Triple Crunch Log Jeremy Leggett

Drax buys equipment for co-firing biomass and coal, cutting CO2 emissions by > 2.5 mt a year. The current site emits 20 mt a year, the largest single UK source of CO2 emissions (7% of UK electricity), meaning a cut in emissions of more than 15% by 2011. The new equipment will generate 500 MW of biomass, the biggest single-site renewables generator in the UK.

Treasury rules out further incentives for the oil industry in the North Sea. The industry warns in turn that oil will remain in the ground. Invetsment has fallen for the second year running, in spite of the high oil prices.

Eon buys stake in one of Siberia’s biggest gas fields and gives up shares in Gazprom. In a deal to be completed in 2009, Eon gains almost 25% of the YuzhnoRusskoye field and loses almost half its 6.5% stake in Gazprom. Gazprom drops a claim to be able to own part of Germany’s energy infrastructure. The deal was four years in the making. Gazprom’s maket cap has halved to $175bn since May.⁸²⁶

3.10.08 DAY 19 Friday

The Paulson Plan has gone from 3 to 451 pages in 12 days. 105 are on the TARP, and include equity stakes for government and limits on excutive compensation. 8 pages added by the Senate raise the federal guarantee on deposits from $100k to $250k, temporarily. 150 pages cover tax breaks. Then there 184 pages of other measures, spanning every kind of tag-on deal imagineable.

Policymakers have been approaching the problem as though it is one of liquidity, not solvency. Now the penny is dropping. “The whole system has to be rebuilt,” says Larry Elliot.

UK National Economic Council and Department of Energy and Climate Change created. There are 19 on the NEC, including John Brown ex BP CEO and the chairmen of Barclays and Lloyds TSB> Ed Miliband heads DECC.

Solar PV investment tax credits of 30% pass as part of the US bail-out bill and the $2,000 ITC funding cap is lifted: a major boost for residential systems. The ITC is an eight year scheme for residential, commercial and utility projects. Meanwhile, the Spanish agreed in late September to cap their feed-in tariff at 500 MW as of 2009 (higher than expected, with 233 MW reserved for ground-mounted systems in 2009), a new subsidy scheme is planned for Japan as of April 2009, the Chinese government has sought bids for large ground-mounted systems in eight western provinces, and in Germany PV roof scouts are touring the country trying to convince owners of buildings with suitable rooftops to lease them space. Analysts still disagree about the net impact on demand, with Photon Consulting remaining cautiously bullish. Evergreen and JA Solar have been seen their stock diluted as result of having loaned shares to Lehman Brothers.

Solar PV backed by a feed-in tariff is “safer than a government bond.” Photon analyst Michael Rogol makes this point because the owner has physical assets, as well as a government-backed guarantee.⁸²⁷ (L)

NREL scientists break the 20% efficiency barrier for a thin-film solar cell. This new world record suggests that CIGS thin film has the potential to challenge crystalline silicon, though CIGs modules are still no more than 11% efficient at best.⁸²⁸ (L) And see article on Fraunhofer record of 39.7% PV concentrator cell.

4.10.08. DAY 20

Media analyse the similarities and contrasts with the 1929 crash. The stock market fell 22.6% on Monday 29 October 1929, the biggest one day fall in history. That week, the market lost 30% of its value. But it took until July 1932 to reach the bottom, by which time the market had fallen 89% from its peak. It would take 23 years to recover. Almost 25% of the workforce were out of work by 1933 as unemployment rose from 1.5m in 1929 to 12.8m. The US government disastrously tried to shore up their economies with higher trade tariffs.⁸²⁹ (L) Then it was confidence in shares, now it is confidence in CDSs, CDOs etc. few scholars think the crash caused the Depression, the Economist argues. The downturn was already well underway. Roosevelt was elected in November 1932, and took office in March 1933, by which time the economy had fallen further and more banks had gone under. He immediately declared a federal bank holiday, and this stopped the rot. The US economy had shrunk by more than a quarter between 1929 and 1933. US unemployment is now 6%.⁸³⁰

