Triple Crunch Log Jeremy Leggett

The Co-operative takes out full page ads announcing “We’ve put £1m into solar power for schools. How’s that for a bright idea?” The smaller print talks about how “we aim to be good for everyone” – the mission message - by using solar: on the insurance head office, on 100 schools already, and soon 100 more. “We hope that, as well as producing clean electricity, the Green Energy for Schools scheme will also produce more enlightened children.” There is no overt appeal to bank with them, or take out insurance policies.

19.9.08. DAY 5: Friday

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“Who is going to go after the reckless individuals responsible for this financial catastrophe? Apparently no one.”

Nick Leeson Rogue Trader September 2008

S government steps in to take create a “bad bank”, and shares soar back almost to their Monday values. The US government does three things. First and most relief-inducing, it says it will put the toxic debts into a vehicle like the Resolution Trust Corporation, which ran from 1989 to 2005 to tidy up the mess after savings-and-loan associations imploded. To get the approval of leaders in Congress, the Treasury, SEC and Fed have to agree to deep-rooted reform. The plan will cost the taxpayer “hundreds of billions of dollars,” or as Bush puts it, it will put “a significant amount of taxpayers money on the line.” Second, the government will also extend a blanket federal insurance guarantee to the usually ultra-safe money-market mutual funds, which hold $3.4 trillion giving almost cast-iron returns, but one of which wobbled this week. Third, like London, Washington has ruled short sellers out of bounds: 800 stocks are to be protected from them, the SEC says, though only for a short period. So the chairman of the Federal Reserve, Ben Bernanke, and the Treasury Secretary, Hank Poulsen – a former Goldman Sachs Master of the Universe – “have done more for socialism in the past seven days than anybody since Marx and Engels,” according to Larry Elliot. Supernanny has now arrived and the greedy child that is big finance “is going to have to spend a long spell on the naughty step.”

Russian stocks soar too, but trade on the exchanges has to be stopped once again, after further volatility. The Kremlin has pumped nearly $60bn into the Russian money markets.

Analysts worry that the ultimate cost of socialising the toxic risk is unknowable. The “several hundred billions is only an upfront start. If toxic assets are transferred at market value, the capital hole in the financial system could be as much as half a trillion dollars. There is also risk that the “bad bank” will prove un-negotiable.⁸⁰⁰ Investors are beginning to fear that the fed has dealt with liquidity, but that this is only half the problem: the other half is that the banks don’t have enough capital to cope with credit losses. They fear banks will no longer be able to raise capital from private sources.⁸⁰¹ Note: The total US mortgage pool is $12,000bn.

Nick Leeson, the man who brought down Barings, wonders who will go to jail this time. Risk management, which has been the mantra in banks since his escapades in 1995, “is clearly an oxymoron.” He spent six and a half years in a Singaporean jail. “Who is going to go after the reckless individuals responsible for this financial catastrophe?” he asks. “Apparently no one.”⁸⁰²

20.9.08. DAY 6: Saturday

The mood is changing fundamentally: conservative organs call for tight regulation, and trust is shot. Many had suspected a bank might fall, others would have to be rescued, a massive federal bailout might ultimately be needed, and draconian regulation would result from the credit crunch. As a review in the FT puts it, “no one thought they would occur on the same week.” Stagflation is rearing its ugly head. The Daily Express, a conservative paper, screamed in its midweek headline: “Don’t let the spivs destroy Britain.” Let as see the Conservatives eschew regulation in the face of this. Brown has seized on his “ability” to “clean up the city” as a way to revive his political fortunes. And as for the business world itself, as a sacked Lehman employee wrote in the Guardian: “My belief in the firm never faltered. ….Bear Stearns had lacked liquidity, and had been punished for it. I knew that was never going to be an issue for us – management told us so repeatedly.”⁸⁰³

Sub-prime mortgage lender says he is little better than a mid-rank drug dealer. Richard Bitner, now retired to a Dalls suberb with his loot, has written a confessional book. His view: “I almost look at the mortgage industry like the drug trade. Wall Street and the investment banks are the Columbian drug lords.” He himself was the guy on the street going to the consumer. “The industry lost its mind. It went from borderline stupid to downright insane.”⁸⁰⁴

21.9.08. DAY 7: Sunday

Poulsen calls on other nations to follow the US’s example in setting up bad banks. The horsetrading starts in Washington while Congress builds up to a vote this week on what is now a $700bn fund to buy toxic assets, meaning that the US is heading for the first trillion-dollar deficit in history.

