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Archive for November, 2007

‘Wall Street’ risk managment and judgment compromised by blindness, madness and greed.

Posted by Adrian on November 14, 2007

Wall Street has taken huge losses from billion dollar plus write downs on collateral debt, mortgage backed securities and any other complex financial instrument’s connected with the mortgage crisis in America. Which in turn has decreased the asset value of many of the banks that invested in the mortgage market in America, to the point that the collartirised debt obligations (CDO’s) sitting in investment pools and accounts of those banks and hedge funds became a ‘toxic waste’ product that no one would touch. The blind feverish packaging of debt investments like CDO’s, that were majority backed by subprime mortgages, occurred throughout the housing boom in America over the last decade. It was in all retrospect a greed induced blindness, if by definition the theory that profit returns on CDO’s and other debt financial investments was going to be a sure thing, then something went wrong in the psychological risk management in the Wall Street firms and the big retail banks. Was it simply a greed induced frenzy on profit returns or a complete miscalculation of the overvalued mortgage bonds, or an ignorant disposition and assumption that the economy and mortgage market in America was going to continue on without risk. Or all of above.

From Fortune regarding Merrill Lynch Investments Bank, CNN money:

In February international bank HSBC suffered big losses on its subprime portfolio, sending tremors through the market. Under normal circumstances, such worries would have led to higher interest rates on subprime mortgage bonds. But these were not normal times. Instead of rising, rates on subprime mortgage bonds remained abnormally low until the summer of 2007, and in some months even dropped below 2006 levels.

What was going on? Instead of backing away from subprime paper, Merrill Lynch and other big players were gobbling all they could, because they needed it to feed their CDO’s. Their bottomless appetite for the stuff kept prices high and yields low, against all economic logic. “What we had was a perpetual-motion machine driving mortgage prices to uneconomic levels of risk vs. reward,” says Friedberg.”

This appetite for the now risky CDO’s continued with not just big investment banks like Merrill Lynch, but all of the major investment banks on Wall Street buying up and selling CDO’s to other investors – which has we know is now causing the majority of the billion dollar writedowns on Wall Street and other major financial institutions.

But, there is deeper psychological issue at play. If the risk management has faltered and the mathematical models did get it wrong as far as calculating returns on risk assets. What went wrong? The risks, in regards to the mortgage markets were obvious, especially when you consider that loans were given to extremely risky customers. The repackaging of that risk into CDO’s (as it has turned out) has been a waste of money. Can the new lore of Behavioral Economics offer some new perspective? If the world is faced with a severe economic down turn exasperated by the financial turmoil in the credit markets, which is primarily because credit was given to people that should have not received credit. We have to remember that people generally as consumers have that psychological instilled trust in authority – in which that authority (if we are talking about the selling of credit and loans) is based in the financial markets. Given that authority at times could be con job, hence the predatory lending that took place prior and during the subprime mortgage meltdown. Trust in financial institutions and their conduct as far as risk, investments and even profits has been effected, can this trust be reinstalled back into the populous? With the credit crisis not even half way through it’s severity and a more dramatic liquidity crisis widening within the finance markets. The psychological damage has already occurred, this can be seen via financial panics, the example is the English bank Northern Rock looking for emergency lending as it took a huge hit from the credit markets. This financial and psychological damage will spread wider. The confidence in the banking sector, fund managers, hedge fund markets has been damaged, a damage that will be seen in their share prices and accounts as their balance sheets will contact.

So, if after the financial crisis that is sweeping world finishes, will there be a new perspective on economics and financial markets? Like I mentioned earlier, could this perspective be the new theory of Behavioral Economics? That essentially is a new psychological based economic theory to save people from themselves. But if that is the case, that an economic theory that could direct people to make ‘right’ decisions is implicated, the ‘theory’ may need some reworking when the smartest minds in the business from hedge fund managers to the investment bankers of Wall Street; have all made some of the most horrendous mistakes in the history of the financial markets . This in turn has revealed the intellectual core of economics and finance to be completely overshadowed by it’s own flaws.

I’ll finish with the quote from Charles Mackay

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”

Over time Morbius Glass blog will discuss Behavioral Economics and Free Market theory in ‘philosophy and science

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Posted in Finance and Economics. Strategy and Society | 1 Comment »

World Crisis scenarios for the 21st century – Bird Flu (H5N1) and other pandemic Virus concerns (update 2)

Posted by Adrian on November 13, 2007

World Crisis scenarios for the 21st century – Bird Flu (H5N1) and other pandemic Virus concerns – (update 2)

The potentially fatal animal to human strain of H5N1 has surfaced in the UK on a poultry farm. Although the H5N1 is NOT the pandemic human to human mutated strain that the World Health Organization and other scientific organizations are forecasting as a worldwide pandemic. However the animal to human H5N1 (Bird Flu) is still a killer of humans claiming 200 lives worldwide.

