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Wednesday's Top 10 with NZ Mint: How the All Blacks' new sponsor bounced back from AIGmageddon; Germany audits its foreign gold holdings; Peugeot's very French guarantee; Dilbert

Posted in Opinion Updated

Here's my Top 10 links from around the Internet at 12.00 pm today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read article today #7 from Ambrose on the ultimate magic wand for a new global monetary system. It's extraordinary this stuff is now seriously being discussed in public.

1. How AIG made money from its bailout - Here's the FT with a useful piece on how the new All Black sponsor is on the rebound.

No worries then...

Some of the details are interesting about the mess it was in when it was bailed out.

And how the Fed's backstop effectively guaranteed it would not fail.

And then pumped up asset values to ensure it made a profit.

If only we could get the Fed to guarantee we win the next World Cup.

Of all the casualties of the financial crisis, AIG was the scariest. It had a balance sheet of more than $1tn and was involved in $2.4tn worth of derivatives trades. It had taken the cash from the securities it lent out and invested it mostly in toxic mortgages. Further, it provided insurance against losses for the riskiest mortgage securities, whose values were sinking by the day. It was, as US Federal Reserve chairman Ben Bernanke noted, a giant hedge fund perched on top of an insurance company.

Yet AIG also guaranteed retirement accounts and provided insurance to ordinary citizens. It was where Wall Street met Main Street. Ultimately, the government rescue package totalled $182bn. But, in the last week of August this year, the Fed announced that it had liquidated the entire portfolio of troubled assets it had taken from AIG and placed in two units known as Maiden Lane II and Maiden Lane III. And, in a statement that would have been unthinkable four years earlier, the Fed said it had made $9.4bn for the US taxpayer in the sale.

This detail is interesting.

It is hard to overstate the disarray at AIG. Even the insurance company share certificates that were meant to serve as collateral were missing. AIG staffers, whose own financial security was tied to that of their employer, were in a state of shock. After a frantic search lasting days, most of the certificates were found in obscure corners of the head office of AIG on New York’s Pine Street. The certificates were put into hundreds of shopping carts and wheeled from AIG to their new home, the fortresslike building that houses the New York Fed.

Moreover, executives at AIG had no idea what its short-term liabilities were – how much money it had to pay out in the coming nine months – making it even more difficult to calculate the size of any rescue package.

2. Where ist das Gold? - FTAlphaville points out Germany's Federal Court wants the Bundesbank to audit its holdings of gold offshore.

The Germans are getting a tad nervous about whether it's actually still there.

In an ultimate act of desperation, the Bundesbank is even considering to let journalists inside the vaults. The problem is only that the gold held outside Germany has not been audited. There are no official figures, but Suddeutsche estimates about 1500 tonnes are held by the Fed, and about 800 tonnes by the central banks of England and France. The total value is some €133bn. The court of auditors has now demanded regular audits of Germany’s foreign gold reserves. The last audits from New York were from 1979/1980. The Bundesbank has since been let into the vault, but not allowed to open the boxes in which the bars are stored, something that has obviously stokes suspicions.

The Bundesbank has released the court of auditors statement, with several parts being blacked out, presumably given the continued official secrecy about the location of Germany’s gold reserves. The Bundesbank insisted that there is no doubt about the integrity of the foreign depots warning that the doubt itself could have considerable political implications. As a sign of goodwill, Suddeutsche writes, the Bundesbank wants to repatriate 50[metric] tons from abroad, melt it and test the quality.

3. Funding for Lending not working  - FTAlphaville points out Britain's fancy new scheme to get banks lending is not working.

It shouldn't be a surprise. Those who can borrow don't need to. Those who need to borrow can't and those who lend don't want to lend to those who can't. Ultimately, the only way out is to restructure debt and redistribute income to get the middle to lower income groups spending again.

Figures from the BBA on Tuesday generally confirmed what we already knew: July’s £100bn Funding for Lending scheme, which was supposed to reduce the real cost of borrowing in return for the banks getting even cheaper access to cash, is simply failing to get through.

Unsecured borrowing fell 2.5 per cent in the year to September, while personal deposits grew 5.7 per cent over the same period. There was a slight upward blip in gross mortgage lending during September, but at £7.3bn that’s still below the monthly average over the past 12 months. Consumers are in lock-down.

