http://en.novayagazeta.ru/data/2008/63/00.html
Politics
Putin And Gazprom
How a gas control valve became the attribute of presidential power, instead of a football
EPA
In February 2008 the authors of this paper published an independent expert report titled “Putin.Itogi” (fittingly, ‘Putin. Summing up’.), where presented was their vision of the outcomes of activities and political heritage of the Second President of the Russian Federation. In that report we gave uncomplimentary, though fair, assessment of working by Vladimir Putin in various spheres of our life – economy, army, pension system, health care, road infrastructure and other areas. The report was based on figures and facts concealed from Russian citizens by official propaganda.
However, many readers have made a note that there is one issue we have touched too slightly. That’s about condition of the Russian energy industry in general and Gazprom in particular.
That was not an accidental omission by us. We consider it that the situation about Gazprom requires special consideration which would not be possible to be fit in just a couple of paragraphs. First, this is because Gazprom and what is happening in this company is of special importance for the entire country. Second, this is because we have first-hand knowledge of Gazprom problems, having had direct relation to this company in our professional activities as a former fuel and energy minister and the deputy energy minister of Russia. Third, this is because Gazprom has been a kind of special and personal project by Putin. From the very beginning of his presidency he has cared for the company, appointing his people to the key posts and looking into all the details carefully. Gazprom is one of few projects where Putin can be considered personally responsible for the results, from the beginning of his office, and one of the projects to be taken as a criterion for assessment of Putin’s presidential activities.
In this present paper we intended to develop analysis given in the report “Putin.Itogi” and to focus on what has been happening to Gazprom these years. If you are interested to learn about that, here is the “Putin and Gazprom” report for you.
Gazprom as the main personal project by Putin
Gazprom is a unique phenomenon in the Russian political and business life. In 2007 proceeds by Gazprom amounted over $93 Bn, which is 7% of the Russian GDP. This is 2.5 times as much as our defense spending. Gazprom’s share in the industrial production is over 12% and in the cost structure of the Russian export is about 16%. The company makes about 43% of the Russian production of primary energy carriers and has similar share within the structure of the national consuming the energy resources. Gas supplies by Gazprom secure up to 40% of production of electric energy in the country. In fact, Gazprom is an energy core of the Russian economy. Stability and prospects of our economy depend greatly on effective and reliable working by the Company.
The Company is also a key player in the world energy market. The volume of oil and gas extraction by Gazprom takes a share of 5% of the world production of the energy resources and about 8.3% of the world production of petroleum and gas. Supplies by Gazprom make for over 50% of the gas import by the EU countries.
It’s difficult to find another company of a similar scale and similar extent of political and economic influence in Russia. Significantly, Evgeny Yasin once called Gazprom “a purse” of the government, as the Company has no equals in terms of the degree of concentration of the financial means and opportunities of quick mobilization of those means for the purposes needed by the government.
In the ‘90s the authorities used this resource from time to time for solving political problems, like it was in 1997 where the government dealt with the task of paying off the arrearage of pensions. Then President Yeltsin commissioned that Gazprom pay off major part of its arrearage to the Pension Fund in the amount of $2 Bn so that to finance the payments of pensions.
Over the years of Putin’s presidency the Gazprom resources have been used for different purposes. This is what we are going to tell about within the framework of the given brochure.
Gazprom has become the most important personal project by President Putin. Right after coming to power, he began to have an eye on the company. Even over the course of the presidential election campaign of 2000 it was clear that energy issues and Gazprom were the key elements on the Putin’s political agenda. In June 2000, just a month after his inauguration, Putin managed to make a prompt replacement of Viktor Chernomyrdin for his closest team-mate Dmitry Medvedev at the post of chairman of the board. And in May 2001 the head of Gazprom Rem Vyakhirev, who had managed the company since its foundation in 1992, was substituted with Alexei Miller.
“Gazprom is more than just a joint-stock company. The entire national economy is based to a significant extent on the gas industry”. These words by Putin, spoken at a meeting held on 30 May 2001 in the Kremlin and dedicated to dismissal of Vyakhirev and appointment of Miller, have let understand clearly his attitude towards the Company at the very beginning of his presidential term.
Gazprom was the first business structure where Putin began seizing systematically the key positions appointing his people to the commanding posts and ousting members of the old management team. The supreme leadership of Gazprom was soon filled with old acquaintances of Putin’s from the times of working in the St Petersburg administration. As of today, 11 out 18 board directors managing financial matters, property issues, corporate management, are people who in the ‘90s worked either in St Petersburg Administration or in OAO Sea Port of St Petersburg, or in some St Petersburg commercial structures, or in FSB.
Such a practice is uncharacteristic of large global energy entities. Usually the leading positions there are taken by professionals having many-year experience of working in high-ranking posts in different energy corporations. As a rule, former minor regional officials, employees of ports and building companies are not appointed (particularly in such a big number) to fill the positions of top-managers in the leading oil and gas corporations.
However, Putin, who made in person all the appointments, staked not on professionalism but on belonging to his “St Petersburg clan”.
This is not only about seizing the management in the company. Putin dedicated significant part of his working time to solving the current problems of Gazprom functioning. Major part of the agenda of his international meetings and visits to abroad was related to lobbying various Gazprom projects.
Putin stood for Gazprom interests over the course of consideration of questions related to regulation and development of the gas industry by the Russian government. When in 2002-2003 the cabinet of Mikhail Kasyanov attempted to include a question of reforming the gas industry and opening this sector for competition, the question was constantly dismissed under request from the Kremlin. Recently, when reproofs to Gazprom have become more frequent (also from the government’s officials’ side) regarding unacceptably low level of tax paying by the company, Putin has protected Gazprom from tax increase, and the government has undertaken to keep the previous level of taxation of the company till 2010.
With Putin’s approval the government has signed the program of sharp increase of gas prices for the Russian consumers making it correspondent to European prices. Gazprom has been lobbying this decision for 15 years and it failed to get it in cabinets of Gaidar, Chernomyrdin, Kirienko, Primakov and Kasyanov. The program was finally accepted with the Regulation #333 of 28 May 2007, signed by Mikhail Fradkov. In accordance with this program, the gas prices for the Russian consumers are to have doubled by 2011 compared to today’s level, and amount to at least $125 for 1,000 cubic meters (today’s price is about $64). Probably, in reality the prices will be even higher, as the gas prices in Europe have been going up rapidly and unpredictably.
Over the years of his presidency Putin has proved to be a very effective lobbyist and advocate for Gazprom interests.
Has the country got any advantage out of that? Have Russian citizens got any benefits out of such undivided attention by the President to the main company in the country?
Reliability of securing gas for the country getting worse
The appointed by Putin management having been working for 7 years it seems reasonable to make it accountable for production and economic results of the company’s activities over the mentioned period. The results are rather poor. Above all, Gazprom management has failed the main function by the company – that’s reliable gas supply to the Russian consumers. It is considered that exactly in exchange for this function performing Gazprom was given all the privileges, including the monopolist status and active support from the state.
However, the volume of extraction by Gazprom has not grown over these years, and it even decreased in 2007 down to the level of 1999. Considering the exhaustion of the old gas fields, the stagnation of the gas extraction may turn into complete decline in the near future.
Gazprom supplies to the Russian consumers have not increased either. In 2007 the volumes of gas supplies to the home market amounted only 307 billion of cubic meters, which is only 2% higher than the figure of 2001. In the meanwhile, the home demand for gas has increased for 18% or almost 67 billion cubic meters per year!
Thus, the gap between home demand and supply is growing changing from 72 bn of cubic meters in 2001 up to almost 132 bn of cubic meters in 2007. Today Russia has to satisfy about one third of her need in gas through using the “non-Gazprom” products.
This gap has been traditionally closed with supplies by independent Russian gas producers and with import of gas from the central Asia countries. However, at the moment the possibilities by independent producers being restricted, the rapidly growing dependency on importing the gas from Central Asia leads to the sharp growth of costs by Gazprom (this will be considered in more details below).
The problem of insufficient gas supplies in the home market, getting sharper against the background of the export obligations by Gazprom, is turning into a real threat. So far Gazprom has been lucky with favorable weather conditions: two last winters have been relatively warm which helped smoothing the winter peaks of gas consummation. However, even considering the mild temperatures, the demand for gas increases in winter period.
Indirectly, this may be seen at an example of the last winter season of 2007-2008 where under conditions of gas extraction stagnation the gas extraction from the underground storing facilities went up to a top record figure of 50.1 bn of cubic meters, which was 20% more than the average figure for the three previous winters! By the end of January, the underground gas storages of Gazprom had been exhausted almost completely. Along with that the daily output increased only for 2-3 % compared with the previous season, despite the fact of putting into operation the new relatively large Yuzno-Russkoe gas field.
The winter of 2007-2008 was featured with a top record of daily extraction of the gas from underground storages – that’s 583.6 million of cubic meters per day, which is higher than the record of the really cold winter of 2005-2006.
This shows how much the wintertime demand for gas has grown even under conditions of relatively mild winters. One may suppose the threatening consequences to affect Russia in case one of the next winters is really cold. One should expect large-scale cutting off of the vitally important facilities due to the gas shortage.
Similar picture we could see in the winter 2005-2006 where mass restriction of gas supplies had to be imposed on the consumers. According to the RAO EES, the total restrictions of the gas supplies to the Russian electric power stations on the cold days of January-February 2006 was 12.5% against the target volumes for the entire United Energy System and up to 80-83% for the power stations of the central region and the North-West.
In other word, there was almost complete turning off of gas supplies to power stations in the European part of Russia (should it be reminded that the gas is the dominating fuel used for producing electric energy in Russia?).
In January-February 2006 there was a serious tension also about export gas supplies. According to information by the media, on 18 January 2006 Gazprom decreased voluntarily the volume of transit of the gas through Ukrainian territory from 390 to 350 million cubic meters per day due to shortage of the gas. Same day Gazprom informed its Italian partner, the ENI Concern, of its incapability to guarantee the gas supplies in the planned volume due to extremely cold temperatures, after which restrictions of Gazprom supplies were reported by Serbia (25%), Croatia (6-10%) and Hungary (20%).
The reason for stagnation of the gas supplies in the home market against the background of the growing demand is a systemic shortage of investments into extraction. Russia possesses sufficient stock of the proved reserves of the gas, which should be enough for the next 80 years with today’s level of the extraction. However, many of those fields are not explored. Significant part of the reserves is concentrated in the fields in the new unexplored areas where there is no developed infrastructure and this is why those areas are so difficult for exploration.
For example, to explore the fields in the peninsula of Yamal situated at a distance of 500-600 km to the north of the standing regions of the gas extraction, it takes construction of a 540 km long railroad that is to pass permafrost areas and the lands waterlogged for 50-60%, featured with a lot of small rivers and streams. To deliver the gas from the peninsula of Yamal it is necessary to build a gas pipeline with the length of 1,100 km, underwater part of which is also to pass on the permafrost and waterlogged territories.
According to licenses given, Gazprom was to put those fields in operation at the late ‘90s. However, nothing real has been done about that. In 2000 the former head of Gazprom Rem Vyakhirev asked for prolongation of the licenses. He was refused first, however, after appointment of Alexei Miller to be the head of the company, the license terms were postponed for 8-12 years in a quiet way and without any explanations given. And now even those terms are going to be unmet.
Against the background of declining volumes of extraction at the old gas fields, put into operation as far back as 1980s, Russia is going to face a threatening problem of the gas deficit. The Yuzhno-Russkoe field is the last relatively large field remaining in the standing area of the extraction where the infrastructure is rather well developed and conditions of extraction are more favorable. The “new gas” will have to be taken from unexplored fields, one of the most complicated in the world, where exploration and making the necessary infrastructure will require vast investments. According to fresh estimation by Gazprom itself, the cost alone of the construction of the Bovanenkovo-Ukhta pipeline will be $80-90 Bn, while the entire project of exploration of the Yamal may take an amount of up to $200 Bn, which is more than all the Russian Stabilization Fund!
Why all those investments haven’t been done so far, considering it was planned that the gas from Yamal gas fields was to be delivered to the continent at the late ‘90s?
The problem is that over all these years Gazprom intentionally has spent only relatively minor means on investments into its profile business, i.e. gas extraction. The vast super profits, gained out of rapid growth of the export and domestic gas prices, Gazprom has spent on buying up the assets and on financing the rapidly growing costs.
That way, within the period from 2001-2007 only slightly over $27 Bn have been spent by the Company on the capital investment of its main business, the gas extraction.
