Catarina's World

The plot thickens. Top generals on Wall Street are hence trying to make sure there is no re-run of “Fiscal Cliff”. Devote 4 minutes to watching this Hollywood style video about the dangers of “Fiscal Cliff” and how the armies intend to make it history:

Reuters’ video explaining the problems, battlefields and actors taking part in “Fiscal Cliff” is not only a creative but also laudable way of making the public understand what “Fiscal Cliff” is all about.

The “Fiscal Cliff” war room

As Lloyd Blankfein put it: “Would you lend money to someone with the credit characteristics of the United States? Of course not”. And added that a repeat is unthinkable .

In the “Fiscal Cliff” war room you hence find not only Blankfein but Jamie Dimon. They are in charge of  invading Washington and the American public as part of their strategy of putting an end to the dreaded “Fiscal Cliff” dramas.

Would another episode of “Fiscal Cliff” stop US recovery and entail losses for Wall Street? Can Wall Street make Tea Party republicans surrender to their financial logic? Or will corporate America CEOs convince them? How about the Gang of Eight? Will appealing to the American public work? Can the armies assembled stop conservative Republicans and the forces of Congress from staging more episodes of “Fiscal Cliff”? Can repeats of “Fiscal Cliff” be peacefully avoided? Will K Street be able to assist Wall Street, corporate America and the Gang of Eight in assigning “Fiscal Cliff” to a thing of the past? Or maybe you are of the opinion that another episode is essential for the Unites States and the world economy?

By Catarina Alexon

Video: Reuters – You Tube

Is the centre of global finance gradually moving from Wall Street to China? Goldman's vice chairman Mark Schwartz has been sent to Beijing, the new battleground for foreign banks. China is dominating Asia IPOs and the street has decided that's where the money is. Devote 3 minutes to watching Breakingviews' Wayne Arnold and Wei Gu talk about why the focus is moving to Beijing:

When it comes to capital markets Chins today is where the US was in the late 70s. For anyone, apart from multinational companies, to raise capital is almost impossible. But then came the 80s and suddenly virtually all US companies could. China is now going through a similar transition. So for international banks being downgraded by rating agencies, such as Moody's, the timing is perfect for moving in. 

China opening up its financial markets

It started in April this year when China increased the amount of money that international fund managers can invest in China to $80bn i.e. almost tripled it.

Beijing wants to increase investment and competition in its financial and banking sector. Opening up its financial markets is a way for Beijing to build up the yuan as an alternative to the US dollar as a global reserve currency.  

Wall Street swiftly moved in

Question is how will Wall Street's presence affect China? Will the Chinese allow the kind of new innovative financial products that Wall Street come up with on a regular basis? Is it even possible that China will be the new centre for dealing in risky financial products that could be regulated in the West? Maybe the Chinese market will be more tightly regulated when it comes to protecting China as opposed to the rest of the world?

Can China, once again, re-write the rules of competing in the global economy? Will the centre of finance gradually move from New York to China? The same investment banks may still dominate and set the trends, but their branches, or head offices, in China will be in charge?

Will China avoid making the same mistakes Japan did when building a capital market? How will China's equity, bonds and derivatives markets evolve? Is the investor mix in China changing? How will new financial products be received? Will the yuan emerge as a global reserve currency? Do you believe the centre of the world of finance will long term be in China instaed of New York? 

Video:ReutersVideo

Am pleased to note that Saudi Arabia and Qatar are likely to lead recovery in the Gulf. Their proactive government support and spending have been instrumental in helping banks maintain relative stability. Can’t help reflecting how interconnected the world is.

We all know how the markets work, but isn't it incredible that Saudi Arabia on the other side of the world got hit by a global crisis made in the US? Shows how interconnected the world is, doesn't it?

Understand how the markets work, but isn’t it incredible that a financial crisis made in America can even hit Saudi Arabia. Not only is the kingdom on the other side of the globe, it also has more money than any other country in the world. Actually the Gulf banking sector as a whole faced a challenging 2009 with most countries facing limited or negative GDP growth, reduced liquidity, lower business volume, and a drop in asset values, representing a significant deterioration in banks’ operating environments. Mainly because of what started far away in the United States.

We are so interconnected what happens is sometimes crazy. Another example is the Swedish currency being hit by the problems in the Euro zone, despite the fact that Sweden’s budget deficit is next to none. At the same time foreigners investors have since the beginning of the year moved $21 billion into Swedish government bonds. And let’s not forget how North Korean sable rattling negatively impact markets world-wide.

Understand perfectly well that almost anything that happens can have an impact on the financial markets. However, what happens as a result is sometimes ludicrous. Where is the logic in Kim Jong-il being allowed to have a negative impact on anything, let alone the markets, outside of North Korea? The fact that he has gives him power he shouldn’t have. What are the chances of China lining up behind Pyongyang to start World War III? But financial markets all over the world still worry about it, which only plays into the hands of the little North Korean dictator.