Enron warnings went unheeded, says journalist who began to unravel that story. The banks had exactly the same structured investement vehicles as Enron for hiding debt off balance-sheet, allowing them to only earnings. Another parallel is that Enron’s leaders were huge champions of the free market, and blamed their demise on short sellers. But we seem to have forgotten, collectively, that the short sellers were the first people to warn of problems at Enron.⁸³¹

5.10.08. DAY 21

Germany guarantees all private savings accounts: every man for himself in “united Europe.” This just a day after Merkel criticized Ireland for doing the same. EU leaders, meeting in Paris to try and agree a plan, are predictably furious. So much for globalization of policymaking: the international institutions don’t seem to have the authority to do anything much. The World Bank, the IMF, and the G7 are barely to be heard in the coverage. We don’t seem to have the right institutions to deal with what we have created.

Are some banks too large to keep afloat? UBS, for example, has assets more than four times the entire Swiss economy. RBS is almost 1.5 times the UK’s GDP, and ING is more than twice the size of the Netherlands’.⁸³²

Debt wracked up over the last the last decade in Britain amounts to £1.44 trillion. That is an average of 180% of disposable income, the highest in the G7. Fewer than half of Britons have any savings at all. banks are largely to blame, for tempting people into debt, even the poorest.⁸³³ (L)

6.10.08 DAY 22 Monday

FT suggests Darling is considering part-nationalising banks. FTSE plunges 6% on opening and 7.9% on the day. Oil sinks below $90 as commodities fall across the board. Now the credit crunch is hitting equities, and hard.

Lehman CEO blames everyone but himself and his over-valued assets in Congressional testimony. Richard Fuld Jr rails against the media, the short sellers, the government, but says he did nothing wrong himself. He claims to have thought the bank was healthy until five days before the collapse, and rejects accusations that he mislead investors. Over the previous eight years he took home a total of nearly $500m in salary and bonuses.⁸³⁴

7.10.08. DAY 23

BBC reports that some banks are urgently seeking shareholder capital. Iceland nationalises deeply troubled Landsbanki.

The Fed considers a plan to buy vast amounts of unsecured short term debt so that companies can start lending to each other again in the way they do normally so as to finance their day-to-day activities. The $700bn Paulson package seemed vast at the time, a few days ago. Now it seems small compared to soaring scale of the crisis.

RBS and HBOS shares plunge 40%. Retirement funds have fallen 10% in the last month and almost 20% over the last year. Will Hutton says the nation is on the edge of a massive bank run. He advocates actions as follows: 1. Put £50bn in to the banks. 2. Make a £100bn bad bank to hold toxic assets for up to 20 years. 1 and 2 allow the banks to resume lending. 3. BoE to set up a special purpose vehicle to buy unsecured commercial paper from the banks. 4. EU governments to require EU to suspend state aid rules preventing government insurance of new issues of mortgage-backed securities. This will get the mortgage market going again and steady the property crash. 5. BoE to cut interest rates by at least 1%.

Germany, Sweden, Denmark, Greece and Austria have all guaranteed deposits. The policy response continues to be piecemeal and divisive.

Analysts begin to worry that federal governments may be over-extending themselves. The sums extended are huge, and have not yet dented failing confidence.

This crunch is playing out faster than the 1929 crunch. The stock market crash of 1929 hit in three terrible days, then slowly took three more years to hit rock bottom, with shares 89% down in value. This crisis is playing out in a major hit a day: first Lehman, then AIG, then Washington Mutual etc.⁸³⁵ In the Great Depression industrial capacity fell 60% and 25% of Americans fell out work (unemployment is now 6%). Farm income halved and soup kitchens were set up to provide free food to the homeless.⁸³⁶

AIG executives face torrid questioning in Congress about investments in CDSs and possible fraud. Former chief executive Martin Sullivan, had to defend a week-long retreat of sales executives at a Californian resort after the $85 government loan for which the expenses bill was $442,000. He was also confronted by Representatives on the House Oversight and Government Reform Committee about assurances to investors about AIG’s health after receiving a warning from company auditors about exposures.⁸³⁷

Corporate jet business still thriving. 27,000 turn up to the annual trade fair in Orlando, with 2008 set to become the fifth consecutive year of broken sales records, at 15% growth. Next year might not be quite so good though.⁸³⁸

UK Climate Change Committee advocates “almost totally decarbonising power” by 2030, en route to target of 80% cuts of all greenhouse gases by 2050, including aviation.