Just compare: in 2003-2007 Gazprom has spent $44.6 Bn on buying the assets. Over $30 Bn in that amount were assets having no relation to the gas industry. That’s mainly oil companies (Sibneft, Tomskneft) and electric energy companies (RAO EES, Mosenergo, wholesale and territorial generating companies), also Rosukrenergo trader.
If those means had been spent on exploration of the new gas fields, Russia would not be posed a threat of the gas supplies crisis.
While the fields in Yamal are not getting explored yet, Gazprom has got into dependence on the gas import from the Central Asia. If in 2002 the share of the Central Asian gas was slightly over 4% in the Gazprom balance, now the figure is 8%. In the meantime, this gas is going up rapidly. In 2003 a thousand cubic meters of the Turkmen gas cost to Gazprom $30. Today the price is $150. And since 2009 on, the figure may become $250 or even higher.
No wonder that the financial report of Gazprom for 2007, made in accordance with the international standards, has shown a paradoxical result: with the growth of proceeds of more than 8% out of the gas selling, the profits out of selling have reduced for 11%. And this figure appeared against the background of steady growth of gas sales in 2007, including 22.5% for the Russian consumers and the average 25.2% for the CIS countries.
How can it have been shown reduction of profits out of sales with the rapid growth of prices? The Gazprom’s management makes no secret out of the fact that the reason is the growth of costs, where the main article is buying up the gas from the third persons (cost of such buying has increased for 36%). If in 2003 the expenses for bought oil and gas were less than a billion dollars, in 2007 the figure was $15 Bn or more than a quarter of all the operational costs by the Company!
The biggest share of those costs is rapidly growing costs for buying the gas in the Central Asia: a bit over $ 1 Bn in 2006; $7.5 Bn in 2006; $11.7 Bn in 2007.
In March 2008 the heads of the petroleum companies from Kazakhstan, Uzbekistan and Turkmenistan advised Gazprom that since January 2009 they are going to change for the new tariffs of the gas supplies, making it proportionate to the European prices. That means, the purchasing prices may reach the limit of 250-300 dollars per one thousand cubic meters. Thus, the costs for buying the Central Asian gas will increase to $17-21 Bn per year.
There is another problem hindering the increase of investments into gas extraction, that’s a very low economic effectiveness of the activities by Gazprom. The operational costs of the Company (with taxes excluded) have increased as many as three times compared to the year 2003: from $4.9 to $14.8 per barrel.
Besides the growth of costs for the bought gas, the rising figure of the wage payment is another article of the expenses increased. The figure has gone up from $3.7 Bn in 2003 to $9.7 Bn in 2007, or counting it in barrels of the extracted oil equivalent this is the change from less than $1 per barrel in 2003 to $2.5 in 2007.
Gazprom headcount has been constantly increasing, going from 391,000 in 2003 to 445,000 in 2007.
To be able to finance its growing appetite on buying the assets and to pay the growing costs, Gazprom has got indebted greatly. The Company’s debt that was $13.5 Bn at the end of 2000 reached the figure of $61.6 Bn or 66% (two thirds) of the annual proceeds. It should be noted that with the international petroleum companies the normal figure of proportion of the debt to the annual proceeds is considered to be no more than 10-15%.
Vast payments for servicing the debt hinder the investments. Moreover, there is a risk that in case of aggravation of the export price conjuncture Gazprom would have to reduce investments or even go bankrupt.
Possible consequences then would be accelerated price rise for gas for the home consumers, worsening the crisis in the gas extraction and probable spending of the state financial resources made for getting Gazprom avoid the bankruptcy.
So it turns out that the gas resources lying in the depths and allegedly belonging to people, in reality are disposed of by a narrow circle of persons who are close to the country’s leadership.
(Published with abridgements. To be continued.)
Reference: Gazprom, Explanations to the financial report under international standards
Boris Nemtsov
Vladimir Milov
02.09.2008
Monday, December 29, 2008
Monday, December 22, 2008
banks and the bailout , merry christmas!
At least you got a free toaster
Those with high blood pressure and low account balances may want to skip this item. Because, in what is sure to become yet another public relations disaster for the financial industry, an AP analysis has determined that banks receiving $188 billion in government bailout money paid their top execs almost $1.6 billion last year. The AP review of SEC documents found that the companies awarded the biggest of their bigwigs "cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships, and professional money management." "Professional money management"? How much can that be worth, anymore? Give us a good mattress.
Those with high blood pressure and low account balances may want to skip this item. Because, in what is sure to become yet another public relations disaster for the financial industry, an AP analysis has determined that banks receiving $188 billion in government bailout money paid their top execs almost $1.6 billion last year. The AP review of SEC documents found that the companies awarded the biggest of their bigwigs "cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships, and professional money management." "Professional money management"? How much can that be worth, anymore? Give us a good mattress.
Saturday, December 20, 2008
Thursday, December 18, 2008
the father of all the ponzis
from
http://www.ft.com/cms/s/0/e8294d3c-ccef-11dd-9905-000077b07658.html
Pomerantz, a New York law firm, said it was building a case on behalf of clients, and it was “increasingly apparent that investors who invested with Madoff indirectly through one of his related ‘feeder funds’ may have a basis for legal redress, against those funds and their auditors”.
Many of the other big US lawyers have also been instructed by victims to put together cases and find deep-pocketed companies to sue.
However, auditors say they are entitled to take on trust the word of custodians of assets.
Cindy Fornelli, executive director of the Center for Audit Quality, the US audit lobbyist, said fund accountants were responsible for ensuring money was “disbursed to the firms it invested in.”
“It is not the auditor’s responsibility to audit the underlying investments of the firms the capital management firm invests in. As an example, if the firm you’re auditing invests in AT&T, you’re not responsible for auditing AT&T.
“Rather, the existence of the underlying securities is verified with a third party, which in this case was a respected and SEC-registered investment adviser who was a former head of Nasdaq.
“In our view, the Madoff matter demonstrates why more light is needed in areas not currently regulated in our capital markets.”
BDO Seidman pointed out it did not audit Madoff Securities. It said its “audits of Ascot Partners conformed to all professional standards and we will vigorously defend ourselves against these unfounded allegations”.
PwC and Ernst & Young declined to comment. KPMG said: “Our work conformed to all professional standards.”
http://www.ft.com/cms/s/0/e8294d3c-ccef-11dd-9905-000077b07658.html
Pomerantz, a New York law firm, said it was building a case on behalf of clients, and it was “increasingly apparent that investors who invested with Madoff indirectly through one of his related ‘feeder funds’ may have a basis for legal redress, against those funds and their auditors”.
Many of the other big US lawyers have also been instructed by victims to put together cases and find deep-pocketed companies to sue.
However, auditors say they are entitled to take on trust the word of custodians of assets.
Cindy Fornelli, executive director of the Center for Audit Quality, the US audit lobbyist, said fund accountants were responsible for ensuring money was “disbursed to the firms it invested in.”
“It is not the auditor’s responsibility to audit the underlying investments of the firms the capital management firm invests in. As an example, if the firm you’re auditing invests in AT&T, you’re not responsible for auditing AT&T.
“Rather, the existence of the underlying securities is verified with a third party, which in this case was a respected and SEC-registered investment adviser who was a former head of Nasdaq.
“In our view, the Madoff matter demonstrates why more light is needed in areas not currently regulated in our capital markets.”
BDO Seidman pointed out it did not audit Madoff Securities. It said its “audits of Ascot Partners conformed to all professional standards and we will vigorously defend ourselves against these unfounded allegations”.
PwC and Ernst & Young declined to comment. KPMG said: “Our work conformed to all professional standards.”
Monday, December 15, 2008
madoff fuckoff
http://ftalphaville.ft.com/blog/2008/12/15/50428/elementary-dear-sec/
http://www.marketwatch.com/m/story/857b1318-23a1-4355-878a-5ab629877287/0
http://clusterstock.alleyinsider.com/2008/12/how-we-knew-bernie-madoff-was-a-fraud
http://clusterstock.alleyinsider.com/2008/12/flashback-2001-barrons-questioned-madoffs-returns
http://www.marketwatch.com/m/story/857b1318-23a1-4355-878a-5ab629877287/0
http://clusterstock.alleyinsider.com/2008/12/how-we-knew-bernie-madoff-was-a-fraud
http://clusterstock.alleyinsider.com/2008/12/flashback-2001-barrons-questioned-madoffs-returns
Friday, December 12, 2008
Saturday, December 06, 2008
Friday, December 05, 2008
Thursday, December 04, 2008
Wednesday, December 03, 2008
Neel Kashkari
a super hero, rambo of finance , devising weapons of mass destruction at the treasury , this time with the tax payers money , after having contributed to destroy the shareholders money of corporate America. what kind of experience has this guy to make him one of the centerpieces of the financial bail out? the only impressive thing is his bold head, that may have the purpose of scaring the opponents. you add to this some mimetic paint on his face , he would then be perfect.
Tuesday, December 02, 2008
Sunday, November 30, 2008
Tuesday, November 18, 2008
paulson, oedipus complex
forget about all the technicalities, the real problem is one of trust, a treasury secretary who sealed the current financial system , a fine deal maker , or rather a bad statesman who managed to grab usd 700 bio from the government to fix the banks balance sheets , destroying before this its rival, lehman. this guy will pass to history as too biased to understand the real mess and facts that himself contributed to create, too proud to admit his own mistakes. the real job is currently done by Bernanke. Paulson knows that his mandate is over and that he has spent one of the most miserable moments of his career . He thought to serve the country out of philanthropy, he discovered that he was the originator of this mess , the largest ever destruction that capitalism has assisted to. it looks like an Oedipus complex, an existential drama unfolding: Paulson has murdered his father and married his mother, and he does not understand the absurd destiny reserved to him . he cannot act . let's be frank, the only person who could steer the nation out of this mess is the one who understood well its implicaitons ask rubini.
Monday, November 10, 2008
Thursday, November 06, 2008
november 08 bookmarks
http://www.nybooks.com/articles/22012
Volume 55, Number 17 • November 6, 2008
• A Fateful Election: What's at Stake by Russell Baker, David Bromwich, Mark Danner, Andrew Delbanco, Joan Didion, Ronald Dworkin, Frances Fitzgerald, Timothy Garton Ash, Paul Krugman, Joseph Lelyveld, Darryl Pinckney, Thomas Powers, Michael Tomasky, and Garry Wills
• The Glories of Yiddish by Harold Bloom
• Green Fantasia by Bill McKibben
• Who Killed Anna Politkovskaya? by Amy Knight
• Georgia: The Ignored History by Robert English
• China's Golden Age by Eliot Weinberger
• How Muslims Made Europe by Kwame Anthony Appiah
• Hugo Chávez Versus Human Rights by Jose Miguel Vivanco and Daniel Wilkinson
• Plus: Mark Ford on Ted Hughes, Robert O. Paxton on birding, James Fenton on Vermeermania, G.W. Bowerstock on Daniel Mendelsohn's essays, Benjamin M. Friedman on the free market, Nathaniel Rich on Otto Preminger, and more.
He Foresaw the End of an Era by John Cassidy
The Egyptian Connection by William Dalrymple
AUDIO
A Fine Mess
http://www.newyorker.com/online/2008/11/10/081110on_audio_lanchester¨
In Pictures: Not So Good With Money
http://www.forbes.com/2008/10/29/Intelligent-investing-timebombs-commercial-paper-panel_slide_7.html?thisSpeed=15000
http://www.nytimes.com/2008/11/06/business/economy/06norris.html
http://topics.nytimes.com/top/reference/timestopics/people/n/floyd_norris/index.html
The Stimulus Plan We Need Now
http://www.rgemonitor.com/us-monitor/254216/the_stimulus_plan_we_need_now
Weekly Weight Watcher "Global recession and earnings" 31-Oct-2008 Hatheway
Moreover, history suggests that banking sector recapitalisation efforts have not been able to stem falling earnings in the broader economy-earnings typically bottomed 1½ years after the recapitalisation event. This suggests we are closer to the beginning of a broad-based earnings slump than to the end. Too earlyto re-engage We remain cautiously positioned in our recommended asset allocation portfolio. We have a preference for high-grade corporate bonds, US Treasuries, and defensive allocations in global equities. In commodities, we retain our underweight positions in industrial metals and energy.
……..