4. China's rising wages - Matt Phillips reports at QZ.com that China's wage costs have now risen to Mexican levels, moving in tandem with a higher Mexican share of US imports.

In 2000, Mexican manufacturing labor was more than three times as expensive as Chinese. But after of decade of stagnant wages in Mexico and a sustained rise in China, Chinese labor is no longer cheap. In fact, it costs almost the same amount to hire Mexican workers, JP Morgan economists write. That turnaround—along with other factors, such as the surging costs of transporting finished goods in recent years—helped drive Mexico’s share of US manufacturing imports to nearly 15% in 2012, up from a 10-year low of 11.2% in 2005. Along with a yuan that remains quite strong by the standards of the last two decades, the rising cost of Chinese workers is another headwind for the export sector in the People’s Republic.

5. France guarantees Peugeot - AFP reports the French government will provide US$9 billion of guarantees to keep Peugeot alive and ensure it doesn't shut down a massive factory.

So much for no more state subsidisation in competitive industries. I wonder if the EU anti-monopoly Csar will put the kibosh on this one...

In return for the support, the French government will demand that Peugeot reduce job cuts announced earlier this year as part of a massive restructuring. "It's the give-and-take principal," Industrial Renewal Minister Arnaud Montebourg told Liberation newspaper, adding that it was Peugeot who had come asking for help.

Peugeot has announced 8,000 job cuts as part of a massive restructuring and Montebourg said he expected the plan to be scaled down by hundreds of jobs.

6. What happens if Bernanke's not there? - Andrew Ross Sorkin at NY Times' Dealbook reports Ben Bernanke has told friends he will not run put himself forward for a second term when his current term expires in early 2014, regardless of who wins the Presidential election. Romney has already said he wouldn't reappoint Bernanke.

That might put a spanner in the works of the Fed's pledge of zero rates till mid 2015 and unlimited bond buying. What would a new Chairman do?

For the last couple of months, there has been a parlor game on Wall Street and in Washington about who will become the next Treasury secretary. After all,Timothy F. Geithner has made it clear he plans to be out of that office at the end of the year whetherPresident Obama is re-elected or not.

But there is another wrinkle in the parlor game calculus: Ben Bernanke, the Federal Reserve chairman, is likely to need a successor, too. If Mitt Romney wins the presidency, he has already pledged he will replace Mr. Bernanke, whose term as chairman ends in January 2014, in just over 15 months. However, Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election.

That would be a one-two punch, with two of the most important jobs in the nation up for grabs. And over the last couple of years, especially at the depth of the financial crisis, the relationship between the two people in those roles has been increasingly important.

7. The magic wand - Ambrose Evans Pritchard has stirred up a hornets nest by focusing on the IMF's 'Chicago Plan revisited' paper and suggesting the following:

A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan. One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

8. The rebuttal - Marshall Auerback has a rebuttal for Ambrose's idea. He's not a fan, but has some useful things to say.

There are some good things about a 100% reserve backed banking system.  To the extent that we require all institutions to hold liquid reserves of equal value to their deposits then the fear of a bank run is eliminated.

But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes, there would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces. Any firm that wanted to borrow funds would have to issue a convincing asset as collateral. Nobody would ever have access to credit. Maybe some people think that’s a good thing, but you need a fiscal policy which promotes jobs and income growth so that people never have to resort to credit. And that would apply to all credit issuing institutions, such as credit card companies. I would assume that credit granting institutions would have to issue liabilities first in order to warehouse demand deposits (that are 100 per cent reserved by the deposit issuing bank), before extending new credit.

The truth is that the debt explosion that has brought the World economy to its knees was not the fault of private sector credit creation per se. It was the result of lax regulation; criminal activity; and a neo-liberal obsession that national governments had to run surpluses (and hence squeeze private sector liquidity and wealth).

With this obsession dominating public policy over the last few decades, economies could only grow (mostly) if the private sector took on increasing debt levels. The rise of the financial engineering sector – with the elimination of regulations that might have reasonably controlled its errant tendencies – guaranteed that the households would take on this debt…on increasingly dubious grounds.

9. Eyes wide shut - Here's banking analyst Chris Martenson writing at Peak Prosperity about net energy. Worth a read.

The core of my views is shaped by the idea that the very thing being sought, more economic growth (and exponential growth, at that), is exactly the root of the problem.  I suppose I would take a similarly dim view of an alcoholic trying to drink their way back to health as I do the increasingly interventionist central bank and associated political policies the world over.

