Mish's Global Economic Trend Analysis: Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now!

Mish's Global Economic Trend Analysis: Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now!

In Cyprus, a decision was made to screw savers with a 6.75% to 9.9% "Tax" on deposits.

Supposedly this move was made to "avoid unsettling investors in larger countries and sparking a new round of market contagion."

In reality, the action was mandated theft, imposed by EU officials to protect senior bondholders.

How can such an action do anything but cause contagion?

This can cause more Oy-R panic as the negative sum game to minimize losses means people need to get their money out ahead of the competition. Weak I-O policing means that illicit money is penalized the same as honest, a Gresham's dynamic then causes the honest money to continue to do worse by comparison. For example if a business sector is rife with fraud the more criminal Iv agents make more money, if the government just fines everybody with increased taxes to pay for the economic problems then this makes the honest businessmen even poorer and losing market share.

Twitpic - Share photos and videos on Twitter

Bifurcation points are like where Iv branches and B roots grow in two directions, this indicates an Iv-B economy then.


Twitpic - Share photos and videos on Twitter

 228

about 6 hours ago

"Calling the Big Banks’ Bluff" by Frank Schäffler and Norbert F. Tofall | Project Syndicate

"Calling the Big Banks’ Bluff" by Frank Schäffler and Norbert F. Tofall | Project Syndicate

Above all, the G-20’s decision to prop up systemically relevant banks must be revisited. And governments must respond to the banks’ threats by declaring their willingness to let insolvent banks be judged accordingly. A market economy must rest on the economic principle of profit and loss. An economy with neither bankruptcies nor a rule of law that applies equally to all is no market economy. The law that is valid for all other companies should apply to banks as well.

This is the Iv-B response to the crisis, to let banks collapse rather than the V-Bi one of propping them up as zombies.  

CommentsMoreover, governments should guarantee insolvent banks’ loans to non-financial companies, as well as private customers’ current, fixed-term, and savings deposits, by reforming insolvency laws. Certainly, governments should not guarantee interbank liabilities that do not affect customer deposits. An insolvency administrator would manage the bank and ensure that all payments for which a state guarantee is given are carried out properly, with refinancing of these payments continuing to take place via the central bank.

This is a V-Bi aspect of partial insurance, however there can be enough hidden chaos in the system to still bring it down. The problem is still not letting the I-O police and market do their job, they should compensate people who are deserving of insurance and not people who were dishonest in the crisis. The problem should not be moral hazard because this always occurs with insurance, but whether people acted in ways because of insurance that would justify canceling their insurance. For example banks that speculated in a risky way knowing they could become insolvent might not be insured.

CommentsAfter taking these steps, the payments system would be safe. In case of insolvency, a bank’s computers would not be turned off, its employees would not instantly be dismissed, and payment transactions would not collapse. Nor would a run on savings deposits occur, given the official guarantees that they remain unaffected by a bank’s insolvency. After all, even a simple banknote is money only because the government says so, and thus is no different from savings deposits, which means that no saver has an advantage from holding cash. So there would be no need for bank runs.

CommentsOf course, the deliberate restriction of the effects of bankruptcy to accounts other than private current, savings, and fixed-term deposits means that the insolvency of bank A could lead to the insolvency of bank B. For bank B, too, the same liquidation scenario would apply: savings deposits would be safe, payments could be made from its customers’ current deposits, and loans that it granted to non-financial companies would not be revoked.

The Dangerous Myth that Financial Regulation is Unrelated to Financial Crime

http://neweconomicperspectives.org/2012/08/the-dangerous-myth-that-financial-regulation-is-unrelated-to-financial-crime.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+neweconomicperspectives%2FyMfv+%28New+Economic+Perspectives%29&utm_content=Google+Feedfetcher

Long defines the U.S. as engaging in “overregulation,” by which she means greater regulation than City of London banks experience.  That operational definition of regulation demonstrates that she sees financial regulation as having no value, for the “logic” of a race to the bottom is that all nations will be forced to deregulate and desupervise finance.  Some of the rules may remain in place, but they will not be enforced.

There can be a race to deregulate for advantage but this just creates more of an Iv-B and V-Bi disconnect, this is not always desirable if it makes an Iv-B boom and then bust.