Moreover, as we also show in this note and a companion Global Economic Comment, episodes of severe bank stress are typically followed by protracted periods of weak growth and falling inflation. Which asset classes do best Even after recent sharp declines in equity prices and lower government bond yields, the evide
Volume 55, Number 17 • November 6, 2008
• A Fateful Election: What's at Stake by Russell Baker, David Bromwich, Mark Danner, Andrew Delbanco, Joan Didion, Ronald Dworkin, Frances Fitzgerald, Timothy Garton Ash, Paul Krugman, Joseph Lelyveld, Darryl Pinckney, Thomas Powers, Michael Tomasky, and Garry Wills
• The Glories of Yiddish by Harold Bloom
• Green Fantasia by Bill McKibben
• Who Killed Anna Politkovskaya? by Amy Knight
• Georgia: The Ignored History by Robert English
• China's Golden Age by Eliot Weinberger
• How Muslims Made Europe by Kwame Anthony Appiah
• Hugo Chávez Versus Human Rights by Jose Miguel Vivanco and Daniel Wilkinson
• Plus: Mark Ford on Ted Hughes, Robert O. Paxton on birding, James Fenton on Vermeermania, G.W. Bowerstock on Daniel Mendelsohn's essays, Benjamin M. Friedman on the free market, Nathaniel Rich on Otto Preminger, and more.
He Foresaw the End of an Era by John Cassidy
The Egyptian Connection by William Dalrymple
AUDIO
A Fine Mess
http://www.newyorker.com/online/2008/11/10/081110on_audio_lanchester¨
In Pictures: Not So Good With Money
http://www.forbes.com/2008/10/29/Intelligent-investing-timebombs-commercial-paper-panel_slide_7.html?thisSpeed=15000
http://www.nytimes.com/2008/11/06/business/economy/06norris.html
http://topics.nytimes.com/top/reference/timestopics/people/n/floyd_norris/index.html
The Stimulus Plan We Need Now
http://www.rgemonitor.com/us-monitor/254216/the_stimulus_plan_we_need_now
Weekly Weight Watcher "Global recession and earnings" 31-Oct-2008 Hatheway
Moreover, history suggests that banking sector recapitalisation efforts have not been able to stem falling earnings in the broader economy-earnings typically bottomed 1½ years after the recapitalisation event. This suggests we are closer to the beginning of a broad-based earnings slump than to the end. Too earlyto re-engage We remain cautiously positioned in our recommended asset allocation portfolio. We have a preference for high-grade corporate bonds, US Treasuries, and defensive allocations in global equities. In commodities, we retain our underweight positions in industrial metals and energy.
……..
Moreover, as we also show in this note and a companion Global Economic Comment, episodes of severe bank stress are typically followed by protracted periods of weak growth and falling inflation. Which asset classes do best Even after recent sharp declines in equity prices and lower government bond yields, the evide
Russia, an ivory tower of young narcisist leaders who disregard the world around
Oil & gas—The ruble should become the currency for oil and gas trading
News The ruble should become the main currency for oil and gas contracts,
President Medvedev said yesterday in his address to the Federation Council.
Comment There is little that Russia can do unilaterally to establish ruble
denominated oil trading. Russian oil trades on the basis of dollar denominated
dated Brent prices. If Russian oil companies ask their off-takers to pay in rubles,
the impact would be limited to their counterparts at the MICEX’s ruble
exchange operations. The real impact might have place if Russia attempts to
establish independent exchange trading of ruble contracts for its Ural blend.
While this development is possible in theory, technically, it would take a long
time to establish a reliable ruble-denominated trading benchmark. In the case of
gas, the situation is even more complicated, as Gazprom would apparently have
to renegotiate all of its long-term contracts, which would not be an easy task in
an environment of mounting pressure to substitute long-term contracts for spot
trading.
News The ruble should become the main currency for oil and gas contracts,
President Medvedev said yesterday in his address to the Federation Council.
Comment There is little that Russia can do unilaterally to establish ruble
denominated oil trading. Russian oil trades on the basis of dollar denominated
dated Brent prices. If Russian oil companies ask their off-takers to pay in rubles,
the impact would be limited to their counterparts at the MICEX’s ruble
exchange operations. The real impact might have place if Russia attempts to
establish independent exchange trading of ruble contracts for its Ural blend.
While this development is possible in theory, technically, it would take a long
time to establish a reliable ruble-denominated trading benchmark. In the case of
gas, the situation is even more complicated, as Gazprom would apparently have
to renegotiate all of its long-term contracts, which would not be an easy task in
an environment of mounting pressure to substitute long-term contracts for spot
trading.
Wednesday, November 05, 2008
Tuesday, November 04, 2008
the incredible story of the ubs lost shares
from fuw
UBS-Paket bleibt verschollen
Luqman Arnold im Abseits
Nächste Woche wird die UBS die Einladungen zur Generalversammlung verschicken - es ist die vierte in diesem Jahr; sie findet am 27. November in Luzern statt. Einer, der sich nicht für die Traktandenliste interessiert, ist Luqman Arnold. Obwohl seine Beteiligungsgesellschaft Olivant dieses Jahr 2,78% der UBS-Aktien kaufte, wird Olivant damit nicht abstimmen können.
Die Aktien im Marktwert von rund 1,4 Mrd. Fr. sind verschollen, untergegangen im Strudel der Lehman-Pleite. Dass es Jahre gehen könnte, bis die Aktien mit dem Segen des Konkursverwalters PricewaterhouseCoopers wieder bei Olivant landen, ist noch die optimistische Annahme. Möglicherweise werden sie aber nie mehr auftauchen. Olivant-Sprecher Jürg Wildberger sagt gegenüber der FuW: «Man muss mit allem rechnen.»
Jedenfalls kann Arnold sich nicht mehr als UBS-Aktionär betrachten. Er wird bis auf weiteres zur Schweizer Grossbank schweigen, bestätigt Wildberger. Zwischen April und August dieses Jahres äusserte sich Arnold wiederholt in Briefen an UBS-Vizepräsident Sergio Marchionne und in Mitteilungen ausführlich und gehaltvoll über die Corporate Governance und die Strategie der UBS.
Die Londoner Tochtergesellschaft von Lehman Brothers war Prime Broker von Olivant. Diese hinterlegte dort die UBS-Aktien, um von Lehman Kredit zu erhalten. Die Bank lieh die Papiere an Dritte aus, um ihrerseits Kredit aufzunehmen. Wegen des Konkurses werden die Transaktionen nun einzeln analysiert. Wem die Aktien zugesprochen werden, dürfte sich erst in juristischer Feinarbeit herausstellen. Es kommt auf das Kleingedruckte in den Verträgen an und auf die Kontotypen, auf denen die Aktien lagen. Gemäss Schätzungen sind in Lehmans Europaeinheit wegen der Pleite Vermögenswerte von 40 bis 60 Mrd. $ blockiert.
Ebenfalls nächste Woche wird die UBS über den Geschäftsgang im dritten Quartal berichten. Die Eckwerte sind bekannt. Der Reingewinn von 300 Mio. Fr. kam dank eines Gewinns aus der Neubewertung eigener Verpflichtungen zustande (2,2 Mrd. Fr.) und dank einer Steuergutschrift (912 Mio. Fr.).
Nicht zum Tragen kommen bei der UBS hingegen die gelockerten Bilanzierungsregeln. Die Deutsche Bank schaffte es im dritten Quartal in die Gewinnzone, weil sie Wertpapiere von 25 Mrd. € aus dem Handelsbestand herausnehmen konnte und sie deshalb nicht mehr zum Marktpreis bewerten musste (vgl. Seite 31). Das ersparte ihr 845 Mio. € Wertberichtigungen. Der Fall UBS liegt anders. Die UBS will ihre Risikopositionen weitgehend an die Schweizerische Nationalbank auslagern (verkaufen). Buchhalterisch müssen sie bis dann im Handelsbestand verbleiben, weshalb eine Umklassifizierung nicht möglich ist.
UBS-Paket bleibt verschollen
Luqman Arnold im Abseits
Nächste Woche wird die UBS die Einladungen zur Generalversammlung verschicken - es ist die vierte in diesem Jahr; sie findet am 27. November in Luzern statt. Einer, der sich nicht für die Traktandenliste interessiert, ist Luqman Arnold. Obwohl seine Beteiligungsgesellschaft Olivant dieses Jahr 2,78% der UBS-Aktien kaufte, wird Olivant damit nicht abstimmen können.
Die Aktien im Marktwert von rund 1,4 Mrd. Fr. sind verschollen, untergegangen im Strudel der Lehman-Pleite. Dass es Jahre gehen könnte, bis die Aktien mit dem Segen des Konkursverwalters PricewaterhouseCoopers wieder bei Olivant landen, ist noch die optimistische Annahme. Möglicherweise werden sie aber nie mehr auftauchen. Olivant-Sprecher Jürg Wildberger sagt gegenüber der FuW: «Man muss mit allem rechnen.»
Jedenfalls kann Arnold sich nicht mehr als UBS-Aktionär betrachten. Er wird bis auf weiteres zur Schweizer Grossbank schweigen, bestätigt Wildberger. Zwischen April und August dieses Jahres äusserte sich Arnold wiederholt in Briefen an UBS-Vizepräsident Sergio Marchionne und in Mitteilungen ausführlich und gehaltvoll über die Corporate Governance und die Strategie der UBS.
Die Londoner Tochtergesellschaft von Lehman Brothers war Prime Broker von Olivant. Diese hinterlegte dort die UBS-Aktien, um von Lehman Kredit zu erhalten. Die Bank lieh die Papiere an Dritte aus, um ihrerseits Kredit aufzunehmen. Wegen des Konkurses werden die Transaktionen nun einzeln analysiert. Wem die Aktien zugesprochen werden, dürfte sich erst in juristischer Feinarbeit herausstellen. Es kommt auf das Kleingedruckte in den Verträgen an und auf die Kontotypen, auf denen die Aktien lagen. Gemäss Schätzungen sind in Lehmans Europaeinheit wegen der Pleite Vermögenswerte von 40 bis 60 Mrd. $ blockiert.
Ebenfalls nächste Woche wird die UBS über den Geschäftsgang im dritten Quartal berichten. Die Eckwerte sind bekannt. Der Reingewinn von 300 Mio. Fr. kam dank eines Gewinns aus der Neubewertung eigener Verpflichtungen zustande (2,2 Mrd. Fr.) und dank einer Steuergutschrift (912 Mio. Fr.).
Nicht zum Tragen kommen bei der UBS hingegen die gelockerten Bilanzierungsregeln. Die Deutsche Bank schaffte es im dritten Quartal in die Gewinnzone, weil sie Wertpapiere von 25 Mrd. € aus dem Handelsbestand herausnehmen konnte und sie deshalb nicht mehr zum Marktpreis bewerten musste (vgl. Seite 31). Das ersparte ihr 845 Mio. € Wertberichtigungen. Der Fall UBS liegt anders. Die UBS will ihre Risikopositionen weitgehend an die Schweizerische Nationalbank auslagern (verkaufen). Buchhalterisch müssen sie bis dann im Handelsbestand verbleiben, weshalb eine Umklassifizierung nicht möglich ist.
obama final speech
Obama come periple
l giudizio di Tucidide su Pericle [modifica]
Lo storico Tucidide presenta Pericle come un modello di uomo politico equilibrato, che seppe portare Atene al massimojavascript:void(0) splendore ed alla massima potenza. Pericle infatti condusse la città nei periodi di pace con moderazione e la mantenne sicura, facendola diventare grandissima. Quando scoppiò la Guerra ne previde la potenzialità, manifestando una preveggenza che si rivelò solo dopo la sua morte.
Disse infatti che gli ateniesi avrebbero vinto se fossero rimasti tranquilli, si fossero curati della flotta e non avessero cercato di ampliare l'impero nel corso della guerra facendo correre pericoli alla città. Gli Ateniesi fecero l'esatto contrario, imbarcandosi in imprese estranee alla guerra e che, se riuscite, avrebbero portato vantaggi soprattutto a privati cittadini, e il cui fallimento si sarebbe ritorto a danno per l'intera città.
Il giudizio di Tucidide è lucidamente espresso nelle seguenti parole:
« [...] Ne era motivo il fatto che Pericle, potente per dignità e senno, chiaramente incorruttibile al denaro, dominava il popolo senza limitarne la libertà, e non era da lui condotto più di quanto egli stesso non lo conducesse, poiché Pericle non parlava per lusingarlo, come avrebbe fatto se avesse ottenuto il potere con mezzi illeciti, ma lo contraddiceva anche sotto l'influsso dell'ira, avendo ottenuto il potere per suo merito personale. [...]