Go on then, drink more, but I think we all know what the result will be.

The most pressing concept at the center of it all is the idea of net energy, or the energy returned on energy invested.

10. Totally John Stewart on the Presidential Debates and Baracktose intolerance

(#6 Updated to correct Bernanke's 'run' for a second term to 'put himself forward' for a second term. As readers pointed out, he would be reappointed rather than reelected)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

18 Comments

Eroei........a Greek maiden

Eroei........a Greek maiden of sorts?

http://www.zerohedge.com/news

http://www.zerohedge.com/news/2012-10-23/nigel-farage-total-subjugation-...

Some great truthiness on Europe from naughty Nigel

no.7 is absolutely brilliant.

no.7 is absolutely brilliant. Fractional reserve banking has had it's day and proven to be highly destructive. Time to return to real money and real economy where bubbles aren't constantly blown distrorting everyone's incentives. 

Fractional reserve banking is

Fractional reserve banking is a big part of the problem, but why not simply ban fractional reserve banking instead of using it as an excuse for the state to grab even more control over our money supply?  Or how about we get rid of central banks, which are largely responsible for allowing fractional reserve banking by protecting inherently insolvent banks?
 
The response at no. 8 is full of fallacies about full-reserve banking and the gold standard.  The late 1800s saw arguably the greatest period of economic growth in history (relatively speaking), during a time when the gold standard was in full force and prices were falling rather than rising. 
 
No "countervailing fiscal policy that promoted more job growth and higher incomes" was needed; sound money and the capital accumulation it enabled did the job.  Also, the idea that governments need to run deficits to somehow help the private sector save is ridiculous.  Real savings aren't just accounting entries in a book; they are actual physical goods that have been deferred from present consumption.  If you are on a desert island you don't need government deficits to "save" sticks and leaves, do you?

you are probably right in the

you are probably right in the adminitration of it Kleefer. Don't want to give the state too much power over money supply. It was the radical idea to return to real money and do away with these crazy credit bubbles and banksters running the world which got me. 

"The late 1800s saw arguably

"The late 1800s saw arguably the greatest period of economic growth in history (relatively speaking), during a time when the gold standard was in full force and prices were falling rather than rising. "
But the people didn't benefit.  They migrated on mass because their lives were so desperate.  This was the tie of the Poor House and the time when the Irish were starving to death because the British exported the produce from their massive holdings in Ireland and would not let the Irish have the food.

Seems to me you would not

Seems to me you would not have to suddenly move to 100% banning of fractional reserve banking.
Rather, you could progressively increase the reserve requirements of the commercial banks, which as I understand it, would limit the mulitples they can apply to their actual deposits. If by increasing these reserve requirements, their lending ability was reduced to an economy damaging level; then the RB could loan them more printed money until they did have sufficient lending capability.
The day to day plumbing of banking would still be theirs (and they could expect reasonable margins for doing so). The picking of sound credit risks from not so sound would still sit with them.
Interest rates would not actually have to decline to zero before doing so; punishing savers along the way, as they apparently have to do now.
 

Mr. Bernanke has told close

Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election.
Did he just....?...told close friends..? like who...?Bernanke would sleep alone in a whore house...what friends would these be....Bolly...?..Merke...Mario..?
If Bernanke won't return under Obama, it's because he knows something they don't.... yet.....and it's all bad....really bad, or maybe he needs a good deal of time to write his Quantative memoirs with fractional reserve.
Bernard...re #7...The Chicago Papers.....mmmmmm noo,  don't think there will be any serious thought put toward that....it's a guaranteed way to get yourself murdered....with predjudice. 

An interesting book by Cox &

An interesting book by Cox & Alm ( Myths of the Rich and the Poor , 2000 ) demonstrated that income in America redistributes quite naturally , without the heavy hand of the government ....
 
.... the University of Michigan has been undertaking a tracking study of 50  000 Americans , since 1968 ....
 
The data goldmine has revealed an astonishing upward mobility of American workers ....  of those families ranked in the bottom quintile of income in 1975 , a mere 5 % of them were still there in 1991 ..... infact , 75 % of that lowest income bracket had reached the top two income quintiles ... The US Treasury Dept. conducted a similar study , and discovered that 86 % of people in the lowest income quintile in 1979 had moved to a higher income quintile by 1988 ( 66 % had risen to the middle income quintile or above ) ....
 