MEPs vote for tough CCS regulations. The Parliament Environment Committee set the same standards as California - 500 grams per kWh – in amendments to the CO2 storage Directive. They also vote for a €10bn fund for trials. The amendments need to pass two more levels though, one of them the Council of Ministers. Kingsnorth could still slip through such legislation, if passed, provided it is built before 2015.

Nearly half FTSE 250 fail to disclose carbon emissions in the annual Carbon Disclosure Project questionnaire. Shell reached 743m tonnes in 2007, more than the whole UK economy (587m). The CDP sends the questionnaire on behalf of 385 financial institutions which (used to have) $57tn of funds under management.⁸³⁹

8.10.08. DAY 24

UK cabinet part-nationalizes banks with £50bn of preference shares plus £350bn of capital. £50bn will be invested to build up banks’ reserves, £250bn will extended as guarantees for new bank debt, a further £100bn will added to the existing BoE short-term loan scheme. This is very different from the US Tarp scheme. In this, the hard-to-value toxic mortgage-related assets stay on the banks’ balance sheets. Seven banks qualify, with HSBC, Standard Chartered and Abbey (Banco Santander) saying they have no need. City pay and bonuses are to be curbed as part of the deal. This development gets good press from FT columnists. Increasingly the US allowing Lehman to go under is being viewed as a catastrophic mistake: it started the dominoes falling.

Six central banks cut interests by half a percent. The UK rate is now 4.5%. The IoD says the cut might not be enough. Shares fluctuate wildly in response and the FTSE 100 ends down 5.2%. £50bn will build up banks’ reserves, £200bn will provide liquidity, a further £250bn will underwrite inter-bank lending and prop up balance sheets. Seven banks qualify, with HSBC saying it has no need. City pay and bonuses are to be curbed as part of the deal.

9.10.08. DAY 25

Paulson considers following UK example and part-nationalising US banks. Clearly he fears his $700bn package to buy mortgage debtfrom them won’t be enough. Banks have already written off $592bn in credit-related assets, and the IMF expects these to double. In the same period, Bloomberg shows that banks have raised only $442bn of new capital.

Iceland nationalises Kaupthing. Consternation that UK investors may have lost deposits, and a Treasury team flies to Iceland.

Exactly a year after the Dow Jones reached highest ever point, it is a third down. Today was the third worst ever points fall.

10.10.08. DAY 26 BLACK FRIDAY

The $700bn and the £400bn make no difference: panic grips every stock market as shares plunge. The FTSE falls 8.9% over the day, down 21% over the week that wipes £250bn off the value of UK companies. It is below 4,000 for the first time in 5 years. Every European market loses at least 20%. The Dow Jones Industrial Average suffers its worst weekly loss ever, 18.2%, including the October 1929 crash (which saw a 23.6% fall at one point, but 9.2% for the week). The Nikkei falls 23% over the week: twice the rate of fall during the 1989 crisis. Russia and Indonesia closed their stock markets during the week. Berlusconi suggests all stock markets are suspended for two weeks while governments come up with a plan. A treasury team heads to Iceland, where £1bn of British savers’ money is at risk in collapsed banks.⁸⁴⁰

Oil falls below $80 on fears of recession and gold continues to rise as investors look for safety. GM issues a statement saying it is not filing for bankruptcy.

Traders are nervous about a settlement pricing for Lehman credit derivatives that will trigger payouts estimated by some analysts at $400bn. This has been a big factor in the panic, along with hedge funds “deleveraging” in order to pay clients who are pulling out of their funds. Nobody knows for sure who is exposed to the Lehman losses, because of the unregulated nature of the $55 trillion (sic) CDS market. Barclays and RBS are most exposed to this crisis, having both bought such contracts covering around $2.4 trillion (sic) of credit.