Vi era così ad Atene una democrazia, ma di fatto un potere affidato al primo cittadino. »
(Tucidide, Storie, II, 65)
http://www.youtube.com/watch?v=1vlM3x-GoCA&eurl=http://www.huffingtonpost.com/2008/11/04/the-final-rallies-obama-m_n_140800.html
Monday, November 03, 2008
obama tooth
http://www.huffingtonpost.com/2008/11/03/obama-on-grandmother-and_n_140698.html
Calling it a "bittersweet time" in his life, there were moments when one could detect the sadness in his voice and face. The crowd in Charlotte did its best to pull him along, screaming out words of support as he detailed Madelyn Dunham's life and drew from it threads that weaved into his candidacy and message. It was a poignant moment: the woman who helped raise him passing away just hours before the election.
No matter what happens tomorrow, I'm going to feel good about how it has turned out because all of you have created this remarkable campaign. She is gone home. And she died peacefully in her sleep, with my sister at her side. And so, there is great joy as well as tears. I'm not going to talk about it too long because it is hard, a little, to talk about.
I want everybody to know though a little bit about her. Her name was Madelyn Dunham. And she was born in Kansas in a small town in 1922. Which means she lived through the Great Depression, she lived through two world wars, she watched her husband go off to war, while she looked after her baby and worked on a bomber assembly line. When her husband came back they benefited from the GI bill, they moved west and eventually ended up in Hawaii.
She was somebody who was a very humble person, a very plainspoken person. She is one of those quiet heroes we have all across America, who are not famous, their names are not in the newspapers, but each and every day they work hard. They look after their families. They sacrifice for their children, and their grandchildren. They aren't seeking the limelight. All they try to do is do the right thing. And in this crowd, there are a lot of quiet heroes like that, people like that, mothers and fathers and grandparents who have worked hard and sacrificed all their lives and the satisfaction that they get is in seeing their children or maybe their grandchildren or their great-grandchildren live a better life than they did. That is what America is about. That is what we are fighting for.
Calling it a "bittersweet time" in his life, there were moments when one could detect the sadness in his voice and face. The crowd in Charlotte did its best to pull him along, screaming out words of support as he detailed Madelyn Dunham's life and drew from it threads that weaved into his candidacy and message. It was a poignant moment: the woman who helped raise him passing away just hours before the election.
No matter what happens tomorrow, I'm going to feel good about how it has turned out because all of you have created this remarkable campaign. She is gone home. And she died peacefully in her sleep, with my sister at her side. And so, there is great joy as well as tears. I'm not going to talk about it too long because it is hard, a little, to talk about.
I want everybody to know though a little bit about her. Her name was Madelyn Dunham. And she was born in Kansas in a small town in 1922. Which means she lived through the Great Depression, she lived through two world wars, she watched her husband go off to war, while she looked after her baby and worked on a bomber assembly line. When her husband came back they benefited from the GI bill, they moved west and eventually ended up in Hawaii.
She was somebody who was a very humble person, a very plainspoken person. She is one of those quiet heroes we have all across America, who are not famous, their names are not in the newspapers, but each and every day they work hard. They look after their families. They sacrifice for their children, and their grandchildren. They aren't seeking the limelight. All they try to do is do the right thing. And in this crowd, there are a lot of quiet heroes like that, people like that, mothers and fathers and grandparents who have worked hard and sacrificed all their lives and the satisfaction that they get is in seeing their children or maybe their grandchildren or their great-grandchildren live a better life than they did. That is what America is about. That is what we are fighting for.
Monday, October 27, 2008
Sunday, October 26, 2008
Monday, October 20, 2008
Friday, October 17, 2008
Thursday, October 16, 2008
nyt , brooks, a republican, on obama
http://www.nytimes.com/2008/10/17/opinion/17brooks.html?hp
This was not evident back in the “fierce urgency of now” days, but it is now. And it is easy to sketch out a scenario in which he could be a great president. He would be untroubled by self-destructive demons or indiscipline. With that cool manner, he would see reality unfiltered. He could gather — already has gathered — some of the smartest minds in public policy, and, untroubled by intellectual insecurity, he could give them free rein. Though he is young, it is easy to imagine him at the cabinet table, leading a subtle discussion of some long-term problem.
...........
It could be that Obama will be an observer, not a leader. Rather than throwing himself passionately into his causes, he will stand back. Congressional leaders, put off by his supposed intellectual superiority, will just go their own way. Lost in his own nuance, he will be passive and ineffectual. Lack of passion will produce lack of courage. The Obama greatness will give way to the Obama anti-climax.
We can each guess how the story ends. But over the past two years, Obama has clearly worn well with voters. Far from a celebrity fad, he is self-contained, self-controlled and maybe even a little dull.
This was not evident back in the “fierce urgency of now” days, but it is now. And it is easy to sketch out a scenario in which he could be a great president. He would be untroubled by self-destructive demons or indiscipline. With that cool manner, he would see reality unfiltered. He could gather — already has gathered — some of the smartest minds in public policy, and, untroubled by intellectual insecurity, he could give them free rein. Though he is young, it is easy to imagine him at the cabinet table, leading a subtle discussion of some long-term problem.
...........
It could be that Obama will be an observer, not a leader. Rather than throwing himself passionately into his causes, he will stand back. Congressional leaders, put off by his supposed intellectual superiority, will just go their own way. Lost in his own nuance, he will be passive and ineffectual. Lack of passion will produce lack of courage. The Obama greatness will give way to the Obama anti-climax.
We can each guess how the story ends. But over the past two years, Obama has clearly worn well with voters. Far from a celebrity fad, he is self-contained, self-controlled and maybe even a little dull.
Monday, October 06, 2008
latest news / lehman/buft/racism and obama
http://www.iht.com/articles/2008/10/06/business/06gene.php
http://www.iht.com/articles/2008/10/06/business/free.php
http://www.iht.com/articles/2008/10/06/business/buffett.php
http://www.iht.com/articles/2008/10/06/business/lehman.php
http://www.iht.com/articles/2008/10/06/business/fuld.php
http://iht.com/articles/2008/10/06/opinion/edkristof.php
http://iht.com/articles/2008/10/06/europe/politicus.php
markets and cannon rothschild
argentina returns to the internartional debt market
dubai property red alarm
http://www.iht.com/articles/2008/10/06/business/free.php
http://www.iht.com/articles/2008/10/06/business/buffett.php
http://www.iht.com/articles/2008/10/06/business/lehman.php
http://www.iht.com/articles/2008/10/06/business/fuld.php
http://iht.com/articles/2008/10/06/opinion/edkristof.php
http://iht.com/articles/2008/10/06/europe/politicus.php
markets and cannon rothschild
argentina returns to the internartional debt market
dubai property red alarm
Friday, October 03, 2008
lehman bakrupcy: dynamics of the strangling. Lessons
lehman bloomberg
Lessons to be drawn : European countries intervened witha certian coordination to rescue the other large groups from the same problem amplified after the fall out of LEH ( see Hypo, Fortis, Dexia). The strange thing is the lack of cooperation and secured financing in the US to choke off the liquidity strangling.
Lessons to be drawn : European countries intervened witha certian coordination to rescue the other large groups from the same problem amplified after the fall out of LEH ( see Hypo, Fortis, Dexia). The strange thing is the lack of cooperation and secured financing in the US to choke off the liquidity strangling.
Steinbrueck, Germany , the crisis and the gaz deal
A new star is rising the European firmament of anti capitalism, his name is Peer Steinbrück, his fierce attack on the the American model and the end of its hegemony was accompanied 2 days later by the collapse of the larger commercial estate lender in Germany , Hypo real estate , and its demise as rubbish to be swept away gradually. The German finance minsiter has demonstrated a great coherence on his anti cpaitalistic views but a short sightedness on the reasons and ramifications of the crisis. While socialism is unveiling the mantra of anti americanism asa demagogical tool of sad memory, it shows a far more realistic Welt anschaung when it comes to broker deal with gaz and the Putin regime ratehr than supporting the the fate of one of the largest financial institutions affected by the credit crisis as many others in Europe.
In the meantime rumors on the end of the USA are still spread from Russia with a nostaligc touch for the good old times of the Soviet Union in spite of their own domestic financial crisis . Which takes you back to the famous quote: rumors over my death were exagerated.
Lets hope that democratic and republican institutions are good and dynamic enough to reform the system proving to be a better alternative than authoritarian regimes. this is a new challenge for America but also for Europe.
Monday, September 29, 2008
Thursday, September 25, 2008
Wednesday, September 24, 2008
Saturday, September 20, 2008
commenti
il capitalismo é un idea coniata da marx con connotati negativi. io credo piu nell'economia libera dei mercati. la parola capitalismo serve a descrivere il funzionamento del capitale con modelli che cambiano nel tempo . in questo caso il modello predominante é stato il bonus legato alla performance del dipartimento crediti senza tener conto dei rischi sistemici della banca stessa e l'illusione del della frammentazione del rischio spacciata per verità scientifica. certo , mi auguro che l'economia libera di mercato non finisca perché é nel codice genetico degli USA. mi chiedo se una punizione esemplare di certi dirigenti aiuterebbe a correggere certe pratiche. questo vale per il mondo dell'impresa ma anche per la politica e gli organi di regolamentazione che non hanno visto arrivare quest'enorme tsunami. solo i soliti emarginati come nouriel roubini facevano da spaventa passeri e oggi vengono rivalutati . per tipi come larry summers o greenspan tutto filava liscio come l'olio. i dirigenti delle banche non facvano che eseguire il grande credo della crescita senza barriere. insomma anche il libero mercato o il capitalismo é in grado di creare grandi illusioni che influenzano la maggioranza dei dirigenti.
who is the culpritt
from nytimes
"These experts, from both political parties, say Mr. Bush’s early personnel choices and overarching antipathy toward regulation created a climate, that, if it did not set off the turmoil, almost certainly aggravated it.............William H. Donaldson, a former Wall Street executive with respected Republican credentials who became chairman of the Securities and Exchange Commission under Mr. Bush, quit after facing resistance from the White House and Republican members of the agency, who criticized his support for stiffer regulations on mutual funds and hedge funds......To some extent, Mr. Bush was simply following a deregulatory pattern set by his predecessor, President Clinton. Perhaps the most significant recent deregulation of the banking industry — the landmark act that allowed commercial banks to expand into other financial activities, like investment banking and insurance — was signed into law by Mr. Clinton in 1999.....Beyond the administration’s deregulatory bent, some economists argue that its fiscal and tax policies made the United States more dependent on foreign capital, which inflated the bubble in housing prices......The White House and Congress wanted to make housing affordable to more Americans, and freeing up the lending markets was a way to do that. As Mr. Rogoff said: “It was a market-based way to help poor people. There was an incredible belief in free markets.”"
"These experts, from both political parties, say Mr. Bush’s early personnel choices and overarching antipathy toward regulation created a climate, that, if it did not set off the turmoil, almost certainly aggravated it.............William H. Donaldson, a former Wall Street executive with respected Republican credentials who became chairman of the Securities and Exchange Commission under Mr. Bush, quit after facing resistance from the White House and Republican members of the agency, who criticized his support for stiffer regulations on mutual funds and hedge funds......To some extent, Mr. Bush was simply following a deregulatory pattern set by his predecessor, President Clinton. Perhaps the most significant recent deregulation of the banking industry — the landmark act that allowed commercial banks to expand into other financial activities, like investment banking and insurance — was signed into law by Mr. Clinton in 1999.....Beyond the administration’s deregulatory bent, some economists argue that its fiscal and tax policies made the United States more dependent on foreign capital, which inflated the bubble in housing prices......The White House and Congress wanted to make housing affordable to more Americans, and freeing up the lending markets was a way to do that. As Mr. Rogoff said: “It was a market-based way to help poor people. There was an incredible belief in free markets.”"
Friday, September 19, 2008
lehman creditors
Richard Fuld : usd 17000 per hour , half a billion from 1993 till today. Where is the money ?
Richard Fuld charity work : robin Hood Foundation!!!!
Fuld serves on the board of directors of the Federal Reserve Bank of New York and is a member of the International Business Council of the World Economic Forum and the Business Council. He also serves on the Board of Trustees of Middlebury College and New York-Presbyterian Hospital, as well as on the board of directors of the Robin Hood Foundation.[3]
lehman authorised to sell to barclays
lehamn history ft
Lehman Brothers Faces Objections to Barclays Sale (Update3)
Lehman Creditors May Be Able to Recover Fuld's Pay, Lawyers Say
iht lehamn creditors
Broken brothers: How brinkmanship was not enough to save Lehman
By Henny Sender, Francesco Guerrera, Peter Thal Larsen and Gary Silverman
Published: September 15 2008 20:22 | Last updated: September 15 2008 21:44
On May 29 2007, with the clock ticking on one of the greatest global property booms in history, Richard Fuld rolled the dice on the US real estate market one more time.