Call echoed in the UK for the government to act as decisively as the US has done. The BoE’s Special Liquidity scheme, which allows banks to exchange some of their securitized assets for cash under penal terms (£100bn has been swapped, almost unreported), is nowhere near strong enough to stop the probable rot, and only extends out to January 2009. Britain, says Will Hutton, “remains on the edge of the precipice,” and needs to act like the US has done.⁸⁰⁵ Thought: how many financiers, must less regulators, even less financial journalists, understand the esoteric details of how all the debt has been packaged up into securities (i.e. the process of securitisation that is at the root of all the problems)?

22.9.08. DAY 8: Monday

Fears emerge on the US bailout, the dollar, plummets, and stocks tumble. The Fed says minorities can now own 33% of a bank, up from max 25%.

Morgan Stanley and Goldman Sachs, the last independent investment banks, give up that status voluntarily as their shares come under pressure. They will now accept normal deposits, and so qualify for the safety blanket of access to the Fed’s liquidity system. This really is the end of an era. Regulators are highly unlikely to allow these temples of leverage such licence again. Other countries still say they see no need for special funds for distressed assets.

New York State says it will both investigate and regulate the $62 trillion derivatives market. It will be seeking sworn statements from financiers as it investigates the role of derivatives in market speculation.

Oil price jumps $25 in a day ($130 at the high point), the largest ever rise, as investors betting on a low oil price were forced to cover their positions before a big crop of futures contracts expire in October. Otherwise they would have had to take physical delivery of the oil.

Shell, first oil major to sign a deal with the Iraqi government, opens an office in Baghdad. Its first deal will be to use gas currently flared in southern Iraq, where 700 mcf are wasted every day at present, the equivalent of 130,000 barrels of oil.⁸⁰⁶

German government supports an almost total exemption for its industry from carbon trading, threatening the viability of the European emissions trading scheme. Poland and Italy are playing the same game.

23.9.08. DAY 9: Tuesday

Warren Buffett invests $5bn in Goldman Sachs, on terms they would once have found humiliating. He will get an annual dividend of $500m, ie Goldman is paying 10%.

US Senate approves bill providing $17bn in tax credits for renewables, paid for by higher taxes on oil industry. This was the ninth attempt, and Democrats had to agree to drop a quarter-century old ban on drilling on the east and west US coasts.⁸⁰⁷

Azerbaijan increases oil shipments to Russia, and cuts use of trans Caucasus oil pipelines, in a move guaranteed to worry the west. It also starts selling crude to Ian. An official of the state oil company, Socar, says it is a bad idea to have all eggs in one basket. Azerbaijan has not condemned the Russian action in Georgia. Azerbaijan’s president was in Moscow for talks with Medvedev last week.⁸⁰⁸

Al Gore calls for civil disobedience to stop coal plants. Speaking at the Clinton Global Initiative, he says: “I believe we have reached the stage where it is time for civil disobedience to prevent the construction of new coal plants that do not have carbon capture and sequestration.” He receives prolonged applause. 28 plants are under construction in the US and 20 are close to starting, or have permits.⁸⁰⁹

