Monday's Top 10 with NZ Mint: Roubini warns China will hit brick wall in 2013; The next big US bailout; Europe's Too Big To Fail banks; Royal Wedding video (sorry); Dilberts

Here's my Top 10 links from around the Internet at 10 to 10 am in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I could do with a few more management layers under me. But not as many as Dilbert's boss....

1. China's Great Brick Wall - Nouriel Roubini, the maverick economist who predicted the Global Financial Crisis, has predicted a hard landing in China from 2013.

This is today's must read as it has a nice overview of China's problem of over-investment.

It's important for us because much of this over-investment in infrastructure includes steel and concrete made from raw materials bought from Australia, our biggest trading partner.

However, if China can fire up demand from Chinese consumers that might be good for us, given consumption of protein is something we're good at supplying.

Roubini's warning via Project Syndicate is well worth reading below and here:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

2. Euro Too Big To Fail - Economists Morris Goldstein and Nicolas Veron ask at VoxEu whether European banks are Too Big To Fail. The chart below shows how much the biggest banks in each country have in assets as a percentage of GDP. Looks to me like the Dutch in particular have a too big to fail problem, along with the Brits (already nationalised) and Swedish.

The higher assets-to-GDP ratios observed in Europe are mainly due to high banking sector concentration, significant international expansion of some major banks, and business models that lead banks to retain many assets on their balance sheet.

3. A dual justice system - The head of America's Financial Crisis Commission Phil Angelides has asked whether America appears to have a dual justice system: One for the financial elite and one for the rest. This is quite extraordinary coming from one of the members of the establishment.

HT Zerohedge

Here's Angelides (video below:

"One for ordinary people and then one for people with money and enormous wealth and power."

"To the extent laws were broken, we need deterrents. If someone robs a 7-11, they took $500 and they were able to settle the next day for $50 and no admission of wrongdoing, they'd knock over that 7-11 again. And we've seen time after time where people and firms have made tens, one hundreds, billions of dollars. They've settled charges for pennies on the dollar. At Citigroup for example they represented that they had $13 billion of subprime mortgage exposure when they really had $55 billion. The penalty to the chief financial officer who made $19 million that year, 2007, was $100,000. Goldman was fined $500 million but the date they settled their stock moved up $2 billion. There's been no real consequence."

And here's Tyler Durden at Zerohedge and his apocalyptic view.

At some point, sooner or later, the American peasantry will snap. Maybe not tomorrow, maybe not the day after the Apple borg hypnosis ends, and the fascination with American Idol expires, but at some point thereafter, absolutely. And the primary reason will be the glaring trampling of the tenets contained in both the Declaration of Independence and Constitution, by the kleptocratic "superclass."

Then what happens when the billions of ones and zeros held in some bank vault and imparting some ephemeral monetary greatness to these people, finally is exposed for the sham it is, and they have nothing to protect them from the hordes of hungry, angry and very well armed?

4. The Great Muni bailout to come - Chriss Street, the man who exposed the Orange County failure that led to its bankruptcy, has warned over at BigGovernment.com that the US banks are preparing to ask for a government bailout of the municipal bond market.

His comments follow the warning from JP Morgan boss Jamie Daimon last week that hundreds of 'muni' issuers would default.

Street warns against such bailouts, saying corrupt banking practices and inefficient local governments are to blame. He also makes an ominous point about how local governments have been artificially keeping their property taxes high despite falls in prices.

Sound familiar?

Here's Street:

Currently there are 50,000 municipal bond issuers in America and they have sold over $3 trillion in bonds to mostly individuals, mutual funds and money market funds. A good portion of tax free bond sales were to fund local government worthy projects, such as roads, schools and even city halls. But another huge portion of the money raised in the municipal bond market has gone to support politically connected contractors and other crony capitalists.

Mr. Dimon has real insider knowledge of this dark side of the muni market; since his firm recently paid $75 million in penalties and forfeit $647 million to settle SEC charges in an “alleged” municipal bond kick-back and derivative scam. It seems those nice people at JP Morgan Chase somehow got $3.5 billion in underwriting business after sprinkling $8 million in cash on the friends of elected sanitation officials in Alabama.

If one issuer alone could cost a bank almost a three quarters of a billion dollars, how much could hundreds of defaults cause the banking industry. And, what if it turns out thousands of these muni deals were tainted by pay to play? How much more could a coming market crash cost the banking industry?

5. JP Morgan behind Madoff - The smoke is clearing around the Bernie Madoff Ponzi scheme and it seems that JPMorgan Chase, which was Madoff's bank, suspected he was running a big Ponzi scheme but didn't warn authorities. The NYTimes did however direct some executives at JP Morgan did, however, direct some of their top clients away from Madoff...