The odds were not good for the chairman and chief executive of Lehman Brothers investment bank. It had been nearly a year since the US Federal Reserve brought an end to the era of cheap money with a series of interest rate increases that took its overnight lending rate from 1 per cent in June 2003 to 5.25 per cent in June 2006. It had been more than three months since HSBC became the first big global bank to reveal multi-billion-dollar losses on subprime mortgage loans. The credit cycle was turning, as it had so many times before during Mr Fuld’s four decades at Lehman, but he still felt lucky.
As a result, Lehman, a bank with a little more than $20bn (€14bn, £11bn) in equity at the time, joined Tishman Speyer, a developer, and Bank of America to spend $15bn for Archstone-Smith Trust, a property investment company that owned a giant portfolio of apartments in “the most desirable” neighbourhoods of large US cities.
Lehman had its reasons for believing that it could still make money in US property. Blackstone, a private equity firm run by former Lehman executives Steve Schwarzman and Pete Peterson, had just stunned Wall Street by sealing a string of profitable deals to sell several upscale office towers acquired as part of its highly leveraged $36bn buyout of Equity Office Properties a few months previously.
The Archstone deal was also consistent with the high-risk, high-reward culture that had taken root at Lehman. With less capital than rivals such as Goldman Sachs and Morgan Stanley, Lehman was known for punching above its weight and being quicker than others to seize opportunities. Mr Fuld, a former bond trader known to associates as “the gorilla”, was the embodiment of this culture. A man of military mien known for his direct management style, he was determined, having re-established the bank’s independence from American Express, to return it the pinnacle of Wall Street.
He almost got there. In the months preceding Archstone, Lehman was worth $60bn and was seen as one of Wall Street’s best-run banks. Mr Fuld had also showed himself very much aware of the storms gathering over the financial system. At Lehman’s 2006 Christmas party visitors noted his cautious outlook for the year ahead. A month later at last year’s World Economic Forum in Davos he talked openly about being “really worried” about the risks posed by property valuations, excess leverage and the rise in oil and commodity prices. “We’re taking some money off the table,” he said.
But while Mr Fuld may have been aware of danger and prepared to take precautions, within Lehman, as one insider remembers, “the acquisition machine rolled on”.
Below: From Alabama to a doomed second act
With the benefit of hindsight, the Archstone deal was a sign that Lehman was losing its touch. Just as the deal was being done, an era of wheeling-and-dealing fuelled by mountains of cheap debt was coming to an end. Over at Blackstone, Jon Gray, the group’s property chief, was already confessing to associates that the office tower sales the firm had made in April 2007 would have been impossible a month later. Mr Fuld, in other words, had committed the ultimate Wall Street sin – buying at the top of the market.
Archstone was a millstone for Lehman, part of a crippling $30bn-plus in property assets that the bank could not sell and investors could no longer tolerate. The bank’s stock market capitalisation crumbled to the point where it stood at $2bn last Friday. By Monday morning it was seeking protection from its creditors.
Lehman on Monday declined to comment but insiders said the bank was hit by a crisis of such virulence that Mr Fuld and other senior executives could have done little to avoid its consequences. While the Archstone deal came near the peak of the property cycle, they added, it did not in itself play a big part in Lehman’s demise. Mr Fuld’s allies said the chief executive did not disregard risk-management practices, pointing out that top executives met every Monday, often for several hours, to review the bank’s risk practices.
Yet the bet that left Lehman with a massive illiquid property portfolio was hardly out of character for a bank built in the image of its pugnacious 62-year-old chief executive. Mr Fuld was known as a canny operator, leveraging his bank’s prowess in the fixed-income markets and its small pile of capital to take big risks and earn bigger returns than larger rivals. Lehman thought of itself as the smart, scrappy underdog – not just good at spotting chances but also nimble enough to get out in time.
It was a formula that was prone to trouble. In 1998, when Wall Street executives and regulators met at the New York Federal Reserve to rescue the Long-Term Capital Management hedge fund, Lehman was allowed to chip in less money than most of its competitors – an unspoken acknowledgement that it had problems of its own.
However, Mr Fuld brought Lehman back from the abyss in take-no-prisoners fashion, pushing regulators to clamp down on rumour-mongering and firing up his staff. His inspirational abilities were on display after the September 11 attacks forced Lehman to evacuate its headquarters and relocate to a midtown hotel. There, Mr Fuld addressed his staff like a general going into battle.
With the Fed keeping interest rates low to stave off a recession after the terrorist attacks, Lehman grew rapidly, playing an outsized role in the securitisation market and the leveraged lending businesses – and produced quarter after quarter of record earnings from 2005 to 2007. Mr Fuld was feted as a visionary and paid as such, with Lehman awarding him a $186m 10-year stock award bonus in 2006 – prompting criticism that the investment bank’s board of directors had grown too cosy with their chief executive.
But as Lehman grew bigger, signs of internal tensions emerged. In 2004, Mr Fuld picked Joe Gregory, a former commercial paper trader, as president and chief operating officer – effectively his successor. Mr Gregory personified Lehman’s loyal, co-operative culture. But former colleagues say he became obsessed with the administrative processes and recruiting practices, while neglecting risk management.
They also accuse him of ratcheting up the appetite for risk and forcing out executives who disagreed. One of the Lehman bankers who urged caution, former colleagues say, was Mike Gelband, former head of fixed-income, who left in early 2007.
At the time of the Archstone deal and for some months afterwards, Lehman insiders recall few, if any, internal objections. Instead, executives remained so bullish that they congratulated themselves on having picked up Archstone on the cheap. Internal criticism became more common after Mr Gregory helped install Erin Callan as Lehman’s chief financial officer in the summer of 2007. A well-regarded investment banker, Ms Callan was widely touted as a rare example of a woman breaking into Wall Street’s upper ranks. But some Lehman bankers questioned whether putting a dealmaker in charge of the books was the right move to make as the subprime mortgage crisis worsened.
Mr Fuld’s role in these decisions was hard to pin down because colleagues say he was growing more remote. Mr Fuld spent an increasing amount of time in his mansion in Sun Valley, a ski resort in Idaho that he has used for years to entertain clients, or travelling around the world. “When Dick came over it was like a state visit,” says one London-based banker. Some bankers believed, too, that Mr Gregory shielded Mr Fuld from what was going on and discouraged executives from raising criticism or reporting bad news. “Joe was like Dick’s bodyguard,” says one senior banker.
It could be argued that clearer-eyed commentary on Lehman came from hedge fund managers such as David Einhorn of Greenlight Capital, who repeatedly questioned whether the bank’s problems were deeper than many thought. Lehman tried to wave off such criticism but investors drove the bank’s shares lower.
Lehman tried to shore up its defences this year, securing a $2bn credit line from its banks on March 14 – the Friday before the Fed-engineered sale of Bear Stearns to JPMorgan Chase. As part of the rescue, the Fed said it was making its borrowing window available to securities firms in a move widely seen on Wall Street as influenced by Mr Fuld, who sat on the board of the New York Fed. Indeed, some bankers referred to the measure as the Save Lehman Act of 2008. If so, it was to provide only a temporary respite.
Lehman’s access to the discount window seemed to preclude a Bear-style run on the bank. But Mr Einhorn continued to question the value Lehman assigned to its holdings. Analysts were particularly sceptical about Archstone, arguing that it should be marked down by 30 per cent – in line with comparable property investment companies and the relevant indices. In that case $4bn in bridge equity provided by a Lehman-led bank group – intended to be eventually replaced by funds from other sources – would be at risk.
In June, Lehman stunned the market with a $2.8bn loss. The bank demonstrated its connections in the financial world, however, by also raising $6bn in new capital. Hank Greenberg, the former AIG chief executive, invested through his CV Starr vehicle, along with the state of New Jersey pension fund; Wes Edens, a former Lehman executive and the founder of Fortress Investment Group; and GLG, a hedge fund 20 per cent owned by Lehman.
But for its critics, Lehman’s earnings report contained further reasons to worry. Despite the loss, it was marking its Archstone holdings at 85 cents on the dollar – far higher than bearish critics thought appropriate.
What the hedge funds did not know was that Lehman’s search for new capital was going international. Before raising $6bn from domestic sources, Lehman had sought an investment from Korea Development Bank, a South Korean state-controlled lender.
Two days after the earnings announcement, Mr Gregory and Ms Callan were ousted, and Bart McDade, previously head of Lehman’s equities business, was installed as president. The reshuffle sparked more turmoil inside the bank. Executives who had left, such as Mr Gelband and Alex Kirk, a former fixed-income banker, returned to senior positions. In London, Jeremy Isaacs, a long-serving executive who had overseen Lehman’s expansion in Europe and Asia, signalled that he wanted to leave.
In public, Mr Fuld embarked on a crusade to stop what he regarded as a concerted campaign to sink Lehman by a small group of short-sellers. He called on the Securities and Exchange Commission to take action, drawing up a voluminous dossier of “evidence”. The SEC eventually tightened rules outlawing abusive short-selling for Lehman and several other financial groups. But Mr Fuld went further, phoning some Wall Street counterparts to say that he had heard their traders were spreading false rumours about his bank.
But such behind-the-scenes actions only served to confirm the anxieties of Mr Fuld’s critics. In late June and early July, he began discussing the possibility of a management buyout and initiated talks with half a dozen private equity firms, with the idea that each would put up about $2bn. Those talks also went nowhere. By August, analysts were anticipating red ink, with JPMorgan predicting a possible $4bn loss. The share price drop accelerated.
Within the bank, the atmosphere became siege-like. “It was like Fort Apache, The Bronx,” said one senior insider, with reference to a hard-nosed film centred on a beleaguered New York police station.
During the first week of August, Lehman hosted top executives of Korea Development Bank and China’s Citic Securities at its New York headquarters for talks on the purchase of a major stake in the bank. Mr Fuld greeted his guests with a show of strength, people familiar with the talks said. Even when he was not in the room, he directed the negotiations, according to one adviser to KDB, and gave out virtually no information about Lehman’s holdings. “The Koreans were very receptive,” says this person. “But then he [Mr Fuld] tried to change the terms. The deal went away.” Lehman has declined to comment on Mr Fuld’s role in the talks.
Lehman’s insiders argue that KDB never tabled a formal offer and that the prolonged discussions prevented them from seeking other suitors. In their view, Lehman’s downfall was so fast that Mr Fuld had little time to look for alternatives.
Lehman did begin talks with potential buyers for all or part of its property book, including Blackstone and Colony Capital, another savvy player in the market. Last week the bank said that it planned to sell its $4bn UK portfolio to private equity group BlackRock – while providing 75 per cent of the financing – but found no takers for other holdings.
It also initiated talks with several parties about its asset management business – its crown jewel, including Neuberger Berman . Carlyle, a private equity firm, was willing to buy the whole thing for about $7bn and give Lehman the right to buy it back, But Lehman held out for a better deal and spurned Carlyle’s offer, according to people familiar with the matter.
Last week, Mr Fuld tried a different tack, saying Lehman would try to sell a 55 per cent stake in the asset management arm and spin off $30bn of commercial property assets into a separate “bad bank” structure that would enable the rest of Lehman to survive. However, his efforts quickly came to be viewed as a last-ditch attempt to sell the entire bank.
When Lehman’s end did come, it was swift. As Hank Paulson, US Treasury secretary, and Tim Geithner, the president of the New York Fed, summoned the heads of some of the world’s largest banks to crisis talks on Friday, it did not take long for them to realise that Lehman was doomed.
Wall Street titans including Lloyd Blankfein of Goldman Sachs, Morgan Stanley’s John Mack and Merrill Lynch’s John Thain, huddled for hours in an attempt to devise a plan to buy $33bn of commercial assets from Lehman. The deal, reminiscent of the LTCM bail-out in 1998, was aimed at facilitating a sale of Lehman to Bank of America or Barclays of the UK.
But there was a snag: neither suitor was prepared to even table a bid for Lehman without a government guarantee that would have allowed the bank to continue trading until a takeover was completed. When Mr Paulson indicated that there would be no repeat of the intervention that helped JPMorgan Chase’s acquisition of Bear Stearns and enabled the government takeover of Fannie Mae and Freddie Mac, the giant mortgage financiers, Lehman’s game was up. Bank of America quickly announced it had entered merger discussions with Merrill Lynch, while Barclays withdrew from the race.