Scientists find “methane chimneys” in the Arctic, raising fears of runaway warming. Scientists aboard the Jacob Smirnitski, surveying the East Siberian Sea and the Laptev Sea, find an area of intense methane release, and other areas of dissolved methane in seawater. For the first time they have found a field of methane release where the bubbles are so intense as to form a continuous column- a chimney, as they call it - rising to the sea surface. They fear the permafrost is perforating in an area where the stored methane, a greenhouse gas twenty times as potent as carbon dioxide, contains more carbon than all coal reserves, in the form of hydrates. Igor Semiletov of the Far-Eastern branch of the Russian Academy of Sciences has led 10 expeditions to the area since 1994, but did not detect elevated levels of methane until 2003, since when he has observed a rising number of hotspots. “Nobody knows how many such areas exist on the extensive East Siberian continental shelves,” says Dr Orjan Gustaffson of Stockholm University, by e-mail from the ship. The problem is the 4 degrees C rise in average temperatures in the Arctic region over the last few decades, and the warmer water being released by Siberia’s rivers as the land warms.⁸¹⁰

24.9.08. DAY 10: Wednesday

Credit markets seize up again as fears grow for bail-out plan. US money market funds (with trillions of dollars of assets) lead a stampede out of the interbank market into government debt. Warren Buffett urges Congress to act, or face “an economic pearl harbour.”

A hedge fund pleads with the FSA to stop other hedge funds shorting its shares. The Man Group is the only one failing to see the irony. Note: the FSA ban on shorting applies only to banks and insurance companies.

Federal investigators widen their inquiry into the subprime collapse. Fanny, Freddie, Leham and AIG are all to be investigated by the FBI. Officials say they will be looking for lawbreaking.⁸¹¹

Oil price drops to $105 despite evidence that a third of US refinery capacity has been knocked out by hurricanes.

EDF buys British Energy for £12.5bn and puts 4 UK nuclear sites up for sale. It plans to build four reactors on two sites, two on each of Hinkley Point and Sizewell. Dungeness, Bradwell, Heysham and Wylfa are for sale. Westinghouse is likely to build four to six reactors on them, an industry source tells the FT.

World’s first commercial-scale wave power station inaugurated in Portugal. Currently the Agucadoura plant comprises three 140m long 700 tonne Pelamis machines generating 2.25 MW at peak. A further 25 machines will added, giving a total of 21 MW, saving 60,000 tonnes of CO2 a year.⁸¹²

25.9.08. DAY 11: Thursday

Conservative Republicans, stirred up by John McCain, oppose Paulson’s plan. Phrases such as “financial socialism,” “un-American”, and “un-Republican” are bandied about. Some democrats also oppose the bill. The Democratic chairman of the Senate Banking Committee, Chris Dodd, says it places the constitution at risk. In a rancorous meeting bringing together Bush, McCain, Obama and lawmakers from both parties, the plan goes backwards. Paulson goes down on one knee to House speaker Nancy Pelosi, begging for his deal to be approved. But his original deal would have propped the system up as it is. There are six problem areas: no share for the public in the banks’ capital base despite use of public funds (i.e no partial nationalisation); no oversight (Paulson and Bush seem to want carte blanche); no constraints on executive pay and bonuses in the future (much less past or present); no protection for taxpayers money; help for bankers but none for homeowners (who could, for example, be given modified mortgage terms so they have a chance of keeping homes); and the difficulty of fixing a fair price for the toxic assets. Paulson stresses the liquidity problem, but others are saying the issue is one of insolvency: too little capital. The public money - $8,000 from every family - could be completely wasted if so. The final cost of the Troubled Asset Relief Programme could be $1.4 trillion, or up to 10% of US GDP, according to some estimates.⁸¹³

Libor rate rises to 6.27% as banks put £6bn in a low-interest Bank of England facility rather than lend to each other even for a short time.

Incredibly, investment banks continue to earmark huge bonus pools for star “risk takers”, even now. Morgan Stanley has accrued over $10bn for the year to date. Goldman Sachs’s is over $11bn to end August. The Lehman pool was $2.5bn, and the bonuses are still expected to be paid, notwithstanding the $6.6bn overall loss by the bank to date in 2008. The Lehman CEO trousered $40m last year in total remuneration.⁸¹⁴

The Archbishop of York calls hedge fund managers “bank robbers and asset strippers.” The term “speculators” is being used many times in media coverage, to the anger of hedge fund managers.

First mandatory US inter-state carbon trading opens as carbon permits to power plants are auctioned. The scheme, known as Reggie (the Regional Greenhouse Gas Initiative), will limit the CO2 emitted by 233 power plants and factories in 10 north-eastern states between 2009-11. Critics say too many permits have been allocated.