Long’s anti-regulatory logic should cause us (and her) to ask a series of questions.  If financial regulation has no value, then the race to the bottom is a distraction – we should immediately eliminate financial regulation regardless of what the City of London does.  Conversely, if financial regulation were valuable to society it would be vital to break the perverse dynamic of the race to the bottom. If the U.S. adopted the “clear, simple rules” that Long favors (whatever those rules are) and the UK adopts “clear, simple rules” that are much weaker in restraining banks what does Long want us to do in response to the UK’s race to the bottom?

Iv-B can have a race to the top in a boom or a race to the bottom sometimes as a bust but also this can be more controlled such as selling short. A boom is where people race to invest because prices will go up, a race to the bottom of floor is where the minimum price will be and a turn around point. Sometimes these banks can be in a race to the bottom where they need to divest themselves of problem assets or restructure, those that do this first will have a competitive advantage in a coming boom. At other times there can be a race to the ceiling for regulations where investors might flock to areas perceived as less corrupt, this happened for the US in the GFC where money went there. 

 ...

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”  George Akerlof (1970).

This only occurs in a disconnect when I-O regulators are weak.

M&A bankers

The Epicurean Dealmaker

 First of all, it is important to understand both what M&A bankers are good at—where they bring true value—and what they are not good at. M&A bankers are good at collecting, digesting, and sharing competitive market intelligence; identifying and engaging good or likely counterparties for actual or potential deals; negotiating purchase price, structure, and other deal terms for the benefit of their clients; and helping parties to an agreed deal withstand the vicissitudes of fate, clashing egos, and unruly markets to bring a deal to the closing finish line. They are connectors, networkers, traffickers in information, and deal-doers. Fixers.

When the i-O police are strong Iv agents usually produce positive sum games.

What M&A bankers are not—notwithstanding their propaganda and self-perception—is idea men (or women). It is not their job to think big thoughts, to construct grand strategic visions of their clients' and their clients' industries' futures, to be thought leaders. That is their clients' job, the job of their customer's CEO, Chairman, and/or Board of Directors (and sometimes the management consultants these executives hire to do their thinking for them). While M&A bankers often talk about bringing deal "ideas" to their clients for discussion and action, what they really bring is opportunities.

Strategic visions are usually V-Bi where different and often competitive ideas are brought together into a synthesis.

This is as it should be, for no M&A banker knows as much about a company or its industry as that company's senior executives (unless the latter are congenital idiots).

V management needs to know about the whole team's activities including some of the Iv actions, the Iv agent usually just needs to know their own specialty. 

The CEO and his or her Board should develop over time a well-reasoned view of the other companies in their industry, their relative strengths and weaknesses, and their potential fit as acquisitions, merger partners, or purchasers of their own company. What a good M&A banker can bring to the discussion is a well-judged view of the strategic visions, deal-making proclivities, and potential competitive responses to possible transactions the client's peers are likely to have.

They look for competitive advantages where often V management are looking to get along with other V companies like trees interlocking their canopies. Iv agents with too much power might cause trouble for V by making another company's agents competitive too, then the V teams might be brought into conflict.

In addition, the M&A banker can provide an informed view on how the financial markets and company shareholders would react to a particular deal or company strategy, and—in the case of a particular deal—some sense of the probable clearing value of a particular asset.

Iv agents usually handle the sale of V assets in the I-O market.

Leverage | Above the Market

Leverage | Above the Market

When I was *much* younger and a relative neophyte on Wall Street, the ”carry trade” was a new trader staple.  It arose out of a 1985 agreement whereby the U.S., Japan, the U.K., France and West Germany sought to lower the value of the U.S. Dollar against the currencies of the other nations. It almost seems quaint now.

Basically, the trade involves a play on currency yields. It consists of borrowing a low-yielding currency (in those days, Japanese Yen) and investing in a currency that is offering a higher yield (in those days — hard as it may be to believe now – typically U.S. dollars).  The yield difference provided the profit (after costs). Currency risk provided the largest potential problem. 

Most traders saw this as easy money with low risk and “levered up” to give the trade some real juice since the initial transaction itself only yielded relatively small profits. Leverage was needed to accentuate and accelerate returns.  Thus a feedback loop of sorts was created and kept repeating, with leverage extending to ten times and often much higher.  This trade was a consistent and enormous success for a number of years.