All that Lehman’s executives could do was embark on the grim ritual of a bankruptcy filing. It is impossible to say whether the bank could have escaped with its independence intact. Critics point to a string of poor decisions as a sign that Mr Fuld and his team were late to recognise the risks of the credit bubble and slow to respond when the crisis hit. Others argue that the bank’s relatively small capital base and wholesale funding model meant it was almost impossible to avoid a loss of confidence when the turmoil struck.
Strangely enough, it was presaged seven years ago by Mr Fuld himself. When asked, in an interview with the Financial Times, if Lehman’s then $7.2bn in equity was sufficient for an investment bank, he responded with a story about playing blackjack in Las Vegas three decades before.
A young Lehman bond trader at the time, Mr Fuld said he was playing for a few dollars a hand when he was joined by a high-roller. The man’s luck was terrible but every time he lost, he doubled his bet, impressing the younger Mr Fuld. “That’s the answer,” he thought. “Get enough capital and double up.” But as dawn neared and the high-roller’s losses mounted to several million dollars, Mr Fuld said he felt sick to his stomach as he realised the cost of taking a high-risk approach.
It does not matter how rich you are, Mr Fuld said. “You don’t have enough capital.” It is a lesson he has since had to relearn.
FROM ALABAMA TO A DOOMED SECOND ACT
For a generation of Wall Street executives, it was hard to follow accounts of Lehman Brothers’ eleventh-hour negotiations to sell itself without recalling the events that unfolded at the bank more than two decades ago. “I’m watching this with sad fascination,” a former Lehman partner said last week. “It’s like déjà vu, but for different reasons.”
Lehman lost its independence in 1984 following a bitter power struggle between its top two executives, Pete Peterson and Lewis Glucksman. While the feud, chronicled in Ken Auletta’s bestseller, Greed and Glory on Wall Street: The Fall of the House of Lehman, helped destroy the old Lehman, the careers of many of its stars, from Stephen Schwarzman and Edward Altman to Peter Solomon and Steven Rattner, continued to flourish.
Mr Glucksman, who died in 2006, appeared to win with the departure of his rival in 1983, only to be forced to sell his prize a year later to American Express, which merged the business with its own brokerage, Shearson. Mr Peterson went on to found Blackstone Group, the private-equity firm, together with Mr Schwarzman. Though Mr Glucksman left Lehman following its sale, one of his proteges, Richard Fuld, would become the man most responsible for reinvigorating the bank after its eventual spin-off from American Express in 1994.
Founded in Montgomery, Alabama in 1850 by German-Jewish immigrants, Lehman Brothers started life as a general store (pictured left), branching out to trade in cotton. The US civil war disrupted the southern economy, prompting Emanuel and Mayer Lehman to move north to New York and venture beyond cotton to other commodities and, eventually, securities.
By the early 1900s Lehman was helping corporate American stalwarts Sears, Roebuck and F.W. Woolworth raise capital. Herbert Lehman, scion of the founding family, succeeded Franklin Delano Roosevelt as governor of New York in 1933.
When the US government forced financial institutions to choose between commercial banking and securities in the 1930s, Lehman opted for the latter.
The bank rose to become one of Wall Street’s most powerful institutions. Though it always possessed a stable of talented bankers and traders, the bank’s emphasis on individual initiative seemed to invite dissent among senior executives, Mr Auletta wrote. Indeed, Mr Peterson rose to power following a boardroom battle that led to the removal in 1973 of his predecessor, Fred Ehrman.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
Richard Fuld charity work : robin Hood Foundation!!!!
Fuld serves on the board of directors of the Federal Reserve Bank of New York and is a member of the International Business Council of the World Economic Forum and the Business Council. He also serves on the Board of Trustees of Middlebury College and New York-Presbyterian Hospital, as well as on the board of directors of the Robin Hood Foundation.[3]
lehman authorised to sell to barclays
lehamn history ft
Lehman Brothers Faces Objections to Barclays Sale (Update3)
Lehman Creditors May Be Able to Recover Fuld's Pay, Lawyers Say
iht lehamn creditors
Broken brothers: How brinkmanship was not enough to save Lehman
By Henny Sender, Francesco Guerrera, Peter Thal Larsen and Gary Silverman
Published: September 15 2008 20:22 | Last updated: September 15 2008 21:44
On May 29 2007, with the clock ticking on one of the greatest global property booms in history, Richard Fuld rolled the dice on the US real estate market one more time.
The odds were not good for the chairman and chief executive of Lehman Brothers investment bank. It had been nearly a year since the US Federal Reserve brought an end to the era of cheap money with a series of interest rate increases that took its overnight lending rate from 1 per cent in June 2003 to 5.25 per cent in June 2006. It had been more than three months since HSBC became the first big global bank to reveal multi-billion-dollar losses on subprime mortgage loans. The credit cycle was turning, as it had so many times before during Mr Fuld’s four decades at Lehman, but he still felt lucky.
As a result, Lehman, a bank with a little more than $20bn (€14bn, £11bn) in equity at the time, joined Tishman Speyer, a developer, and Bank of America to spend $15bn for Archstone-Smith Trust, a property investment company that owned a giant portfolio of apartments in “the most desirable” neighbourhoods of large US cities.
Lehman had its reasons for believing that it could still make money in US property. Blackstone, a private equity firm run by former Lehman executives Steve Schwarzman and Pete Peterson, had just stunned Wall Street by sealing a string of profitable deals to sell several upscale office towers acquired as part of its highly leveraged $36bn buyout of Equity Office Properties a few months previously.
The Archstone deal was also consistent with the high-risk, high-reward culture that had taken root at Lehman. With less capital than rivals such as Goldman Sachs and Morgan Stanley, Lehman was known for punching above its weight and being quicker than others to seize opportunities. Mr Fuld, a former bond trader known to associates as “the gorilla”, was the embodiment of this culture. A man of military mien known for his direct management style, he was determined, having re-established the bank’s independence from American Express, to return it the pinnacle of Wall Street.
He almost got there. In the months preceding Archstone, Lehman was worth $60bn and was seen as one of Wall Street’s best-run banks. Mr Fuld had also showed himself very much aware of the storms gathering over the financial system. At Lehman’s 2006 Christmas party visitors noted his cautious outlook for the year ahead. A month later at last year’s World Economic Forum in Davos he talked openly about being “really worried” about the risks posed by property valuations, excess leverage and the rise in oil and commodity prices. “We’re taking some money off the table,” he said.
But while Mr Fuld may have been aware of danger and prepared to take precautions, within Lehman, as one insider remembers, “the acquisition machine rolled on”.
Below: From Alabama to a doomed second act
With the benefit of hindsight, the Archstone deal was a sign that Lehman was losing its touch. Just as the deal was being done, an era of wheeling-and-dealing fuelled by mountains of cheap debt was coming to an end. Over at Blackstone, Jon Gray, the group’s property chief, was already confessing to associates that the office tower sales the firm had made in April 2007 would have been impossible a month later. Mr Fuld, in other words, had committed the ultimate Wall Street sin – buying at the top of the market.
Archstone was a millstone for Lehman, part of a crippling $30bn-plus in property assets that the bank could not sell and investors could no longer tolerate. The bank’s stock market capitalisation crumbled to the point where it stood at $2bn last Friday. By Monday morning it was seeking protection from its creditors.
Lehman on Monday declined to comment but insiders said the bank was hit by a crisis of such virulence that Mr Fuld and other senior executives could have done little to avoid its consequences. While the Archstone deal came near the peak of the property cycle, they added, it did not in itself play a big part in Lehman’s demise. Mr Fuld’s allies said the chief executive did not disregard risk-management practices, pointing out that top executives met every Monday, often for several hours, to review the bank’s risk practices.
Yet the bet that left Lehman with a massive illiquid property portfolio was hardly out of character for a bank built in the image of its pugnacious 62-year-old chief executive. Mr Fuld was known as a canny operator, leveraging his bank’s prowess in the fixed-income markets and its small pile of capital to take big risks and earn bigger returns than larger rivals. Lehman thought of itself as the smart, scrappy underdog – not just good at spotting chances but also nimble enough to get out in time.
It was a formula that was prone to trouble. In 1998, when Wall Street executives and regulators met at the New York Federal Reserve to rescue the Long-Term Capital Management hedge fund, Lehman was allowed to chip in less money than most of its competitors – an unspoken acknowledgement that it had problems of its own.
However, Mr Fuld brought Lehman back from the abyss in take-no-prisoners fashion, pushing regulators to clamp down on rumour-mongering and firing up his staff. His inspirational abilities were on display after the September 11 attacks forced Lehman to evacuate its headquarters and relocate to a midtown hotel. There, Mr Fuld addressed his staff like a general going into battle.
With the Fed keeping interest rates low to stave off a recession after the terrorist attacks, Lehman grew rapidly, playing an outsized role in the securitisation market and the leveraged lending businesses – and produced quarter after quarter of record earnings from 2005 to 2007. Mr Fuld was feted as a visionary and paid as such, with Lehman awarding him a $186m 10-year stock award bonus in 2006 – prompting criticism that the investment bank’s board of directors had grown too cosy with their chief executive.
But as Lehman grew bigger, signs of internal tensions emerged. In 2004, Mr Fuld picked Joe Gregory, a former commercial paper trader, as president and chief operating officer – effectively his successor. Mr Gregory personified Lehman’s loyal, co-operative culture. But former colleagues say he became obsessed with the administrative processes and recruiting practices, while neglecting risk management.
They also accuse him of ratcheting up the appetite for risk and forcing out executives who disagreed. One of the Lehman bankers who urged caution, former colleagues say, was Mike Gelband, former head of fixed-income, who left in early 2007.
At the time of the Archstone deal and for some months afterwards, Lehman insiders recall few, if any, internal objections. Instead, executives remained so bullish that they congratulated themselves on having picked up Archstone on the cheap. Internal criticism became more common after Mr Gregory helped install Erin Callan as Lehman’s chief financial officer in the summer of 2007. A well-regarded investment banker, Ms Callan was widely touted as a rare example of a woman breaking into Wall Street’s upper ranks. But some Lehman bankers questioned whether putting a dealmaker in charge of the books was the right move to make as the subprime mortgage crisis worsened.
Mr Fuld’s role in these decisions was hard to pin down because colleagues say he was growing more remote. Mr Fuld spent an increasing amount of time in his mansion in Sun Valley, a ski resort in Idaho that he has used for years to entertain clients, or travelling around the world. “When Dick came over it was like a state visit,” says one London-based banker. Some bankers believed, too, that Mr Gregory shielded Mr Fuld from what was going on and discouraged executives from raising criticism or reporting bad news. “Joe was like Dick’s bodyguard,” says one senior banker.
It could be argued that clearer-eyed commentary on Lehman came from hedge fund managers such as David Einhorn of Greenlight Capital, who repeatedly questioned whether the bank’s problems were deeper than many thought. Lehman tried to wave off such criticism but investors drove the bank’s shares lower.
Lehman tried to shore up its defences this year, securing a $2bn credit line from its banks on March 14 – the Friday before the Fed-engineered sale of Bear Stearns to JPMorgan Chase. As part of the rescue, the Fed said it was making its borrowing window available to securities firms in a move widely seen on Wall Street as influenced by Mr Fuld, who sat on the board of the New York Fed. Indeed, some bankers referred to the measure as the Save Lehman Act of 2008. If so, it was to provide only a temporary respite.
Lehman’s access to the discount window seemed to preclude a Bear-style run on the bank. But Mr Einhorn continued to question the value Lehman assigned to its holdings. Analysts were particularly sceptical about Archstone, arguing that it should be marked down by 30 per cent – in line with comparable property investment companies and the relevant indices. In that case $4bn in bridge equity provided by a Lehman-led bank group – intended to be eventually replaced by funds from other sources – would be at risk.
In June, Lehman stunned the market with a $2.8bn loss. The bank demonstrated its connections in the financial world, however, by also raising $6bn in new capital. Hank Greenberg, the former AIG chief executive, invested through his CV Starr vehicle, along with the state of New Jersey pension fund; Wes Edens, a former Lehman executive and the founder of Fortress Investment Group; and GLG, a hedge fund 20 per cent owned by Lehman.