G7, meeting in Washington late on the day, agrees to a co-ordinated global rescue plan. The five point plan will: 1. Pledge to save key banks. 2. Provide ample liquidity to banks so credit and money markets can operate. 3. Follow the UK example and part-privatise banks, Paulson’s $700bn included. 4. Instigate stronger depost-guarantee schemes. 5. Force banks to reveal the full extent of their losses. If this doesn’t work, the next stop is total nationalisation of banks.

Jubiliation among many of America’s enemies in the ME. Ayatollah Ahmad Jannuit of Iran: “God is punishing them.”⁸⁴¹

EU states will have the authority to decide themselves whether or not they hook up with Gazprom or other foreign giants, EU energy ministers decide in Brussels. Germany, with 40% of its gas already coming from Russia, doesn’t want to be tied. The Commission is reined in.

11.10.08. DAY 27 Saturday, a breather….

Head of IMF says world financial system is “teetering on the brink of systemic meltdown.” Nations can’t solve the problems alone, are all in it together, and must act together. (Just like climate really). But the Europeans are split about the need for joint action.

Conservative politicians talk like socialists. Merkel: We must “redirect the markets so they serve the people, not ruin them.”

12.10.08. DAY 28

UK government agrees to inject £37bn into RBS, HBOS / Lloyds and Barclays as Brown ties down his part-nationalisation plan. They cannot pay dividends until they have repaid £9bn. The RBS boss describes the meeting as “more of a drive-by shooting” than a negotiation.

13.10.08. DAY 29

Europe follows the UK example. Merkel announces €500bn (£391bn) bailout of the German banking system and Sarkozy announces a €360bn French bank bailout.

Stock markets soar as confidence returns for the day. The Dow Jones Industrial Average rises a record 936 points. The S&P 500 enjoys its biggest one-day gain since the 1930s.

14.10.08. DAY 30

US is reluctantly forced to follow the UK lead too, as it too buys minority stakes in its banks. Nine banks are forced by the Treasury to sell shares for $250bn, including Goldman Sachs and Morgan Stanley, whether they want to or not. The measure is temporary.

Confidence returns to London, Frankfurt, Tokyo and New York as shares continue to rise. Nikkei has one of its highest ever rises.

Institutional investors say they will eschew banks of there is a “no dividend rule” for 5 years as Brown intends. The banks get cold feet.

15.10.08. DAY 31

Shares slide again: the return of confidence lasted 48 hours The FTSE loses 7.2% and closes at a five year low. The Dow Jones falls 7.8%. The S&P 500 endures its biggest one-day fall since the 1987 crash. Brown’s bailout comes under threat as banks, complaining about the terms of their nationalisation, look for a better private deal. Fears abound that hedge funds are next in line for disaster. High unemployment figures spread the fear from the health of the banking sector to the wider economy.

Darling is forced the “clarify” that there will be no blanket “no dividend rule” for 5 years. But otherwise, Brown is being feted around the world as the super-hero who arrested the freefall.

FSA chairman Lord Turner says the days of soft-touch regulation are gone for ever. The financial services industry must be reined in. Catastrophe might have been averted in the last week, but contingency plans for apocalypse – heading off a fatal spiral via a bank holiday - had been considered during it.

EU solidarity on climate change fractures ten weeks before the Posnan climate summit. Italy says it is in no condition to support the European Emissions trading Scheme and Poland says it is being punished for being coal dependent. Special pleading abounds. Sarkovy has ten weeks to broker a deal, or the summit will fail.

UK pledges to 80% cuts in all greenhouse gas emissions by 2050 as new Climate Secretary Ed Miliband makes the right start. The 60% target has been replaced. There will be feed-in tariffs for renewable microgeneration from 2010. NGOs are broadly supportive, though the target excludes aviation and shipping as ever.

16.10.08. DAY 32

Shares touch a point lower than on Black Friday last week and oil falls to a low of $68.57, the lowest since August 2007. Opec is expected to cut production imminently.

