Summary of business news and analysis

FT: US set for ‘big bang’ financial clean-up, Jan. 30, 2009

"The Obama administration is gearing up for a “big bang” announcement next week that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets."...

..."Details of the financial overhaul are being finalised and have yet to be approved by President Barack Obama, but it may include both the purchase of toxic assets by a “bad bank” and insurance-style guarantees for problem assets remaining on bank balance sheets.

Anti-foreclosure efforts are likely to focus on subsidising programmes that reduce unsustainable monthly mortgage payments, though there may also be support for schemes that subsidise the partial writedown of loans that exceed the value of the home. Treasury may also unveil new efforts to revitalise dysfunctional securitisation markets."

Source: Excerpts from FT article linked to above

Looking at some of the debates at the WEF in Davos I got the impression that people are now overly pessimistic and many tend to believe that governments alone can solve the crisis.

In this context I just would like to remind that one of the causes of the US real estate crisis was the way Fannie Mae and Freddie Mac were acting. Because government was universally believed to guarantee their debt, Fannie and Freddie could borrow at better rates than private firms and consequently accumulated greater risks, thus contributing to the creation of a real estate bubble. I know, it is an old story. However, it helps not to forget that government is not a better shareholder than private investors.

Here is some further reading from 2001! which should not be ignored:

Mercatus Center, George Mason University: Neither Fish Nor Fowl: An Overview of the Big-Three Government-Sponsored Enterprises in the U.S. Housing Finance Markets, November 15, 2001

FX Street: U.S. Reuters/U. Michigan consumer sentiment index improved in January, Jan. 30, 2009

"Consumer sentiment has brightened somewhat in the U.S. in January, despite consumers’ concern of a deep an long recession period ahead, according to the latest Reuters/University of Michigan Survey of Consumers.

The index of consumers’ sentiment has risen to 61.2 in January from 60.1 in December, although it remains in levels well below the 78.4 posted in January 2008. Consumer sentiment has posted its second consecutive increase from the 55.3 low posted in November.

Economic expectations index improved to 57.8 in January from 54.0 in December. It was at a 68.1 level in January 2008."

The WSJ, reporting from Davos, asks whether capitalism is dead.

MarketWatch: Is capitalism dead?

They should distinguish between owners capitalism and manager capitalism: Capitalism in the sense of active owners, caring about the shareholders and stakeholders, should urgently get a revival. Manager capitalism, in the sense of managers plundering companies, should disappear.

John C. Bogle, Founder of the Vanguard group, put it in better words already back in 2003:

Text "The root causes of the disease in our system are deep, and the remedies that are required to cure it will not be easy to come by. For what we have witnessed in the failure of corporate governance in America has been, as journalist William Pfaff described it, “a pathological mutation in capitalism.” He was right on the mark. The classic system—owners capitalism—had been based on a dedication to serving the interests of the corporation’s owners, maximizing the return on their capital investment. But a new system developed—managers capitalism—in which “the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.” Why did it happen? “Because,” in Mr. Pfaff’s words, “the markets had so diffused corporate ownership that no responsible owner exists. This is morally unacceptable, but also a corruption of capitalism itself.”"

Source: John C. Bogle, Founder and Former CEO, in a speech on June 2003

Related Reading:

A link found through MarginalRevolution:

What is political capitalism?

MarketWatch: U.S. Q4 GDP down 3.8%, inventories limit downturn; Worst performance since Q1 of '82; economy in new territory

The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth.

A clearer picture of the scope of the weakness in the fourth quarter, which excludes the inventory buildup, contracted at a 5.1% pace, the weakest in 28 years.
Even with inventories, the growth rate is the worst since 1982.

Today's report also confirms that the economy has entered new territory with a stunning record drop in headline inflation.

The drop in growth in the fourth quarter was above economists expectations that growth would shrink at a 5.5% annual rate. read more

This is a new study by the University of St. Gall about the consequences of the financial crisis (for German speaking readers):

University of St. Gall: Konsequenzen aus der Finanzmarktkrise Perspektiven der HSG, Jan. 2009

Olivier Blanchard published an excellent article about the role of fear in the current crisis in The Economist. He explains the role of uncertainty on behavior and that moving away uncertainty quickly is key to overcome the crisis. He urges governments to move away tail risks and the perception of tail risks.

