Corruption

Friedman, the author of The World is Flat, did an op-ed piece in the New York Times last week.

He was asked a question: “Just how corrupt is America?”

The context was the arrest of Madoff on charges of running a Ponzi scheme of roughly $50 billion dollars. And the nonsense that has savaged the market.

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker that makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard and Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial services industry was doing. If that isn’t a pyramid scheme, what is?

Resistance is Futile

I had posted on the madness of Jerry Yang a couple of weeks back. And today, Reuters reports that:

Microsoft Inc is in talks with Yahoo Inc to buy the U.S. internet company’s online search business for $20 billion, according to a report in Britain’s Sunday Times.

The proposal under discussion involves a complex transaction that would see the U.S. software giant support a new management team to take control of Yahoo, but it has no intention of refreshing its bid, said the newspaper.

Microsoft withdrew its $47.5 billion buyout offer for Yahoo in May after Yahoo chief executive Jerry Yang and his board rejected the bid as too low.

Tough to go up against the Borg, Jerry. And saving them $25 billion or so in the process just does not make sense for the shareholder. Except perhaps for Carl Icahn. He seemed to know that something was up.

Billionaires Lose Money Too

This is a cross-post from my other blog. Given my recent string of optimistic posts about the financial fate of the world, I thought it necessary to highlight the plight of the very rich. According to The New Politickler, here are the biggest losers in the financial markets:

Loser #1 Anil Ambani LOSS: $32.5 billion

Indian billionaire Anil Ambani”™s Reliance Communications has recently become the new face of Hollywood film-financing, completing high profile deals with DreamWorks and a series of A-list actors and directors this past year. In fact, just days into the current financial meltdown, Reliance closed its long-simmering deal to invest $500 million in DreamWorks.

Ambani has likely lost more money this year than anyone else worldwide.

Loser #2 Lakshmi Mittal LOSS: $30.5 billion

Last year, Lakshmi Mittal was the wealthiest man in India and Forbes”™s fourth richest person worldwide. Now, he”™s lost $30.5 billion this year after his steelmaking conglomerate ArcelorMittal increased production cuts and its stock dropped precipitously. He”™s just one of the Indians who helped the country”™s richest class lose $200 billion this year.

ArcelorMittal”™s stock price went up through June, then it dropped from $104.77 to around $25 a share now. During that period, Mittal, who owns 43 percent of the company, experienced stock losses totaling $50 billion. Fortunately, taken over the entire year, Mittal”™s net worth has only dropped from roughly $50 billion to around $20 billion.

Loser #3 Sheldon Adelson LOSS: $30 billion

In 2006, casino magnate Sheldon Adelson was the world”™s third richest man and he boldly predicted that he would soon overtake Warren Buffett and Bill Gates to ultimately claim the top spot. But the markets, like craps tables don”™t always behave as you”™d like. The 75 year-old CEO of Las Vegas Sands saw that play out this year, as he lost $30 billion of his net worth. That”™s the same as losing $100 million a day, $4 million an hour or just more than $1,000 a second.

In fact, Adelson”™s is possibly the largest paper loss in U.S. history, even including the Rockefellers”™ $1 billion loss in the Great Depression, adjusted for inflation. (It”™s not the biggest loss worldwide, though.)

As a result of his massive losses, Adelson, who is probably best known for his Venetian casino on the Las Vegas strip, had to halt plans to expand into Macau and Singapore, which he was still pursuing a few months ago, despite the economic downturn and rivals like Steve Wynn”™s decisions to cut back on overseas development. Instead, he”™s invested nearly $1 billion of his family”™s money into Las Vegas Sands to stave off bankruptcy.

Loser #4 Mukesh Ambani LOSS: $28.2 billion

Mukesh Ambani overtook Lakshmi Mittal as India”™s richest person this year. Ambani saw his net worth drop by $28.2 billion in 2008, but still lost less than Mittal. Ambani controls Reliance Industries and is the brother of Anil Ambani, head of DreamWorks backer Reliance Communications. Anil”™s 2008 loss: $32.5 billlion.

Loser #5 Warren Buffett LOSS: $13.6 billion

Warren Buffett has, in many ways, been one of the heroes of the financial meltdown, saving everyone from Goldman Sachs to GE. But even the Oracle of Omaha is not immune to stock losses. After his net worth increased by $8 billion during September, he lost $5.29 billion in October thanks to Berkshire Hathaway”™s plunging stock price. For the year as a whole, Warren”™s paper wealth is down by $13.6 billion, leaving him with only $48.1 billion. Tough times in Omaha.

Has Pessimism Gone Too Far

CTV broadcast a set of news items yesterday to highlight what has now become a daily parade of negative financial news. CTV reported that 850 people in Newmarket and Aurora will lose their jobs because of Magna closing plants. CTV then reported that there was a 90 percent plus jump in Employment Insurance claims in Oshawa. And the videographer painted Oshawa as a ghost town: empty stores, empty streets, empty wallets.

The Wall Street Journal asked the question whether pessimism has gone too far. And they presented an interesting data point. On Thursday, November 20, the S&P was down 48.8% for the year to date.

At that point, 2008 goes down as the worst year in the history of the S&P. Since 1926.

The only time that the markets came close to losing that much money was in 1931. The Great Depression. The S&P lost roughly 43 percent.