26.9.08. DAY 12 Friday

Biggest US bank failure ever: Washington Mutual files for bankruptcy. The 119 year-old institution has $9bn in debts. (Lehman had $613bn, the largest bankrupcty ever). Its shares had fallen 98% over the last year.

Cracks begin to appear in the French nuclear consensus. The government report on radioactivity of groundwater under France’s reactors is due next month. Areva has promised to shift the military dump that may have been responsible for the older radioactivity found in water below Tricastin after 75 kg of untreated uranium leaked in July. Polls show that although two thirds do not think there should be a reduction of nuclear power, 49% of those under 35 believe the share should be reduced because of the dangers involved. The independent nuclear inspectorate created two years ago posts all nuclear incidents on its website ….and there are 800 a year. Says an official: “people are beginning to realise that incidents are frequent.”⁸¹⁵

http://www.ft.com/cms/s/0/af47d33a-8b63-11dd-b634-0000779fd18c.html

27.9.08 DAY 13

FT editorial sings praises of free markets: “a flawed but precious mechanism,” arguing that notwitstanding a clear need for regulation, “Congress has become distracted by the desire to clip Wall Street’s wings.” “Remember what open markets have achieved, and what lies in wait for societies that suppress them.” “….No better alternative has ever presented itself.”⁸¹⁶

New Scientist concludes the “quant” models used by Wall Street whiz kids don’t work, and have bamboozled regulators. Their statistical models were blind to certain risks, and quite probably the real situation can’t be modelled mathematically. Note: Some estimates show the banking industry has lost more money in the credit crunch than it has made in its entire history.⁸¹⁷

28.908. DAY 14

Hedge funds are in trouble everywhere, with one third of all 10,000 predicted to fail. The $2tn industry is heading for a massive contraction as leverage fails them, according to the largest allocator to hedge funds, Inion Bancaire Privee. The rate of launches is currently still ahead of closures, but the average hedge fund loss was 4.85% in the first 8 months of 2008.⁸¹⁸

LIBOR is over 6% as BoE continues to resist City calls to cut interest rates. Banks are putting up mortgage rates. House prices continue to fall, at 25% annualised. Analysts fear a severe debt-induced deflationary spiral.

Calls for Tories to condemn City’s moral failure. This week: Osborne opposed the ban on short-selling. Boris Johnson railed against regulation of the city. Cameron thinks “the left” may use the crisis to bring down the basis of wealth creation.⁸¹⁹ But they are vulnerable, having received hundreds of thousands of pounds from hedge fund managers active in the game, including those shorting HBOS. They also take funds from tax exiles.⁸²⁰

Spremberg in Germany became the first coal-fired power plant to bury its own CO2 earlier this month. Built by Vattenfall, the plant emits up to 90% less CO2 than conventional plants. A European Parliament vote in the next 10 days will decide whether €12bn goes on 12 demonstration projects …or not.

29.9.08. DAY 15 Monday

Panic grips world markets as the Paulson bail-out plan is rejected. The House of Representatives ditched the plan by 228 votes to 2005 last night. Republicans voted 2:1 against, Democrats 3:2 in favour. The S&P fell 8.8%, the worst day since falling 20.5% in 1987. The Dow Jones fell 7%, almost as much as the 7.3% when the markets reopened 9 days after 9.11. Main Street, leaning on politicians on both sides, wants to see Wall Street suffer, it seems, without much thought for the consequences. US stocks fall Governments in Germany, Belgium and Iceland bail out banks as the crisis spreads.

Banks fall in US and UK as Citigroup buys Wachovia Bradford and Bingley is nationalised. Bank Santander gets the retail segment and the public get the dodgy £42bn mortgage loan book, replete with risky buy-to-let loans and self-certified” mortgages, into which B&B pluged ahead of more cautious banks. Plus rising arrears of course. The people of Britain are in the debt collection business it seems. GDP-to-bailout ratios are $14.3tn (2007-8) vs £1bn US (7.1%) and £1.47tn vs £127bn (8.6% [5.9% Northern Rock, 2.7% Bradford and Bingley]) UK.

