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)
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