As more people decide to forgo vacations abroad due to the state of the global economy, regions dependent on tourism are worried, especially during the critical summer season. Italy, for one, is shaking in its boot.  

The sight of water swishing around craggy rocks and wooden fishing boats in Vernazza's tiny harbor is postcard perfect. The village is just one of several in Italy's Cinque Terre region that are strung along the coastline like gems on a necklace. 

In Vernazza, vineyards perch on the cliffs above and the harbor is rimmed with pastel-colored homes and restaurants - a perfect setting for a romantic getaway.  The problem is, fewer are deciding to get away to this picturesque region as the world stumbles through the global economic crisis.

"Vernazza and tourism are like husband and wife," said Edoardo Basso, restaurateur at the Taverna del Capitano. "And if the wife leaves? Now is a problem in the house, there's a crisis." 

Volkswagen is planning to purchase all of sports carmaker Porsche, which has run into massive financial problems linked to its overly ambitious plan to take control of VW. The attempted takeover, which had been financed using loans, ultimately failed because of the credit crunch and ensuing liquidity problems that almost saw Porsche go bankrupt.

SPIEGEL has obtained information that Volkswagen is planning a complete takeover of beleaguered sports carmaker Porsche in a series of two transactions. The company is planning the imminent purchase of 50 percent of Porsche shares and will purchase the remaining shares in the Stuttgart, Germany-based automobile manufacturer in a second step. Once completed, Porsche will become the 10th brand in the stable of Volkswagen, the world's largest carmaker.

Porsche headquarters in Stuttgart: VW has won the power struggle between the two companies. VW's move to acquire Porsche follows a power struggle between the companies. Porsche had sought to buy VW through complicated loan transactions that collapsed when the sports carmaker's liquidity dried up as a result of the credit crunch. It has already been reported that Wolfsburg-based VW would purchase 49.9 percent of Porsche, but SPIEGEL has learned it is now planning a complete acquisition in a second purchase of shares.

The deal envisions a payout to Porsche Automobil Holding of €8 billion ($11.3 billion), enabling it to pay off the bulk of its crippling debts. VW is also considering acquiring Porsche's Salzburg-based network of dealerships from its family owners, a move that could raise an addition €3 billion for Porsche.

There are still lots of question marks surrounding the three bids for a majority stake in Opel, Germany's economy minister has said.

Karl-Theodor zu Guttenberg said that the bidders needed to take on more risk if any deal was to be agreed.

The German government is closely involved in talks between Opel's owner General Motors and the bidders, having pledged considerable financial support.

If a deal is not agreed, he said, Opel could ultimately face bankruptcy.

Yes, let us celebrate the 40th anniversary of the Apollo moon landing, an amazing human achievement.

But remember something else as well: The U.S. space program turned out to be one of the great economic and innovative failures of our time. For a decade it absorbed a big chunk of the country's scientific and technical resources, while producing very few economically useful spinoffs.

I'm just making the economic point that we used large amounts of scarce scientific and technical labor and money for one activity which at least up to now, has not produced big economic payoffs.

Finally, how much of this problem was due to the heavy hand of government? I've got another post coming up where I'll look at the recent history of private-sector space activity.

Timothy Geithner, architect of bank, auto and economic rescue plans, has another high-stakes job these days: traveling bond salesman

Geithner, who traveled last week to the Middle East and Europe, has to convince foreign investors to keep buying Treasury bills, notes and bonds; they hold nearly half of the government's roughly $7 trillion in publicly traded debt.

"He's a smart guy but it's a very, very big task," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank.

If foreign demand for U.S. debt sags, that could drive up interest rates and spell big trouble for an economy hobbled by 9.5 percent unemployment. Higher rates would make it more expensive for consumers to buy homes and cars, and for businesses to finance their operations.

Is this stuff still rated AAA+?


You're clearly a dangerous pinko commie pragmatist.

The basic banking business of Chase is hurting badly, as seen in this quarter's meager return on equity of 3% (or 6% if you ignore the $1.16 billion non-cash cost to Chase of paying back its TARP money this quarter). These are the sorts of returns banks made in the 1970s, before they discovered ways to lure Americans into debt servitude. One of the reasons Chase has such a low return on equity is that it has built up what it calls a "fortress balance sheet", with common equity of $146.6 billion this quarter. Such a high level of equity drives down the return on equity ratio, but think how much higher the capital would be if Chase hadn't received so much government support. Without the government bailout, banking would require so much capital as to offer hardly any return to its shareholders.