30.9.08. DAY 16

HBOS rescue in danger as share price drops 13%. Lloyds TSB has offered £9.8bn and HBOS is now worth £6.4bn. There are reumours the deal may have to be renegotiated.

Fear everywhere as the super-rich drain the gold supply. Gold refineries cannot produce enough gold bars for people to shift into their own vaults.

Irish government forestalls a run on Ireland’s 6 banks by guaranteeing all retail deposits plus wholesale deposits, interbank loans and most forms of debt. They had lent liberally during the bubble, one of them offering 110% mortgages. By one calculation, the total guaranteed amounts to £72,000 for every Irish citizen. The UK government lifts savings protection from £35,000 to £50,000 in a similar.

1.10.08. DAY 17

US Senate votes 74-25 to approve the revised Paulson Plan to bail out US banks. there is huge concern about how the House will vote.

Stampede to safety continues. Cash flows into Northern Rock and National Savings. Queues develop outside ATS Bullion’s low-key premises next door to London’s Savoy Hotel.

Darling tells the Irish off as accounts are transferred from British Banks to Irish. If France or Germany did the same, what then?

Columnists’ views differ ….wildly. Some, such as Joseph Stiglitz, welcome the rejection of Paulson’s package, saying “in environmental economics there is a basic concept called the polluter pays principle. ….Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup.”⁸²¹ Martin Wolf says Congress has decided it wants to risk another depression. He can’t see why the spiral of liquidity-starved financial institutions dumping assets is not causing more fear. With balance sheets being marked to market, they are harming themselves and each other. The plan isn’t great, but at least it is a plan. The Congress must pass it. Other financial institutions will have to be bailed out as the liquidity crisis spreads. The European Central Bank and the BoE must cut interest rates – a move hardly likely to prove inflationary now.⁸²² Will Hutton agrees but makes the point that RBS, HSBC, Barclays and Lloyds/TSB/HBOS hold combined assets of 6.5 trillion euros, four times the UK’s GDP. We may have to join the Euro to make a bad bank big enough to make a difference.⁸²³

US Energy Secretary: the crisis could have an impact on the nuclear renaissance. Long-term projects like nuclear plant building are going to be the most difficult to finance, and are at risk, he tells reporters.

UK Met Office says drastic cuts in greenhouse gas emissions are imperative from 2010 if there is to be any chance of keeping global average temperature rise below 2C. According to the head of climate change for government at the Met Office’s Hadley Centre, the institutions most recent climate model scenarios show that if global emissions cuts quickly reach 3% a year global cuts from 2010, a “most likely” estimate of just under 2.5C by 2100 results (2.1-2.8C, with the middle of the range having a 50% chance of occurring and the two end members 10%). That scenario reaches 47% global cuts on 1990 levels by 2050 and 1.7C most likely by then. Emissions are currently rising 1%, faster than the worst-case emissions scenario used by the IPCC. Taking no action means a 132% increase in emissions by 2050, resulting in a 2100 temperature range of 5.5-7.1C range, most likely being 6.3C). The risk of the worst-case figure within the estimated range amplifies as the emissions rise, and note that methane release from permafrost is still not included in the models.⁸²⁴

Cost of production from tar sands may have risen above $100. Petroleum Review reports that UTS’s investment in its Fort Hills project suggests incremental costs of production of $100, and maybe as much as $120. Also the the Venezuealan budget requires $100 oil, deepwater dvelopments probably need a minimum of $60 and running the Saudi state more than $60.⁸²⁵

The global gas market is in reality three regional markets, little connected. The EU market is far from a success story. Three articles in Petroleum Review summarize the state of play. (L)

2.10.08. DAY 18

US commercial paper market seizes up as market shrinks $95bn in a week. Even blue-chip companies like GE and AT&T are finding it difficult to raise money in the short-term corporate finance market. This market, known as the commercial paper market, is where companies go to raise working capital for their goods and services.