But for its critics, Lehman’s earnings report contained further reasons to worry. Despite the loss, it was marking its Archstone holdings at 85 cents on the dollar – far higher than bearish critics thought appropriate.
What the hedge funds did not know was that Lehman’s search for new capital was going international. Before raising $6bn from domestic sources, Lehman had sought an investment from Korea Development Bank, a South Korean state-controlled lender.
Two days after the earnings announcement, Mr Gregory and Ms Callan were ousted, and Bart McDade, previously head of Lehman’s equities business, was installed as president. The reshuffle sparked more turmoil inside the bank. Executives who had left, such as Mr Gelband and Alex Kirk, a former fixed-income banker, returned to senior positions. In London, Jeremy Isaacs, a long-serving executive who had overseen Lehman’s expansion in Europe and Asia, signalled that he wanted to leave.
In public, Mr Fuld embarked on a crusade to stop what he regarded as a concerted campaign to sink Lehman by a small group of short-sellers. He called on the Securities and Exchange Commission to take action, drawing up a voluminous dossier of “evidence”. The SEC eventually tightened rules outlawing abusive short-selling for Lehman and several other financial groups. But Mr Fuld went further, phoning some Wall Street counterparts to say that he had heard their traders were spreading false rumours about his bank.
But such behind-the-scenes actions only served to confirm the anxieties of Mr Fuld’s critics. In late June and early July, he began discussing the possibility of a management buyout and initiated talks with half a dozen private equity firms, with the idea that each would put up about $2bn. Those talks also went nowhere. By August, analysts were anticipating red ink, with JPMorgan predicting a possible $4bn loss. The share price drop accelerated.
Within the bank, the atmosphere became siege-like. “It was like Fort Apache, The Bronx,” said one senior insider, with reference to a hard-nosed film centred on a beleaguered New York police station.
During the first week of August, Lehman hosted top executives of Korea Development Bank and China’s Citic Securities at its New York headquarters for talks on the purchase of a major stake in the bank. Mr Fuld greeted his guests with a show of strength, people familiar with the talks said. Even when he was not in the room, he directed the negotiations, according to one adviser to KDB, and gave out virtually no information about Lehman’s holdings. “The Koreans were very receptive,” says this person. “But then he [Mr Fuld] tried to change the terms. The deal went away.” Lehman has declined to comment on Mr Fuld’s role in the talks.
Lehman’s insiders argue that KDB never tabled a formal offer and that the prolonged discussions prevented them from seeking other suitors. In their view, Lehman’s downfall was so fast that Mr Fuld had little time to look for alternatives.
Lehman did begin talks with potential buyers for all or part of its property book, including Blackstone and Colony Capital, another savvy player in the market. Last week the bank said that it planned to sell its $4bn UK portfolio to private equity group BlackRock – while providing 75 per cent of the financing – but found no takers for other holdings.
It also initiated talks with several parties about its asset management business – its crown jewel, including Neuberger Berman . Carlyle, a private equity firm, was willing to buy the whole thing for about $7bn and give Lehman the right to buy it back, But Lehman held out for a better deal and spurned Carlyle’s offer, according to people familiar with the matter.
Last week, Mr Fuld tried a different tack, saying Lehman would try to sell a 55 per cent stake in the asset management arm and spin off $30bn of commercial property assets into a separate “bad bank” structure that would enable the rest of Lehman to survive. However, his efforts quickly came to be viewed as a last-ditch attempt to sell the entire bank.
When Lehman’s end did come, it was swift. As Hank Paulson, US Treasury secretary, and Tim Geithner, the president of the New York Fed, summoned the heads of some of the world’s largest banks to crisis talks on Friday, it did not take long for them to realise that Lehman was doomed.
Wall Street titans including Lloyd Blankfein of Goldman Sachs, Morgan Stanley’s John Mack and Merrill Lynch’s John Thain, huddled for hours in an attempt to devise a plan to buy $33bn of commercial assets from Lehman. The deal, reminiscent of the LTCM bail-out in 1998, was aimed at facilitating a sale of Lehman to Bank of America or Barclays of the UK.
But there was a snag: neither suitor was prepared to even table a bid for Lehman without a government guarantee that would have allowed the bank to continue trading until a takeover was completed. When Mr Paulson indicated that there would be no repeat of the intervention that helped JPMorgan Chase’s acquisition of Bear Stearns and enabled the government takeover of Fannie Mae and Freddie Mac, the giant mortgage financiers, Lehman’s game was up. Bank of America quickly announced it had entered merger discussions with Merrill Lynch, while Barclays withdrew from the race.
All that Lehman’s executives could do was embark on the grim ritual of a bankruptcy filing. It is impossible to say whether the bank could have escaped with its independence intact. Critics point to a string of poor decisions as a sign that Mr Fuld and his team were late to recognise the risks of the credit bubble and slow to respond when the crisis hit. Others argue that the bank’s relatively small capital base and wholesale funding model meant it was almost impossible to avoid a loss of confidence when the turmoil struck.
Strangely enough, it was presaged seven years ago by Mr Fuld himself. When asked, in an interview with the Financial Times, if Lehman’s then $7.2bn in equity was sufficient for an investment bank, he responded with a story about playing blackjack in Las Vegas three decades before.
A young Lehman bond trader at the time, Mr Fuld said he was playing for a few dollars a hand when he was joined by a high-roller. The man’s luck was terrible but every time he lost, he doubled his bet, impressing the younger Mr Fuld. “That’s the answer,” he thought. “Get enough capital and double up.” But as dawn neared and the high-roller’s losses mounted to several million dollars, Mr Fuld said he felt sick to his stomach as he realised the cost of taking a high-risk approach.
It does not matter how rich you are, Mr Fuld said. “You don’t have enough capital.” It is a lesson he has since had to relearn.
FROM ALABAMA TO A DOOMED SECOND ACT
For a generation of Wall Street executives, it was hard to follow accounts of Lehman Brothers’ eleventh-hour negotiations to sell itself without recalling the events that unfolded at the bank more than two decades ago. “I’m watching this with sad fascination,” a former Lehman partner said last week. “It’s like déjà vu, but for different reasons.”
Lehman lost its independence in 1984 following a bitter power struggle between its top two executives, Pete Peterson and Lewis Glucksman. While the feud, chronicled in Ken Auletta’s bestseller, Greed and Glory on Wall Street: The Fall of the House of Lehman, helped destroy the old Lehman, the careers of many of its stars, from Stephen Schwarzman and Edward Altman to Peter Solomon and Steven Rattner, continued to flourish.
Mr Glucksman, who died in 2006, appeared to win with the departure of his rival in 1983, only to be forced to sell his prize a year later to American Express, which merged the business with its own brokerage, Shearson. Mr Peterson went on to found Blackstone Group, the private-equity firm, together with Mr Schwarzman. Though Mr Glucksman left Lehman following its sale, one of his proteges, Richard Fuld, would become the man most responsible for reinvigorating the bank after its eventual spin-off from American Express in 1994.
Founded in Montgomery, Alabama in 1850 by German-Jewish immigrants, Lehman Brothers started life as a general store (pictured left), branching out to trade in cotton. The US civil war disrupted the southern economy, prompting Emanuel and Mayer Lehman to move north to New York and venture beyond cotton to other commodities and, eventually, securities.
By the early 1900s Lehman was helping corporate American stalwarts Sears, Roebuck and F.W. Woolworth raise capital. Herbert Lehman, scion of the founding family, succeeded Franklin Delano Roosevelt as governor of New York in 1933.
When the US government forced financial institutions to choose between commercial banking and securities in the 1930s, Lehman opted for the latter.
The bank rose to become one of Wall Street’s most powerful institutions. Though it always possessed a stable of talented bankers and traders, the bank’s emphasis on individual initiative seemed to invite dissent among senior executives, Mr Auletta wrote. Indeed, Mr Peterson rose to power following a boardroom battle that led to the removal in 1973 of his predecessor, Fred Ehrman.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
Thursday, September 18, 2008
the lessons from great depresion in the subprime
http://iht.com/bin/printfriendly.php?id=16288248
International Herald Tribune
News Analysis: A lesson rooted in the Great Depression
By Carter Dougherty
Thursday, September 18, 2008
FRANKFURT: Will future historians write about the Great Depression of the 2000s as they did about the one in the 1930s? The world's central bankers sought to answer "no" Thursday - resoundingly, though not definitively.
With a huge infusion of cash, the U.S. Federal Reserve, joined by its fellow central banks around the globe, unleashed their most forceful volley of financial firepower yet. The goal was to persuade a convulsing banking system that there will be no shortage of money to meet essential obligations, now or in the future.
The $180 billion in additional funds they committed Wednesday was only the start.
That is in sharp contrast to what happened in the 1930s when the Fed stood idly by as waves of defaults drained money from the banking system, starved the American economy of credit and eventually dragged Europe down as well.
This time around, central bankers are purposefully searching for strategies to avoid that chain of events. And unlike the approach in the 1930s, it is a global effort, driven by a close-knit community of central bankers who are aware that the mistakes of the Depression era erased their credibility for years afterward.
"The need to avoid that next depression plays a big role in U.S. policy making," said Paul de Grauwe, a professor of international economics at the Catholic University of Leuven in Belgium. "But it is also present in Europe because we have experiences with bank crises in a number of countries. It may not be as intense, but it is not absent."
The chairman of the Fed in the 1920s, Benjamin Strong, foresaw the potential for a banking crisis that would interrupt lending and he was one of the few Americans to understand that financial ties between the United States and Europe made the problem a global one.
The solution, in his words, was for central banks to "flood the street with money."
Strong died in 1928, too early to experience the monetary dystopia that followed when the Fed reined in lending in response to the stock market crash of 1929. The other half of Strong's scenario came true in 1931, when a run on the Austrian bank Creditanstalt grew into a European banking crisis that U.S. banks then amplified by calling in loans to Germany and other countries.
The banking system today is deleveraging, the inelegant term for what happened with catastrophic effects in the 1930s. Banks have to shed losses linked to the lifeless U.S. housing market and recapitalize, either by attracting new investors or by selling themselves to stronger institutions, so they can resume lending.
This process sometimes turns out badly: Lehman Brothers is a recent addition to the list, and Washington Mutual, the largest savings and loan in the United States and once among the most successful financial institutions in the country, is talking about selling itself to a stronger bank. That is why even healthy banks hoard cash in a crisis.
Events took an ominous turn Wednesday when it became clear that even money market funds, repositories for savings of as much as $3.5 trillion, were scaling back their lending to be sure they could meet any demands from customers for their money.
That approached the 21st century equivalent of stuffing cash under mattresses for safekeeping - exactly what President Franklin D. Roosevelt urged Americans not to do during the Depression. The credit ecosystem functions today by channeling savings from individuals and into securities issued by, among others, precisely the same banks whose future seems so dark.
Every barometer that measures the willingness to lend went haywire by midweek, notably Libor, a benchmark borrowing cost that influences lending around the world. Returns on ultrasafe U.S. Treasury notes plunged as money sought a haven, an experience that left even seasoned professionals grasping to comprehend the magnitude of distrust.
"There is a complete lack of confidence," said Jim O'Neill, chief economist at Goldman Sachs in London. "It's the most extreme since the credit crisis began."
The cash infusion announced Thursday will function via an exchange of various currencies for as much as $180 billion from the Fed, with most of the share taken by the European Central Bank. That money will then course through the banking system, allowing commercial banks to borrow more easily from each other and their central banks.
Most crucially, and unlike what happened in previous coordinated cash injections, the Fed, the ECB and other central banks explicitly promised to continue the infusions as long as money markets were in turmoil.
After the terrorist attacks on Sept. 11, 2001, the Fed lowered its benchmark rate to 1 percent and promised in advance to keep it there indefinitely to create a security blanket of continuous credit. The strategist behind that step - Alan Greenspan, then the Fed chairman - is now widely blamed for keeping money too cheap for too long, inflating the real estate bubbles whose bursting is now wreaking so much havoc in the United States and elsewhere.
The current corps of central bankers wants to avoid a similar permanent expansion of the money supply, while keeping cash flowing through banks and into the rest of the economy.
The move Thursday creates a globally administered line of rolling credit whose terms can be slowly tightened, via higher interest rates and lower lending volumes, as banks recapitalize themselves and confidence returns among lenders and borrowers. That prospect preserves a stick for central bankers to use on banks that do not heal themselves.
"They are playing a very delicate game of chicken," O'Neill said. "And they are doing a pretty good job, under very difficult circumstances."
Will it work?