“A 3-kilometer (2-mile) protection zone and a 10-kilometer surveillance zone are being set up around the infected farm, Defra said. A wider restricted zone covers the whole county of Suffolk and most of neighboring Norfolk. Within the zones, the movement of poultry will be limited and all birds must be housed or isolated from contact with wild fowl, the agency said.” Bloomberg

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George Lucas’s new 2008 ‘Star Wars’ TV show actress poses for Playboy?

Posted by Adrian on November 9, 2007

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Taxi Driver (1976) – director Martin Scorsese’s and screenwriter Paul Schrader’s classic

Posted by Adrian on November 8, 2007

I saw a doco the other day, regarding Martin Scorsese and his films, namely his scores for various movies that he directed. Scorsese mentioned Taxi Driver, especially the score by Bernard Herrmann, which complements the movie so well – a dark and haunting jazz inspired sound track.

Everyone knows the story of Taxi Driver. A modern cultural reflection on isolation and disturbed male behavior through an individual named Travis Bickle who is mentally unstable. As Scorsese put it, and I guess indirectly, from the documentary that I recently saw, is that Travis the Taxi Driver (Robert De Niro’s character) is what lies in the minds and hearts of men; albeit disturbed men. Fantastic movie, cult classic and without further ado, the memorable, ‘you talking to me scene’. I love this :

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A new liquidity crisis looming. Could a declining USD spark a currency crisis?

Posted by Adrian on November 8, 2007

The credit markets have suffered huge losses and are now under very shaky ground, banks like Citigroup Ltd have now disclosed losses in the 11 billion range, after backing bad loans from the mortgage meltdown in America, but most of the big investment banks have endured huge writedowns that have been estimated at 100 billion to 500 billion.

The credit crunch has emerged again in the UK, where in August 2007 and September 2007 one bank Northern Rock needed emergency funding from the Bank of England, which sparked massive over the counter withdrawals from it’s customers. Now, the Royal Bank of Scotland appears to be in trouble, as does Barkleys Bank either from writedowns, shrinking balance sheets, losses and toxic waste sitting in conduits. Either way, this will cause consumer panic again, instability in the banking sector and a global liquidity freeze, in other words banks will stop lending to other banks indefinitely. There appears to be no end in sight for the crisis sweeping the financial sector, from CNNbusiness:

Stocks retreated at the start of the session on dismal earnings news from General Motors, before the battered financials once again became the trading focus.

Banks and brokerage stocks tumbled following a handful of warnings issued Wednesday that more writedowns were likely before the year’s end.

Citigroup (Charts, Fortune 500) continued its recent decline, falling 3 percent. Morgan Stanley (Charts, Fortune 500) stock lost over 5 percent while Goldman Sachs (Charts, Fortune 500) fell over 3 percent and Lehman Brothers (Charts, Fortune 500) was over 4 percent lower. The AMEX Securities Broker/Dealer index (Charts) was 3.4 percent lower.

But as the US financial sector get’s battered, will Europe suffer the same fate? The fear is the European banking sector may not have enough capital to shake off a storm of losses, from FT.com:

“Once again, banking stocks led the market lower, with Royal Bank of Scotland among the sector’s worst performers. It shares fell 3.9 per cent to 438p on fears that it may require a rights issue to shore up its balance sheet, which has been stretched by the recent acquisition of Dutch bank ABN Amro.

Those worries were heightened by a note from Citigroup. Analyst Simon Samuel said he had benchmarked the European banking sector against a number of standard capital measures with alarming results

“What unfolds is that Europeans banks have significant capital deficits that would require recapitalisation to the scale of 5-20 per cent of market capitalisation,” Mr Samuel said.”

So with a harsher liquidity crisis looming, a potentially perfect storm of worrying developments in the world economy are forming too, one is the pending collapse of the US Dollar. Rumors that China may sell of it’s USD reserves to back a favorable currency like the Euro have emerged. The USD as a world base currency has lost a lot of it’s purchasing power due to the American economy keeping rates low and now cutting rates, which has all contributed to printing more of the ‘greenback’.