All this got me thinking: What was the worst year of all time? Regular daily securities trading began in New York on July 1, 1791, inside a coffee house on the corner of Wall and Water streets, where overcaffeinated brokers could pounce on the latest news moments after ships nudged into the docks on the East River. But trading was spotty and stocks were few for the first couple of decades. Only around 1815 were there enough stocks and sufficient trades for us to get a sense today of how the average stock performed back then.

Yale finance professor Will Goetzmann and his colleagues have built an index for NYSE stocks all the way back to 1815, so it”™s not hard to answer the question of where 2008 ranked, as of Nov. 20, among the worst years of all time.

Here are the 20 worst years in history, based on Yale”™s NYSE index until 1925, and for the S&P from 1926 onward:

1941 -11.6%
2001 -11.9%
1893 -12.3%
1857 -13.2%
1837 -13.4%
1828 -13.6%
1831 -14.0%
1973 -14.7%
1920 -15.0%
1841 -16.1%
1917 -16.4%
1884 -18.5%
1839 -19.0%
1907 -21.8%
2002 -22.1%
1930 -24.9%
1974 -26.5%
1937 -35.0%
1931 -43.3%
2008* -48.8%
*Through Nov. 20.

When this series of stock-market data began, James Madison was president. From that day until this, the market has never seen carnage on the scale of this year. 

Via.

An Economic Crisis of Historic Proportions

Looks like the economic crisis is going to be long and deep.

Reuters carried a piece yesterday outlining Obama’s perspective on the economic crisis. A few of the highlights — or should I say lowlights:

U.S. President-elect Barack Obama said on Saturday he was crafting a two-year plan to fight an economic crisis of “historic proportions” …

… leaders at the Asia-Pacific Economic Cooperation forum called for a global free trade deal to offset the economic crisis.

Obama said, “There are no quick or easy fixes to this crisis, which has been many years in the making, and it’s likely to get worse before it gets better.”

… swift and bold action was needed to prevent a deep slump, a spiral of falling prices and millions of job losses.

“The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions,” Obama said.

I admit that I get a little nervous when the president-elect of the world’s largest economy, and a person who campaigned on hope, starts saying things like an economic crisis of historic proportions. And more so when Wikipedia dedicates a page to it.

Gasoline

The price of gasoline has dropped. In most cases to 80 cents a litre or so. Due to a collapse in the price of oil which has plummeted from a high near $150 in July to a low near $50 today. In my view, the price correction at the pumps is still not aligned to the cost side but at least it is better than paying $1.20 a litre.

Since 2004 the near tripling of trading in oil on the New York Mercantile Exchange (NYMEX), the world”™s biggest market, has neatly coincided with a tripling in the price of oil.

People far smarter than me determined that oil speculators were not really adding that much to the price despite the view that speculators turned oil trading into a global poker game and doubled the price of gasoline practically overnight.

The Economist, in a piece called Don’t Blame The Speculators, provided their perspective:

Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk ”” a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.

Back in May of this year, GlobalResearch made the following observation:

The price of crude oil today is not made according to any traditional relation of supply to demand. It”™s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today”™s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price.

It gets worse.

On August 21, 2008, the Washington Post reported that the Commodity Futures Trading Commission (CFTC) learned that an astonishing 80 percent or more of oil contracts on the New York futures market were held by speculators.

Financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on the NYMEX, a far bigger share than had previously been reported by the agency.

At one point in July, a single foreign energy firm held 11 percent of all regulated NYMEX oil futures contracts for the purpose of speculation.

At a hearing of the Select Committee on Energy Independence and Global Warming on May 22, 2008, the Bush Administration’s top energy official, Energy Secretary Samuel Bodman, testified that he did not believe that speculation was playing any role in the run up in oil prices.

The cost to consumers for all of this nonsense is truly staggering. Untold billions of dollars. And now that the shock waves from the mad economic policies of the Bush adminstration continue to batter our economies, the speculators are bailing out. Victims, caught up in the same downdraft of a global meltdown in the financial markets.

And what were we told all along as the price of gas skyrocketed? A little fairy tale called Supply and Demand. You know the story: more demand in India and China means higher prices for gasoline in Canada.

The Conference Bubble

Conferences can be very interesting experiences. I endure the misery that passes for air travel. I miss my kids. I sleep in crowded hotels. I jam up the calendar with sessions, meals and other forms of networking. And I sift through mountains of information hoping to find something new, something innovative, something helpful.

A conference is a bubble. There is a different pace and culture. The environment seems tranquil with soft music piped into all of the public areas. Even the conversations take place in hushed voices. The speakers speak. The attendees listen. There is an allotted time for questions. Punctuality is highly valued. Food and snacks show up when needed.

The bubble will burst in a couple of days. Hopefully with enough takeaways to make the trip worthwhile.

A General Meltdown of Financial Institutions

I read this interesting quote from Nouriel Roubini:

It is increasingly clear by now that a severe U.S. recession is inevitable in next few months…I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets… massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks; ..ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe knock-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate…; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

Oh, I should also mention that I read Roubini’s quote almost a year ago on his website as well as on the Global Research site. He had been talking about this outcome back in 2006. Only no one believed him then.

So how bad will it get? Bad is an understatement. And bad is just getting started.