..... clearly , anyone who assumes that folk are locked into poverty for life , needs to find some facts to back up that premis . Cox & Alm showed how static income distribution statistics are useless .

Yes GBH...Roger Ream lists it

Yes GBH...Roger Ream lists it among the must studies...an interesting collection of American speeches, books....dissertations...!. covering Free Market economics....infact Tribeless prolly has the collection..!
http://www.tfas.org/document.doc?id=120
 
BTW....had a sneak at Bolly's new offering for Insomniacs Anonymous must read list..?
 Entitled...The Wonder Years  reflecting on neutral ,as perhaps not the best gear for downhill slalom economics, still believing Macro is something to be enjoyed with cheese.
Crikey my dyslexia's set in for the day...better bgguer off..!

Gummy, Was intrigued by these

Gummy,
Was intrigued by these claims, so did some quick googling. Haven't yet got to the actual conclusions by any means; but the thrust of Cox and Alm's book seems to be that a poor person now, if he owned what he did now in the early 1970s, he would have been wealthy then. Calculators, computers, reliable cars with fancy gadgets, dishwashers, colour television with multiple channels and so on.  
That is very different from suggesting they have moved into the top two quintiles now. 
The following extract from a Cornell paper appears to contradict the claim.

While there appears to be considerable relative income mobility (about 60% of individuals change income quintiles over 10 years), it is not far — about 60% of those individuals who changed income quintile in the 1980s or 1990s only moved to the next quintile. But most individuals in the poorest quintile in 1980 experienced an increase in their real income between 1980 and 1989 — half saw their real income increase by more than 36%. Of those in the richest quintile, almost half saw their real income fall by 10% or more during the 1980s. But there are differences in income changes between the 1980s and the 1990s: those in the poorest income quintile may have done slightly better in the 1990s than in the 1980s, while individuals higher up in the income distribution (quintiles 2-5) appear to have done better in the 1980s than in the 1990s. 

 

Their URL was very long and didn't copy well; but a similar paper is here, challenging the Michigan study:

http://www.huppi.com/kangaroo/L-mobility.htm

 

It seems the truth is a little muddy.
 

#9 "Go on then, drink more,

#9 "Go on then, drink more, but I think we all know what the result will be."  yeah,the govt needs the  tax revenue I spose

#6.  Sloppy, sloppy

#6.  Sloppy, sloppy reporting. The Chairman of the Federal Reserve is appointed - not elected.  Bernake wouldn't not "run" again - he would choose not to make himself available for reappointment.
 
How could such an error make it into the NY Times.  Sad and scary at the same time.
 
 
 
 
 
 
 
 

What error ? .... you gotta "

What error ? .... you gotta " run " as it were , by indicating you want to be re-appointed .... doesn't appear 'like sloppy sloppy reporting to me ....
 
.... but then , they do say that one person in four is quite insane ..... and I got 3 buddies , who each look perfectly sane to me ...... meaning .....

My bad, Gummy, it was indeed

My bad, Gummy, it was indeed interest.co.nz who said "run" whereas the NYT reporter said:
 
"Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election."
 
 

Kate/Gummy I have corrected

Kate/Gummy
I have corrected 'run' to 'put himself forward' for a second term.
You are right he is reappointed rather than re-elected.
cheers
Bernard

Aw gees Bernard.....now

Aw gees Bernard.....now everyone's.....  the permanent critic type... ;)....run ...stand....crawl...sidle...I don't care, we get the gist of it.
So he would effectively not be disapointed if not reappointed....?
was that the guts of it..?.... yep, I think so.

Story of George P Mitchell

Story of George P Mitchell (now age 93) ... a truly great entrepreneur ...
 
 
The Man Who Pioneered the Shale-Gas Revolution - WSJ.com
 
 
http://online.wsj.com/article_email/SB10001424052970203630604578075063683097342-lMyQjAxMTAyMDIwMzEyNDMyWj.html?mod=wsj_valetleft_email
 
 
Wikipedia entry ...
 
 
George P. Mitchell - Wikipedia, the free encyclopedia
 
 
http://en.wikipedia.org/wiki/George_P._Mitchell
 

He was the creator of the massive the Woodlands development north of Houston as well. A real environmentalist.
 
 
Hugh Pavletich