Can the world turn to a more secure currency like the Euro as a base currency? With an unstable worldwide market, a severe credit crisis worldwide forming, rising inflation in both the northern hemisphere and southern hemisphere, rising oil, food, energy costs. Is there such thing as a safe haven base currency? In my opinion European problems are going to be on par with America, as far as financial instability, especially in the banking sector. Are middle eastern and Asian countries namely China antagonizing the US, as far as their threat in un-pegging or selling off their USD currency reserves? Possibly. Even with the Euro being a high yielding currency, an extremely volatile market could dump the Euro without a second thought. But, if the threat of dumping the USD does happen, lead by China and we do see an unpegging from the Saudi Arabian Riyal and other currencies pegged to the USD – this would lead to a massive currency crisis, as a world base currency could not be determined, short term base currencies will hold little hope in replacing the USD.

Will Asian be able to whether a storm of various financial market turmoils? In some ways Asia is not overtly effected by the liquidity/credit/currency crisis from the disintegrating American economy. But China, like other parts of Asia are all developing huge bubbles, namely stock, real estate that could come tumbling down and burst at any point, from FT.com:

“Most commentators agree on three things about the Chinese stock market.

First, there’s a bubble. Second, the bubble is the result of excess liquidity in the Chinese financial system. Third, the madness of crowds in Shanghai and Shenzhen shouldn’t particularly concern Western investors. They are correct on the first two points and woefully wrong on the third.

The Shanghai stock market has climbed by around a third since early August and more than 300 per cent since January. In a recent talk, Peter Tasker, of Arcus Investment in Tokyo, described the course of the Chinese boom using a multi-stage model developed by the economist Hyman Minsky.

The bubble starts with a “displacement” which gives investors something new to reckon with, such as Japan’s rise in the 1980s and China’s emergence as an economic superpower over recent years. The rise in stock prices, initially slow, gathers momentum. In China, around 5m new brokerage accounts are opening every month. These neophyte speculators overtrade.”

So if a liquidity/credit and currency crisis globally hit’s hard, the other fear for western markets is the Chinese stock market bubble, if that bursts, according to FT.com online this will undoubtedly effect our markets FT.com:

“As China overheats, inflation is picking up. Sooner or later, Beijing will have to grasp the nettle. When excess liquidity is mopped up, Chinese stocks will fall. But the banking system could also suffer problems and the economy find itself plagued with too much manufacturing capacity and falling profits.

That’s what happened in Japan. Foreign investors may not be directly exposed to Chinese stocks but they are unlikely to escape the aftermath when this bubble bursts.”

Posted in Finance and Economics. Strategy and Society | 2 Comments »

Reserve Bank Of Australia – Rates now 6.75%

Posted by Adrian on November 6, 2007

As expected by majority of the market, the Reserve Bank of Australia has lifted interest rates from 6.50% to 6.75% an increase of 25bps.

This is all due to the inflationary conditions revealed by October’s CPI, (please refer to Australia entering into hyperinflation? CPI figures released October 2007, core inflation 16yr high for more details.)

With higher food, fuel and other consumer costs rising, the RBA may increase interest rates again early next year. The other issue is the credit markets, as banks suffer continued losses from the credit crisis caused by the the US mortgage market collapse. All banks will be increasing fees and interest rates independent from the reserve bank. This will inevitably pressure the consumer and the local markets. What we might see is the beginning of a sharp downturn of the Australian economy

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Dow Jones huge plunge 360 points on Citigroup share downgrade.

Posted by Adrian on November 2, 2007

After just one day when the Fed gave a rate cut of 0.25%, the Dow Jones lost 360 points on Thursday’s trading.

The 360 point drop on the Dow Jones was due to an analyst stock downgrade and capital fears of Citigroup Inc, American’s largest bank by assets which lead to the shares falling to $38.51

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Citigroup, Inc (NYSE:C).

“Citigroup lost $2.85, or 6.9 percent, to $38.51, the steepest slide in the Dow average. CIBC lowered its recommendation on the shares to “sector underperform” from “sector perform.” Citigroup may have to cut its dividend, raise cash or sell assets to raise more than $30 billion to shore up its capital, analysts led by Meredith Whitney wrote in a report to clients. ” Bloomberg

All due to the lingering credit crisis stemmed from the huge losses, profit downgrades and write-downs that has been inflicted onto the finance sector. This latest news regarding Citigroup Inc has only reiterated the seriousness of the credit crisis, with the markets now in a panic selling. We will also see problems in interbank borrowing and financing, if further losses are stated by any one the bigger banks, including Citigroup Inc –  global liquidity will freeze up again.

