package. Dexia's stock fell almost 29% today, leading France's Finance Minister Christine Lagarde to say the government would "take its responsibilities as a stockholder" of the Franco-Belgian bank. (The French government holds 11% of Dexia through the Caisse des Depots.) Belgian Finance Minister Didier Reynders said that the state was ready to help Dexia if necessary.

Ireland's main stock market index was down almost 13% today, with Anglo Irish Bank off 46%. Ireland and Spain are among the European markets most plagued by bad mortgage loans; the European recession has struck there first.

The Big Picture points up another fantastic graphic from the NYT about the bailout, comparing the magnitude of each element of the bailout to normal spending measures in the federal budget.

Econbrowser has a good introduction to the TED spread, a measure of strain in the money markets.

There are substantial practical differences between Gross Domestic Product and Gross Domestic Income, despite their theoretical equivalence. Econbrowser has a primer on the two metrics and explains why our reliance on GDP not GDI may be masking the recession.

Hindsight is 20-20, and consensus is growing that recent dislocations in the credit markets are due to the Lehman failure. Information Processing revisit their previous argument that firms can be too interconnected to fail. Bronte Capital argue the FDIC's seizure of WaMu denied senior debtholders' rights to an orderly liquidation and will make it that much harder for banks to eventually raise funds in the wholesale market -- further delaying the return of private capital to bank business.

Kommersant reports on a new measure that shows real inflation in Russia pushing 40% year-to-date.

The end of the month means it's time for more hedge fund redemptions - even as some funds have pending trades, a total of $13.9bn worth, frozen by the Lehman bankruptcy.


Russia may begin restricting output from its oil reserves, the second-largest in the world, in an effort to prop up prices. Robert Amsterdam publishes an overview, with links, of the history of the energy cooperation between Gazprom, Russia, and Venezuela. It is a must-read primer on the subject, which has led to a major violation of the Monroe Doctrine. Amsterdam also links to an article from the Nezavisimaya Gazeta, in which President Medvedev describes the current organization of the executive branch in Russia as too centralized. The CFR has an interesting video interview between Russian Foreign Minister Sergei Lavrov and New Yorker Editor-in-Chief David Remnick.

Venezuela wants to join the nuclear club, and Russia may help her.

Morgan Tsvangirai continues to hold out hope that a compromise can be reached between the MDC and ZANU-PF parties on ministerial posts, and that the Zimbabwe power-sharing agreement is not doomed. But others are reporting talks are on the brink of failure, particularly with Thabo Mbeki, who brokered the deal, out of office. With 5mn of the country's 12mn expected to require WFP food to forestall famine this year, a dire situation is developing. Even after the redenomination of the Zimbabwe dollar (by 10,000,000x) , the central bank is being forced to print ever higher denomination notes as inflation continues to run rampant and people queue outside banks to withdraw their daily quotas of $20 equivalent.

UNHCR says as many as 20k people have fled across the Afghan border amidst fighting in Pakistan.

Fighting between insurgents and African Union troops in Mogadishu has forced eighteen thousand to flee their homes.


The Senate energy bill, which extended all of the major renewables tax subsidies for one to eight years, was fully funded by the House on Friday. But because of the way in which the bill was packaged, it will have to be reconfirmed by the Senate, which also has the Paulson bailout to think about. This may be the doom of the renewables bill, which would be a disaster for industry, consumers, and the environment alike. In years in which these tax credits have lapsed, we have seen one year declines in investment in the industry of 80% to 90%. Harry Reid was quoted on the Senate floor after passing the first version of this bill that there was no chance of the Senate passing it again.

The Arctic sea ice retreated at the fastest rate in known history for August, melting so fast that, despite a mild June and July, the extent of the sea ice nearly matched last year's historical minimum.

One of Nature's blogs takes a more reasonable look at last week's two press releases about methane clathrates being released in the Arctic. As we pointed out last week, and as this piece does, the actual releases from these two papers indicate that these two incidences of methane plumes are almost certainly long-standing phenomena. Far from confirming that warming is releasing massive amounts of stored methane right now, these papers belong to the process of mapping and understanding exactly what goes on with these deposits.

Walmart plans to cut its plastic bag use by 33% worldwide by 2013, resulting in an annual savings of 9 billion plastic bags and a reduction of 135 million pounds of plastic waste over the next five years.

The Forced Migration Review runs a special issue on displacement due to climate change. "Our generation has failed to live up to its obligations to prevent climate change. We need urgently to prepare now for the human consequences of climate change," writes Craig Johnstone, UNHCR Deputy High Commissioner. One imagines what $700bn, in the right places, in 2002, could have done -- and what, in the right places, today, it might yet do.

The New Scientist describes a policy mistake that has ensured the collapse of the North Atlantic cod fishery for the forseeable future.

An Irish government report stongly urges a carbon tax on fuels and congestion pricing in major cities throughout Ireland. Hear, hear.

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