The new filing by the trustee cleared up one of the mysteries in the redacted lawsuit: the executive who told a senior executive in June 2007 that Mr. Madoff’s returns “are speculated to be part of a Ponzi scheme” was Mr. Zames, a member of the bank’s executive committee who is often cited as a young star who could snag the bank’s top job someday. His warning was given over lunch to Mr. Hogan, who is also a member of the executive committee.

The new filing also showed that Brian Sankey, Mr. Hogan’s deputy, was the executive who, after Mr. Madoff’s arrest, advised that it would be best if the agenda of the meeting at which Mr. Zames’s doubts were discussed “never sees the light of day again.”

Mr. Hernandez was among the other bank executives who learned about Mr. Zames’s doubts that summer, according to the newly filed lawsuit. The new filing also identified the bank executive who refused to put his private banking clients’ money in Madoff-related funds. It was Michael Cembalest, a chief investment officer at the bank’s private banking unit. His team investigated Mr. Madoff and, “after seeing all of the red flags, chose not to invest” in any of the feeder funds, the lawsuit noted.

6. Follow the money - The Economist has an excellent piece looking at who stands to lose if Greece, Portugal and Ireland do indeed have to restructure. The Germans have a lot more to lose than most -- About 230 billion euros.

Calculations by the Bank of England on losses that would arise from haircuts to Greek, Irish, Portuguese and Spanish debt suggests that a 50% haircut would wipe out 70% of the equity in Greek banks, almost half of it in Portuguese and Spanish banks and about 10% of the equity in German and French banks.

That spells trouble of a different kind. Sovereign defaults would entail much more than just a haircut on German banks’ government-bond exposures. It could easily lead to a slew of bank defaults—and corporate ones, too. German banks are owed twice as much by banks in the three bailed-out countries as they are by governments.

Once corporate loans and other exposures are included, Germany’s vulnerability is clear: its banks are owed some €230 billion. These numbers would ratchet up further were Spain to default. German banks have an exposure to Spain that is about three-quarters as great as it is to Portugal, Greece and Ireland combined.

7. Beware the S in the PIGS - Wolfgang Munchau at FT.com warns that Spain is not as safe as many in financial markets think.

No wonder the NZDMO is borrowing hand over fist and stocking up the larder for the government.

Another Greek-style shutdown on European financial markets is not off the agenda.

Falling house prices and rising mortgage payments are bound to push up the still moderate delinquency rates and the number of foreclosures. This will affect the balance sheet of the cajas, the Spanish savings banks. The balance sheets carry all property loans and mortgages at cost. As default rates rise, the savings bank system will need to be recapitalised to cover the losses. The Spanish government implausibly estimates the recapitalisation need to be below €20bn, while other estimates put the number at between €50bn and €100bn. The assets most at risk are loans to the construction and real estate sector – €439bn as of end-2010. Spanish banks also have about €100bn in exposures to Portugal, a further source of risk.

the Spanish private sector debt-to-GDP ratio is 170 per cent. The current account deficit peaked at 10 per cent of GDP in 2008, but remains unsustainably high, with projected rates of more than 3 per cent until 2015. This means that Spain will continue to accumulate net foreign debt. The country’s net international investment position – the difference between external financial assets and external liabilities – was minus €926bn at the end of 2010, according to the Bank of Spain, or almost 90 per cent of GDP.

If my hunch on the Spanish property market proves correct, I would expect the Spanish banking sector to need more capital than is currently estimated. It is hard to say how much because we are well outside the scope of forecasting models. When prices drop so fast, there will be much endogenous pressure that no stress test could ever capture.

The mix of high external indebtedness, the fragility of the financial sector and the probability of further declines in asset prices increase the probability of a funding squeeze at some point. And that means that Spain will be the next country to seek financial assistance from the EU and the International Monetary Fund. As for the large number of official statements that Spain is safe, I think they are merely a metric of the complacency that has characterised the European crisis from the start.

8. Creating shared value - Michael Porter talks here at Harvard Business Review about how the capitalist system is under siege and how it needs to find ways to create shared value with society. He has some big thinking which both business and government needs to do.

Porter is essentially proposing a complete rejig of priorities for modern multinational listed corporates.

A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center.

9. Useful graphic - This graphic from Environment Canterbury shows everything you ever wanted to know about liquefaction (lick-wi-fack-shin). HT Amanda

10. Totally the last mention of the Royal Wedding. Here's T-Mobile viral video mockumentary of this bloody Royal Wedding.