The Economist: (Nearly) nothing to fear but fear itself by Olivier Blanchard, Jan. 29, 2009

"So what are policymakers to do? First and foremost, reduce uncertainty. Do so by removing tail risks, and the perception of tail risks. On the portfolio side, establish a price, or at least a floor on the price, of the troubled assets. Ring-fence them or take them off bank balance-sheets. On the consumption side, commit to do whatever it will take to avoid a Depression, from fiscal stimulus to quantitative easing. Commit to do more in the future if necessary. Above all, adopt clear policies and act decisively. Do too much rather than too little. Delays in financial packages have cost a lot already. Further rounds of debate will stoke uncertainty and make things worse."

Source: Excerpt from article linked to above

The pricing of the troubled assets when transferring them into a bad bank would, of course, be a key issue....

Paul Krugman

CalculatedRisk has once again an excellent summary of credit crisis indicators. It seems that the US Fed is making progress:

CalculatedRisk: Credit Crisis Indicators, Jan. 29, 2009

FT: Japan’s production falls record 9.6%, Jan. 30, 2009

Japanese industrial production fell a record 9.6 percent in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.

Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry – the main driver of the world’s second-biggest economy – as inventories hit record highs despite factory closures and lay-offs. read more

Reuters: Soros urges U.S. to create "good bank" as aggregator, Jan. 28, 2009

Soros proposes a model which would be more at the cost of shareholders rather than taxpayers. It is a creative idea which would cause tremendous implementation issues.

"The United States needs to recapitalize its banks but should consider the creation of a "good bank" when considering how to deal with the toxic assets, hedge fund manager George Soros said on Wednesday."....

"I would keep the capital of the banks together with the bad assets in the bad bank and then create a new bank with the good assets of the bank and the recapitalize that, giving the shareholders the right to put in more money," he said.

We continue to hear people who want to suspend market to market valuation. Here are some econmist's views on this:

Economist's View: Should Mark-to-Market Asset Valuation be Suspended?

Fed Press Release Jan. 28, 2009

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability."

Source: Excerpt from Fed Press Release

NYT: How the Government Dealt With Past Recessions, Jan. 26, 2009

Swiss Economic Institute (KOF): Decline in GDP Confirmed – KOF Economic Barometer, Jan. 28, 2009

"Decline in GDP Confirmed – KOF Economic Barometer For January 2009 the barometer has fallen to –0.87 points. As was signalled last month, this means the barometer is now confirming that the Swiss economy is set to contract over the coming months.

The KOF Economic Barometer declined 0.42 points relative to the December figure (revised from –0.39 to –0.45), and now stands at –0.87. This is the lowest level recorded since 1991, when the current series of data began. This consequently means Swiss gross domestic product is likely to continue shrinking this spring in year-on-year terms."

Source: KOF Press Release

Roubini is still pessimistic for 2009:

Neue Zuercher Zeitung (NZZ): Interview with Nouriel Roubini at the World Economic Forum in Davos, Jan. 28,2009

This is something US Treasury owners have to look at:

Calculated Risk: FOMC Statement: Will the Fed buy longer-term Treasuries? Jan. 27, 2009

This year’s 11th Annual Global PWC CEO Survey examines how CEOs perceive the business environment in which they are operating, and how an increasingly connected world affects the way their companies function and achieve success.

"Their gloom was principally about the immediate future. “As CEOs look at the next 12 months, they’re concerned, but when they look out three years, they feel more confident,” DiPiazza said.

Moods were distinctly different by country. CEOs in the U.S., Britain, Canada, France and Italy were most pessimistic, while 90 percent of Indian CEOs and 73 percent of those polled in China said they were “very confident.""

PWC: Executive summary: 11th annual Global CEO Survey, 2009
FAZ: Zuversicht der Manager sinkt auf Rekordtief, Jan. 27, 2009

Guardian: Mandelson offers car industry £2.3bn in loans, Jan. 28, 2009

Lord Mandelson, the business secretary, offered his first subsidies to protect British industry from the ravages of the recession when yesterday he unlocked £2.3bn in loan guarantees for the ailing car industry, including £1.3bn in loans from the European Investment Bank.

The aid is significantly smaller than the help planned in France and Germany, reflecting the relatively smaller size of the car industry in the UK. rea more