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“Why women are changing their minds about men” – New Scientist April 2006

Posted by Adrian on November 1, 2007

“Fhionna Moore and colleagues at the University of St Andrews, UK, analysed questionnaires from 1851 heterosexual women between the ages of 18 and 35. They found that as a woman’s level of “resource control” increases – in other words as they become more financially independent – so does their preference for physical attractiveness in potential partners.

Women who had low levels of control over their cash rated the financial status of a man over his looks.”

so,

“We recommend that men who aren’t already there get down to the gym, and moisturise.” New Scientist April 2006

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Futurama’s ‘Scary Door’ segments

Posted by Adrian on November 1, 2007

These short animations were inserted into the Futurama show from time to time, usually at the end of the show. It’s a funny take on the Twilight Zone show from the 1950’s.

This one is ‘ The most evil creature’ Scary Door short animation, as usual with the Futurama’s writers dry wit. And the most evil animal is….?

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Federal Reserve cuts 25 basis points, dropping the US interest rate to 4.50% – October 2007

Posted by Adrian on November 1, 2007

The US federal Reserve continues to cut rates. The federal fund now sits at 4.50%, from 4.75% with a cut of 0.25%, the discount fund rate that banks can borrow from has now been cut to 5.00% from 5.25% also with a cut of 0.25%.

It could be argued that the American economy is already in a growth recession with a full blown recession on the cards, with the next two quarters of GDP growth into 2008 being the deciding factor.

“But the third-quarter report is like looking at movie flashbacks. It is the growth in the next two quarters where the rubber meets the road. Analysts expect growth in the fourth quarter to slow to around a 1.5% rate, less than half of the third quarter. They call the January-March quarter of 2008 “the dangerous quarter” for a sharp slowdown.

“What generally happens in a recession is that the economy starts to slow down, and then growth just falls sharply. None of the complex econometric models in use can forecast this break.

‘Most of the models are continuous, where the economy strengthens a bit or softens a bit. It is quite difficult to deal with what could be a step-change, where you get some tipping point where everyone decides it is time to cut back on hiring and capital spending. When that happens, pretty soon everything snowballs into a major slowdown, ‘ said Nigel Gault, economist at Global Insight.” MarketWatch: Can the U.S. economy pull an Indiana Jones? Danger of recession looms, with early 2008 seen as most treacherous period

A fed cut does nothing but stimulate the stock market and ease fears on Wall Street, but home owners who are defaulting on mass get no real reward from a 0.25% fed cut. Maybe an illusionary feel that rates have come down (even though most mortgage rates are adjusting upward) and the American economy is ‘healthy’ again (apart from the housing mess) but inflation picks up. The good indicator for US inflation is the American dollar, which is being dumped for higher yield currencies, the USD continues to plummet against the Euro, AUD, NZD and most Asian currencies. A declining USD isn’t good, with China’s economy growing and their Yuan appreciating at very slow pace, overinflated currencies like the AUD and EUR (due to carry trading and investing) – so if the USD doesn’t regain some strength it may get unpegged by Middle Eastern and even some Asian currencies, which may lead to complete meltdown of the USD. This could throw the world into a currency crisis.

Regardless of the US slipping into a severe recession and it’s possible negative effect on the world economy. High oil, high food costs, namely wheat is going to inflate food prices throughout the world. The northern and southern hemispheres have both had droughts, with Australia (a wheat exporter) having gone through one of the most severe droughts in history. So inflationary pressures in Europe will continue and a resonating credit crunch from the sub prime mortgage disaster in the US, will inevitably lead to consumer’s paying more for food through to banking products (wordwide).

The banks have all suffered from the credit crisis. The biggest write-downs have come from Wall street, namely Merrill Lynch with a huge $8.4 Billion write down on the brokerage firms exposure to subprime debt. Other investment banks and brokerages have been Citigroup $6.5 billion loss on fixed income trading related to the subprime mortgages, Swiss bank UBS AG loss at $3.5 billion, Bear Stearns closed down their hedge fund after losing $1.5million, with Bear Stearns also losing $700 million on it’s exposure to the subprime mortgage markets. Overall the global banking sector is still spooked from massive losses from both retail banks, investments banks and other big financial industries including insurance companies.

But the debt bubbles continue to grow, if confidence returns to the American consumer, it will be on the back of credit, can employment hold into 2008? What ever the case, the collapsing housing market, the ongoing inflation with food and oil and a banking sector that will pass on costs to consumers will all have a negative effect on the largest economy in the world.

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