Iv-B speculation grew largely unmonitored because of weak I-O policing between countries, this high leverage crashed before reaching a ceiling because the Russian default reached its ceiling and collapsed. Financial instruments like these mutate in new innovation growing like weeds and collapsing when the resources are exhausted.  

In 1995, five years after the Nikkei 225/property bubble had spectacularly burst, the Kobe earthquake hit. Japanese interest rates (which had been inching down since 1991) fell below 1%, and the Yen became a funding currency for various forms of speculation all over the world.  At that point, the Yen had been weak and kept on depreciating sharply for several months relative to the USD. Still mixed and weak economic data were coming out of Japan and short-term interest rates there were 0.25 percent while they were closer to 5.5 percent stateside.  Massive carry trade volume using the Yen led to sharp increases in leveraged positions by traders who had been shorting the Yen to make the carry trade bet.

But then the Yen started to appreciate – by 9 percent in one month alone – largely due to Russian debt problems — and the spread between Japanese and U.S. yields tightened dramatically in a flight to quality and liquidity.  One piece of good news from Japan (the Japanese government offered a plan to recapitalize its problem banks) and in a matter of 72 hours the Yen had appreciated by another 12 percent. Julian Robertson’s Tiger Fund lost $2 billion dollars in 48 hours on the Yen unraveling.  LTCM lost even more; it was forced to restructure its operations and was bailed out via a deal brokered by the Fed (and its positions eventually wound down over a year or so).

After years of success, the carry trade death spiral was quick and violent (only to be resurrected in various forms thereafter).  Ongoing carry trades unravelled as quickly as the Yen rallied; margin calls were triggered, levered positions went belly up and the entire financial system went into seizure. The Fed was forced to cut the Fed Funds rate in between meetings by 75bp (in spite of still solid domestic GDP growth) in order to avoid a financial meltdown, a collapse of U.S. financial markets and a global recession.  And, as always, the principals in the trades kept asserting that the models were fine, it was the markets (and the world) that were wrong.

In the roots and branches of trees there is little liquidity or water used, this is the nature of the structure to leverage this liquidity. When such a system collapses it then does not have enough liquidity to work without leverage. It is like hydraulics in nature, without the narrow and longer pipes hydraulics cannot move things faster and for longer distances.

Leverage — like excessive speeds on the highway — kills and often kills quickly.  Whether that leverage is undertaken by hedge funds (as in the example above, even though LTCM resisted being labelled a hedge fund), Wall Street banks (think Lehman Brothers) or retail consumers (think people with multiple investment properties in 2008), troubled times are very difficult to manage by firms and people laden with excessive debt, especially when the items purchased using the leverage (and acting as collateral) are declining swiftly in value.  And the more illiquid they are, the worse the problems become.

Spain's "Terrible And Inhumane" Situation Prompts End To Evictions | ZeroHedge

Spain's "Terrible And Inhumane" Situation Prompts End To Evictions | ZeroHedge

Spanish Prime Minister Mariano Rajoy will temporarily halt evictions of the most vulnerable families as the government devises measures to help people stay in their homes after a woman killed herself in Baracaldo.

The Spanish people are experiencing “terrible things and inhumane situations,” the premier said at an election rally in Lerida, Catalonia last night. The government “will defend the most vulnerable families affected by the evictions and act with seriousness, sensitivity and great humanity,” he said.

Amaya Egana Chopitea, 53, threw herself from the window of her apartment when representatives of Spanish bank La Caixa arrived with locksmiths to evict her yesterday morning, El Mundo reported. Egana and her husband’s mortgage debt of 164,000 euros ($208,640) rose to 213,000 euros because of charges and interest payments, while their home had been auctioned for 190,000 euros, the newspaper said.

Rajoy is searching for a formula that can help families that have fallen behind on mortgage payments without increasing the strain on lenders trying to clean up about 180 billion euros of bad real estate assets, the legacy of a 10-year building boom. Banco Popular Espanol SA (POP) today offered shareholders the chance to buy new stock at a 32 percent discount as it tries to plug a 3.2 billion-euro capital deficit.

When countries become poor in a quasi depression they can collapse into Roy, then G public property can be more efficient. Foreclosing on homes to resell at a fraction of their value causes more bank bailouts, the problem is the Biv system is efficient only when resources are abundant. It is then better sometimes to nationalize some housing and banks, then privatize them again when the country returns to Biv prosperity.