Top hedge fund manager retires calling bankers who made his fund so profitable “idiots.” Andrew Lahde of Lahde Capital is thought to have made one of the biggest percentage profits ever by betting against the housing boom continuing. He has a very low opinion of the people at the top of banks “stupid enough” to take the other side of his bets. He is shutting his fund down to “spend time with his money.”⁸⁴²

17.10.08 DAY 33

Another rally: Wall Street shares end up modestly higher than last Friday. Energy stocks lead the recovery, though there are major concerns about insurers.

Wall Street banks are still set on huge bonuses for this year: $70bn, 10% of the US bailout fund. Six banks, including Goldman Sachs, Morgan Stanley, and Citibank, are in line for the payouts. At one point last week, the $10.7bn payout pot for Morgan Stanley exceeded the market value of the bank. Meanwhile in Europe, Deutsche Banks CEO and many lead traders are waiving their bonuses.⁸⁴³

FT article alleges sleaze between rating agency Moodys and bankers erecting their derivative house of cards. It was the triple-A ratings that allowed the packaging of millions of dodgy mortgage loans into must-have bonds. Hardly surprising, then, to read about all the weekend getaways.⁸⁴⁴ (L)

Cuba announces it “may” have 20bn of oil reserves. Repsol has led a consortium doing test drilling, but the analysis is mostly based on comparison with structures in the US Gulf of Mexico and Mexico’s Cantarell field. Drilling will start next year by the state oil company Cubapetroleo, or Cupet.⁸⁴⁵

UK Coal shares fall more than a third after it admits encountering “difficult geological conditions” leading to falling third quarter production and a profits warning.⁸⁴⁶

Areva mulls yet another delay to its flagship Finnish nuclear plant: the fourth in two years. The reactor is now two years and €1.5bn over budget. EDF is talking with TVO the Finnish utility about moving the start-up target to 2012. 4,000 people are working around the clock six days a week on the site.⁸⁴⁷

Senior Labour MPs urge Brown to nationalise parts of the building industry. MP John Cruddas wants full nationalisation. The once unimaginable is now the realistic. This is the only way the government can hit its 3m homes by 2020 target, they say. The total this year looks like being 75,000, against a target of 240,000.⁸⁴⁸

19.10.08. DAY 35

D
“I made a mistake in presuming the self interest of (banks) was such that they were capable of protecting their shareholders.”
Alan Greenspan

Former Chairman Federal Reserve

October 2008
arling says there is a need to revive Keynes as “Green New Deal” wins wider airing. The economist had some good ideas for digging the world out of the Great Depression. Al Gore and the UN - UNEP executive Director Achim Steiner - are talking about a “Green New Deal.”

UK wind power plans on brink of failure as delays build in the face of multiple problems. The UK must build 35 GW of wind (some 15,000 turbines) onland and at sea if it is to hit its target of 15% energy from renewables by 2020. In the week where the largest turbine in the world is nearing completion in Berlin, a monster 7 MW machine whose blade tips will be 250m off the ground, problems abound. Capital costs for offshore wind have soared with the oil price: 50% over the last three years, with more to come. Most manufacturers are booked solid for five years hence. Vestas, the Danish company that leads the world, has a £6bn order book. Even if you can get a turbine, planning would take 3-4 years on current form, and two-thirds of onshore applications end up turned down. The Infrastructure Planning Commission, designed to speed things up, will not be ready until next year, and will surely be tested in the courts by those who oppose wind power. Then you have to get connected. National Grid has a 13 –year queue in Scotland.⁸⁴⁹

20.10.08. DAY 36

Pension funds, seduced by AAA ratings, now hold billions in toxic structured products, says the IMF. Their estimate for the worldwide losses in collateralised debt and loan obligations (CDOs, CLOs, and all the rest of the alphabet soup) is now nearly $1 trillion ($945bn, £546bn, €705bn). Some other estimates are far higher. Banks have announced writedowns of $400bn to date. Much of the rest is held by pension funds, insurance companies and wealthy individuals. Pension fund assets were around $15tn when the crunch hit last year, and Create Research estimates 8% at that is held in structured products ($1.2tn) up to $700bn of which is toxic.⁸⁵⁰