In fact, it sounds more and more like commercial banking, in a world where risks are priced and capitalized properly, is a world of modest profit and modest returns for shareholders. Doesn't that sound like a utility to you? That's what banks were for most of the past century, until free market theory was used to push banking into a world of aggressive risk taking, outsized profits, and Midas-like bonuses. It worked only because banking has a "put" to the federal government to come to its rescue in times of trouble.

This put has never been applied so vigorously as today, now that Chase and its big competitors have become the ultimate conduit financial vehicle for the federal government. The Treasury and the Fed are propping up so many different markets that it is estimated some 30% of all finance comes from Washington now. Chase is one of the selected vehicles for channeling all this money, and it is allowed to take a generous transaction fee on every dollar. This is no longer banking, but rentier finance for a few institutions granted monopoly rights - again, the classic definition of a public utility.

Despite all this, Chase, as one of the biggest and best of its breed, is unable to generate anything but a 6% return on equity, and that is a variable 6% at that, prone to disappear in any quarter. What must life be like at Bank of America or Citigroup, where the troubles are worse? Or at Goldman Sachs, which is operating in an alternate universe that allows it to receive bank benefits without any of the discipline?

Continuing the series of State Street presentations on relevant market topics, the latest piece "What are the Implications of the Growing Use of Electronic Trading" focuses on the nuanced difference between "real liquidity" and "liquidity hazard", depending on whether one is a price taker or market maker. Yet based on limited available public disclosure, non-premium clients of the NYSE and other PT-espousing exchanges have no visibility of who and under what conditions any given broker/dealer and quant become one or the other. And while merely a few years ago HFT was less than half of traded stock volume, recent data indicates high frequency trading now accounts for over 70% of US volume, and thus it is important to reassess what is the relevant set of data disclosure by dominating broker/dealers. The risk is palpable - as State Street itself notes, there is "equity capital at risk."

And closing off this weekend's program reading series is the following 2005 panel piece from Euromoney, which captures the insights of insiders such as John Elay of Hotspot FX, Scott Freeman of GFX, Bank of America, George Houlihan of GETCO, Ed Hulina of UBS, Ulf Lindahl of A.G.Bisset & Company and Mark Robson of Reuters. Particularly notable is the disclosure by Ed Hulina who discusses the liquidity mirage: "There are a lot of banks making prices and there's ultimately only so much end-user volume to support those prices. So, yes, I think there is a risk of a liquidity mirage in some respects if there is a proliferation of platforms and people providing prices and representing more liquidity at any given time than is actually there." (My bold)

Zero Hedge has disclosed how HFT/PT is now unquestionably dominating the markets as traditional trading mechanisms have fallen on the sidelines. Hulina's point in 2005 is exponentially more relevant now: how can we possibly know what liquidity is real in this market dominated by intermediaries and evaporating end-users? Absent regulatory reform, the only way to know would be a forensic analysis once the current topology breaks and the components are analyzed in retrospect. Of course, by then it would be too late.

The Euromoney link didn't work but there is a State Street slide show on Zero Hedge.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Recent data suggest that job market conditions are not improving in the United States and other advanced economies. In the US, the unemployment rate, currently at 9.5 per cent, is poised to rise above 10 per cent by the fall. It should peak at 11 per cent some time in 2010 and remain well above 10 per cent for a long time. The unemployment rate will peak above 10 per cent in most other advanced economies, too.

These raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the US labor force, for example, the unemployment rate is already 16.5 per cent.

Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets. The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a sober realisation among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising.

The horizon is not so far as we can see, but as far as we can imagine

• Home
• About
• Credits

The American Choice: Break up and regulate companies or suffer another crisis 2009 July 16 by Ian Welsh

Too big to fail means to big to live. This is the mantra which many people have taken up since the financial crisis exploded last year, and 15 trillion dollars or so was spent, loaned, committed and guaranteed by the government in response to systemic failures both in and out of the financial sector (the latter stemming mainly from financial sector failure.)