For global markets, the renewed military tension on the Korean peninsula apparently came at a particularly sensitive time. The threat to South Korea’s fairly big economy — its GDP is four times larger than Greece’s — adds to the markets getting the impression of a world out of control. But why? Sincerely, there have been wars throughout history and we will have wars until the end of time, unfortunately. So why do the markets have to panic because of Pyongyang threatening to start another one? It’s all out of proportions. Not least since although the South Korean economy is bigger than Greece’s, it just accounts for 1,5 percent of global GDP. Europe on the other hand contributes 22 percent.

Maybe the markets impression that the world is out of control isn’t so far fetched? I’m truly international and would like to see the whole world becoming much more global than it is. But some of the negative effects are alarming. Thankfully Wall Street will now be regulated, but if the rest of the world doesn’t follow suit they will just start handling derivatives and other high risk financial products from offices elsewhere in the world.

Just read that until a few months ago, the governments, which had responded so powerfully to the financial crisis, were a comfort to the markets. But weak and wild policies around the globe are now suddenly undermining their conviction. Simply cannot comprehend how the markets could be unaware of the huge government budget deficits? Even I was aware of that escalating problem not only in Europe but also in the United States. How come the markets closed their eyes? And on top of it they suddenly decided it was a problem which wiped a few billion off the markets.

That the Euro slides against the dollar and investors head for the safety of gold makes perfect sense. But that while the Euro goes down European shares rebound sharply doesn’t make sense. Seriously I know this is how the markets work, but it’s crazy. The markets really are out of control. Or is it the whole world?

Photo: Patrick Q – Flickr

The G20 group’s discussions this weekend may lead to banks and other financial institutions having to pay two new taxes to fund future bail-outs. The global proposals by the IMF are “more radical” than most had anticipated.

“Too many Wall Street firms had no one looking over their shoulder, and they went off the deep end.”, Senator Charles E. Schumer of New York said. He has long been one of Wall Street’s best friends on Capitol Hill, but Mr. Schumer has embraced new legislation that will put constraints on his hometown’s leading industry.

Banks are likely to be horrified, especially about the proposed tax on pay.

Insurers, hedge funds and other financial institutions must also pay the taxes, the IMF argues, despite them being less implicated in the recent crisis. If not, activities currently carried out by banks would be reclassified as, for example, insurance or hedge-fund services to escape the levies.

The main focus is on the European Union and United States, where much of the financial crisis played out.

My feeling is that it is crucial to regulate complicated financial products that not even the people who invented them understand fully. A case in point are the subprime debt securities, not to mention the CDOs, sold in the United States and Europe that played a key role in the financial crisis. They were almost non-existent in Asia and a major reason why the region was able to recover more quickly from the global recession.

Good timing that a former Goldman CDO man just published a novel he wrote “about the cliched high life I had been living while creating and selling billions upon billions of these securitization and credit derivative products, now better known as ‘toxic assets”.

President Obama took his rhetoric of reform on Thursday to the nation’s financial capital in a high-profile foray to chide Wall Street bankers for their “reckless practices” and to press for tighter regulations meant to avert another financial crisis.

It is my belief that if there is no oversight and regulation of new complex financial products it is just a question of how long it takes before we have another global crisis. So I am pleased that the Senate approved legislation to tighten regulation of derivatives trading a couple of days ago. But will that be enough? We need similar legislation in Europe and the rest of the world. Debt securities based on life insurance instead of sub prime morgages have been sold for quite some time already. Let’s hope Wall Street isn’t, again, betting against them with a complicated CDO as well?

G20 countries have to find common ground on a variety of reforms to prevent a repeat of the credit crisis that led to a global recession. Otherwise operations will just move to countries where it is allowed. Do you think it will be possible to agree on regulations that make a difference? Or will financial companies just find loopholes and new ways of doing whatever is profitable.

It seems to me that a few bankers have managed to hijack and contaminate the American Dream. To them it means looking after number one at the expense of others, which is as far from the true meaning as you can get. And the price for that is being paid by Middle America with their drastically reduced spending power.

Americans demanding big banks and Wall Street stop spending millions in taxpayer dollars to lobby against financial reform.

How long will it take before those millions of middle Americans hit by the crisis get their spending power back? And what will happen to the US economy in the meantime?

Let’s face it ,we need to get Middle America up and running again since middle class spending power is the backbone of an economy. You only need to look at Africa in the past to see what happens without it. But now with African middle classes growing, and spending more, their economies are improving.

Can not understand how those US bankers can live with themselves. Not least since many of them attend church on a regular basis. The bible obviously doesn’t have any influence on them but neither, it seems, has the materialistic point of view of wanting their children to grow up in a thriving economy. Instead short term thinking seems to have completely taken over their entire lives.