One lesson of the past year has been that the crisis of tomorrow stems from risks that were unseen today. That is one reason why O'Neill and other analysts expect further unorthodox moves from central banks and other officials who know what they want to do - keep credit flowing - but have proved flexible about how to do it.
But their success rests with the banks themselves.
Raising money to rebuild a capital cushion requires issuing new stock, merging or selling big stakes, moves that are rarely popular with existing shareholders even in the best of times. And chief executives often lose their jobs taking such painful steps.
Yet they are necessary before financiers can return to their normal job of lending money to grease the wheels of commerce.
"They are not acting like banks these days," said Charles Wyplosz, director of the International Center of Money and Banking Studies at the Graduate Institute of International Studies in Geneva. "They are acting like besieged fortresses."
Correction:
Notes:
International Herald Tribune Copyright © 2008 The International Herald Tribune | www.iht.com
Wednesday, September 17, 2008
Monday, September 15, 2008
Fuld Lehamn Kamikaze Harakiri Samurai kills himself and everybody around . A sincere thanks .
check this description
Dick Fuld’s “I’ll Fucking Kill You, Like Actually Put A Shotgun In Your Mouth And Pull The Trigger ‘Til It Goes Click” Style Of Management Has Kept Lehman Brothers Safe From Things Like $8.4 Billion Writedowns, So Far. But Is He Going Soft?
dickfuld.jpgJust how has referring to competitors as enemies whose “throats” must be “ripped out,” telling employees to act as though they are “at war,” and, on at least one occasion, making a visit to the trading floor to put his second-best earner’s tie through a shredder, in front of everyone, to make the point that “second best isn’t good enough” helped Dick Fuld to avoid the gigantic writedowns that have plagued Merrill, Citigroup and UBS, the hedge fund failures that have made a joke of Bear Stearns, and the accounting scandal that was Goldman third quarter earnings? How about because all of that is enough to scare the shit out of anyone, especially the people within arm’s length of the guy, into not fucking things up? Nobody wants to be the guy to tell “Gorilla” that things didn’t go so well this quarter, and while everyone else was having a pissing contest to see who could do the worst, Lehman’s minions were being intimidated into not having as horrible a Q3 as their “enemies,” if not necessarily an amazing one (earnings fell 3 percent, to $887 million, and there was a $700 million write-off). Even Mike Mayo, who’s intimidated by no one, gave the credit to Fuld, saying that the outcome was “helped by having one of the most consistent cultures on the Street—one C.E.O. for over a decade, a one-firm mentality and comprehensive risk management,” probably out of fear. Former colleague Stephen Schwarzman, who seems like the kind of guy who would be too petty to give someone else credit for anything, went out of his comfort zone to call Fuld “a survivor” and opine that “he’s got a sixth sense of when things are turning on you,” though, admittedly, Schwarzman’s praise-inducing intimidation could stem more from the height differential than anything else.
But a New York Times profile suggests that Fuld is losing his taste for human flesh, which could mean disaster for LEH. Examine the facts:
- When asked how he felt about “the war comment” from last year, Fuld shifted in his chair and said, “I don’t like the war comment…‘war’ connotes that we are trying to kill our enemies. That’s not the view that I want them to have.”
- After feigning offense at the accusation that he’s “mellowed,” Fuld “paused to collect his thoughts.”
- Then he said: “I think I have many of the same reactions; I just handle them differently…I’VE LEARNED, IN ALL FAIRNESS THERE IS ANOTHER VIEW.”
And the most egregious ?
- Lehman’s president, Joseph M. Gregory, says that Fuld “has improved” his attitude and “made it more comfortable for people to speak.”
This is a phenomenon the must be cut off at the knees (which the old Fuld would’ve already done, without compunction). It’s only a hop, skip and a jump from people not soiling themselves in your presence to Merrill Lynch.
The Survivor [NYT]
Dick Fuld’s “I’ll Fucking Kill You, Like Actually Put A Shotgun In Your Mouth And Pull The Trigger ‘Til It Goes Click” Style Of Management Has Kept Lehman Brothers Safe From Things Like $8.4 Billion Writedowns, So Far. But Is He Going Soft?
dickfuld.jpgJust how has referring to competitors as enemies whose “throats” must be “ripped out,” telling employees to act as though they are “at war,” and, on at least one occasion, making a visit to the trading floor to put his second-best earner’s tie through a shredder, in front of everyone, to make the point that “second best isn’t good enough” helped Dick Fuld to avoid the gigantic writedowns that have plagued Merrill, Citigroup and UBS, the hedge fund failures that have made a joke of Bear Stearns, and the accounting scandal that was Goldman third quarter earnings? How about because all of that is enough to scare the shit out of anyone, especially the people within arm’s length of the guy, into not fucking things up? Nobody wants to be the guy to tell “Gorilla” that things didn’t go so well this quarter, and while everyone else was having a pissing contest to see who could do the worst, Lehman’s minions were being intimidated into not having as horrible a Q3 as their “enemies,” if not necessarily an amazing one (earnings fell 3 percent, to $887 million, and there was a $700 million write-off). Even Mike Mayo, who’s intimidated by no one, gave the credit to Fuld, saying that the outcome was “helped by having one of the most consistent cultures on the Street—one C.E.O. for over a decade, a one-firm mentality and comprehensive risk management,” probably out of fear. Former colleague Stephen Schwarzman, who seems like the kind of guy who would be too petty to give someone else credit for anything, went out of his comfort zone to call Fuld “a survivor” and opine that “he’s got a sixth sense of when things are turning on you,” though, admittedly, Schwarzman’s praise-inducing intimidation could stem more from the height differential than anything else.
But a New York Times profile suggests that Fuld is losing his taste for human flesh, which could mean disaster for LEH. Examine the facts:
- When asked how he felt about “the war comment” from last year, Fuld shifted in his chair and said, “I don’t like the war comment…‘war’ connotes that we are trying to kill our enemies. That’s not the view that I want them to have.”
- After feigning offense at the accusation that he’s “mellowed,” Fuld “paused to collect his thoughts.”
- Then he said: “I think I have many of the same reactions; I just handle them differently…I’VE LEARNED, IN ALL FAIRNESS THERE IS ANOTHER VIEW.”
And the most egregious ?
- Lehman’s president, Joseph M. Gregory, says that Fuld “has improved” his attitude and “made it more comfortable for people to speak.”
This is a phenomenon the must be cut off at the knees (which the old Fuld would’ve already done, without compunction). It’s only a hop, skip and a jump from people not soiling themselves in your presence to Merrill Lynch.
The Survivor [NYT]
Thursday, September 11, 2008
Wednesday, September 10, 2008
traffic à paris
traffic
le probleme c'est le non respect des regles soit par les motards/automobilistes que par les pietons. il y a une telle ignorance à Paris . Ca arrive souvent de voir des pietons croiser au feu rouge et devoir freiner d'emergence ou vice versa , essayer de traverser des passages protégés san feu en tant que pietons et risquer de se faire renverser par des voitures mais surtout des motards qui aiment montrer leur agilité acrobatique. le jardin du voisin est tjrs plus beau mais s'agit il seulement d'un mirage que dans des pays comme l'allemagne , la suisse ou le royaume uni il y a un respect plus repandu des règles du traffic ? que dire alors des camions é Paris , parqués à n'importe quelle heure du jour n'importe où. on a l'impression que dans cette anarchie il y a un fort dégré de tollerance par tous , usagers et autorités, un individualisme tout latin ou tiers mondiste comme j'ai vu jadis dans les rues de Saigon ou d'autres grandes métropoles. Que disent les statistiques des accidents à Paris ?
le probleme c'est le non respect des regles soit par les motards/automobilistes que par les pietons. il y a une telle ignorance à Paris . Ca arrive souvent de voir des pietons croiser au feu rouge et devoir freiner d'emergence ou vice versa , essayer de traverser des passages protégés san feu en tant que pietons et risquer de se faire renverser par des voitures mais surtout des motards qui aiment montrer leur agilité acrobatique. le jardin du voisin est tjrs plus beau mais s'agit il seulement d'un mirage que dans des pays comme l'allemagne , la suisse ou le royaume uni il y a un respect plus repandu des règles du traffic ? que dire alors des camions é Paris , parqués à n'importe quelle heure du jour n'importe où. on a l'impression que dans cette anarchie il y a un fort dégré de tollerance par tous , usagers et autorités, un individualisme tout latin ou tiers mondiste comme j'ai vu jadis dans les rues de Saigon ou d'autres grandes métropoles. Que disent les statistiques des accidents à Paris ?
Sunday, September 07, 2008
novaya gazeta in english
novaya gazeta in russian by number
http://www.novayagazeta.ru/data/2008/64
novaya gazeta in english
http://en.novayagazeta.ru/data/2008/64
http://en.novayagazeta.ru/data/2008/63
http://www.novayagazeta.ru/data/2008/64
novaya gazeta in english
http://en.novayagazeta.ru/data/2008/64
http://en.novayagazeta.ru/data/2008/63
Sunday, August 31, 2008
Saturday, August 30, 2008
why germany and France are responsible for the destruction of Georgia
Второй шаг сделал Запад в апреле, когда на саммите в Бухаресте Германия и Франция под давлением России отложили вступление Грузии в НАТО. Кремль понял, что у него развязаны руки.
the second step was this april when France and Germany influenced by Russia refused the Nato membership of Georgia
the second step was this april when France and Germany influenced by Russia refused the Nato membership of Georgia
Friday, August 29, 2008
Thursday, August 28, 2008
Wednesday, August 27, 2008
Post Russian Annexatation _interesting content and style
repubblica
Negli ultimi anni a Washington ci si è infatti pochissimo occupati di Russia, molto più di Cina, India o radicalismo islamico. Nell'illusione di aver messo l'orso in gabbia, dopo avergli tagliato le unghie. Ma un impero di quelle dimensioni e con quella storia o viene totalmente distrutto o è destinato a rinascere, entro limiti e condizioni nuove.
Negli ultimi anni a Washington ci si è infatti pochissimo occupati di Russia, molto più di Cina, India o radicalismo islamico. Nell'illusione di aver messo l'orso in gabbia, dopo avergli tagliato le unghie. Ma un impero di quelle dimensioni e con quella storia o viene totalmente distrutto o è destinato a rinascere, entro limiti e condizioni nuove.
Tuesday, August 26, 2008
Friday, August 22, 2008
buffet, virtue ,liabilities and subprime
More bank failures are possible this year, Buffett said, and he suggested penalties should be meted out to people who spread rumors about the solvency of investment banks. Speculation about cash shortages contributed to a run on Bear Stearns Cos. and its forced sale to JPMorgan Chase & Co. earlier this year.
``If your virtue is questioned, you've got a problem,'' he said. In the normal course of business, ``there is no investment bank that can pay all its liabilities tomorrow.''
``If your virtue is questioned, you've got a problem,'' he said. In the normal course of business, ``there is no investment bank that can pay all its liabilities tomorrow.''
Wednesday, August 20, 2008
two different views on georgia war
Putin does not hide he likes women, heer a demostration of his youth movement supporting the war in georgia
Tuesday, August 19, 2008
georgia news
end of post soviet era, moscowtimes
http://www.novayagazeta.ru/data/2008/60/02.html
http://www.novayagazeta.ru/data/2008/60/00.html
http://www.novayagazeta.ru/data/2008/60/02.html
http://www.novayagazeta.ru/data/2008/60/06.html
http://www.novayagazeta.ru/data/2008/60/03.html
http://www.novayagazeta.ru/data/2008/60/05.html
http://www.novayagazeta.ru/data/2008/60/02.html
http://www.novayagazeta.ru/data/2008/60/00.html
http://www.novayagazeta.ru/data/2008/60/02.html
http://www.novayagazeta.ru/data/2008/60/06.html
http://www.novayagazeta.ru/data/2008/60/03.html
http://www.novayagazeta.ru/data/2008/60/05.html
Monday, August 18, 2008
nouriel rubin
finally he hits the fame by forecasting doom scenarios . it s a question of method, time and patience untill you are right. afterwards cash in the fame.
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?ref=magazine
August 17, 2008
Dr. Doom
By STEPHEN MIHM
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.
As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”
On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.
Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”
As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”
Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.
Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.
The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”
Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.
His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”
What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.
Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” His last feature article for the magazine was about North Korean counterfeiting.
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?ref=magazine
August 17, 2008
Dr. Doom
By STEPHEN MIHM
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.
As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”
On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.
Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”
As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”
Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.
Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.
The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”
Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.
His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”
What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.
Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” His last feature article for the magazine was about North Korean counterfeiting.
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