“We need to put an end to misleading and dishonest practices of banks and institutions regarding credit and debit cards or mortgage, auto and payday loans. Americans don’t choose to be victimized by mysterious fees, changing terms, and pages and pages of fine print”, president Obama said recently. And he is right since much of the blame for this recession can be put on “the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences.

And since neither going to church nor materialistic common sense seem to have any impact on Wall Street, I unfortunately believe the only way to change their behaviour is to legislate. To avoid a repeat of last year’s meltdown that put the US economy on the brink of collapse, the House of Representatives approval last Friday of the biggest changes in financial regulation since the Great Depression is most likely a step in the right direction?

It’s lamentable that the only way of stopping Wall Street looking after number one at the expense of others seems to be legislation But systematic risks in the economy and dangerous financial products need to be policed somehow. And to get the middle classes up and running again a financial watchdog agency is most likely essential.

One American commenting on Reuters spoke for many Americans when he said: “A Consumer Financial Protection Agency is just the start of the regulatory oversight this country needs to put in place to get Wall Street back under control. The recent behavior and excesses of Wall Street are an embarassment and shame on this country. Anyone working for an investment/banking firm who has benefitted either directly or indirectly from the Big Bail and who is making over $500,000 this year needs to be turned out of their homes, their homes and possessions sold or donated and tax them at the rate the Europeans are taxing their financial criminals this year. Wall Street has become a blight and cancer on the landscape and needs to be brought under control. Middle America is no longer buying their schtick. Even their bought and paid for minions in the US Congress are finding it impossible to peddle their lies. “

As far as I’m concerned innovation and development should be encouraged as well as driving the economy forward into another exciting new decade of success. But risky schemes that threaten the entire economy should not.

Since Wall Street doesn’t seem to learn from their mistakes, change and move on, something needs to be done to protect the middle classes. Otherwise we will have to be content with their spending power being reduced on a continuos basis while their counterparts in Asia and the Middle East increasingly spend more and more money. Doesn’t Wall Street understand that such a development will long term be the end of the American dream? And, worse from their point of view, make sure that “Wall Street” moves to the other side of the world, leaving most US bankers behind.

(Photo: Flickr – SEIU International)

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To avoid repeating last year’s crisis, governments must find a way of making investors in financial institutions understand that they will lose money if banks fail. If not, there is no stopping the moral hazard of investors feeling safe believing that governments will always prevent major banks from collapsing.

Some senior people on Wall Street now warn that if the systematic risks of the industry aren't addressed an even bigger collapse could be happening fairly soon.

As it is investors are lending cheap money to banks that often use it to make risky loans and trades, knowing that they will keep the profit regardless if their bets pay off or not. Executives on Wall Street know that if the deal goes wrong they just have to take their bonuses and move on. And the fact that they frequently have guaranteed compensation packages makes irresponsibility even more rampant.

And as if that wasn’t bad enough. Shareholders frequently get a return of zero. Am not surprised that bank employees are keen to earn as much as possible, but why do shareholders accept such a rotten deal? Bank of America’s executives may even face charges for failing to disclose Merrill Lynch’s mounting losses to shareholders ahead of the purchase.

How did we get to a stage where normal business practice, to use profit to replenish inadequate capital, reward owners and only then pay benefits to employees, has gone out the window?

Some senior people on Wall Street now warn that if the systematic risks of the industry aren’t addressed an even bigger collapse could be happening fairly soon.

The off-exchange derivatives market is still unregulated and banks are selling and trading them, regardless of the role they played a year ago. And if they are allowed to continue betting, backed by taxpayer guarantees, they will soon return to the kind of practices that made them underwrite trillions of dollars of bad loans.

Considering that G20 hasn’t yet done much to regulate banks, what can be done? “Living wills” is a way of making it mandatory for banks to plan how to handle a possible collapse so that depositors are protected while forcing creditors to take the losses. Another option is to force banks to finance themselves with a slice of junior hybrid debt. Obviously the best would be self-discipline. But that’s probably hoping for too much.

The risks taken by a few individuals on Wall Street caused the worst global recession since the Great Depression and many of the taxpayers that had to pick up the bills have also ended up unemployed, lost their houses and are in a mess that is not of their own making. Meanwhile the guys who caused the recession keep on earning a fortune and behaving as if nothing happened. It’s enough to make you understand why people become socialists. Makes me think of old-fashioned socialist posters portraying business owners making profit at the expense of the proletariat, just with the difference that it’s not the owners that are doing so, but the employees.

It’s really time for governments to put en end to the “heads I win, tails I’m bailed out” syndrome”. The minimum that can be expected is that the weak and reckless should be forced to shrink and live within their means and “Living wills” are implemented to protect depositors.

(Photo: Christopher Walker, Photo Xpress)