Or, as Frank Borman put it, capitalism without bankruptcy is like Christianity without hell.  (Perhaps I should capitalize Capitalism, since it's become a religion).

bold mine

i like this one too:

Too Big To Fail . . . You Know The Rest | The Agonist

Just as a gravitational point mass -- a black hole -- is the failure point of Einsteinian physics, so too a monopoly or cartel is the failure point of free enterprise. Would that people would understand it that way.

apologies to the maths-physics brigade if that's nonsense, lol!

or how about this?

"Boomers - Winter is Coming" by James Quinn. FSO Editorial 07/13/2009

We perceive our civic challenge as some vast, insoluble Rubik's Cube. Behind each problem lies yet another, and another, ad infinitum. To fix crime we have to fix the family, but before we do that we have to fix welfare, and that means fixing our budget, and that means fixing our civic spirit, but we can't do that without fixing moral standards, and that means fixing schools and churches, and that means fixing the inner cities, and that's impossible unless we fix crime. There's no fulcrum on which to rest a policy lever. People of all ages sense that something huge will have to sweep across America before the gloom can be lifted - but that's an awareness we suppress. As a nation, we're in deep denial.  - Strauss & Howe - The Fourth Turning

calling rubik, stat!

~Government budget deficits are not nearly as dangerous as the deficits we have created in vital and complex natural systems.~ Naomi Klein.

Paul Krugman on Joseph Stieglitz:

But the larger story is the absence of a progressive-economist wing. A lot of people supported Obama over Clinton in the primaries because they thought Clinton would bring back the Rubin team; and what Obama has done is ... bring back the Rubin team.

Joe Stiglitz stands out because in addition to being on the progressive wing, he's also, as I said, a giant among academic economists. But I think the real story is more about excluded points of view than excluded people.

Perverse Incentives. This is potentially very broad, and it doesn't always require a break up.  For example, the ratings agencies, because they were paid by the firms whose securities they rated, had perverse incentives to rate securities higher than they deserved.  Breaking the companies up wouldn't fix the problem, changing how they get paid is required (I am aware, so far, of no serious proposals to do so.)

But the main perverse incentive I have in mind is high pay.  When decision makers or important workers in a company are paid too much their incentives change.  If you are, say, earning $200,000 a year, even though that's a lot of money to ordinary people, it's not enough so that you don't need to keep your job.  Even 20 years from now, you're still going to need a job.  So it's in your interest to make sure that your employer survives, and that you don't take on risks you can be blamed for.  Old style loan officers in banks, for example, were conservative because if a loan went bad 10 years from when they approved it, they'd be in their managers office justifying it.  If too many loans went bad, well, they'd be out of a job.  When I worked in insurance, the underwriters were paranoid of having too many claims on the policies they approved.  So they only approved good risks.  Why?  Because if they approved too many bad risks, they'd be out of a job.

On the other hand, if you're being paid 5 million or 10 million (or more) a year, what matters is your bonus this year and next year.  If your company goes under you'll still be rich for the rest of your life.  You don't need a job after the first few years at these compensation rates, so it becomes just a game for you.  Long term risk means nothing compared to next month's commission or next year's bonus season.  And if it does all fail, heck, you may even get a golden parachute of 10 million dollars or more.  Failure looks pretty good in the world of high paid executives.

To a lesser extent this is true down the chain.  If you're a loan broker paid on commission, and you can make a million a year, well, you're in the same boat.  A few good years and you can retire for life.  Maybe, unlike your bosses, you can't live in the Hamptons for the rest of your life, but you'll certainly never need a job again.

the whole article is very clear.

~Government budget deficits are not nearly as dangerous as the deficits we have created in vital and complex natural systems.~ Naomi Klein.

According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.

Effectively, California is using its IOUs to create a currency. If this bill passes it would allow California to deficit spend just like the Federal Government and with the IOU's acceptable as payment of state taxes, it instantly imparts value to them (see here and here). In effect, what you have is a state of the union creating a sovereign currency right under the noses of Treasury, Fed. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.

Contrary to most conventional economic thought, whereby people think we pay taxes to create revenue, in fact, it works the other way around under a fiat currency system. The government doesn't need money to spend, but in fact uses tax to manipulate aggregate demand, not raise funds to "pay" for government. The tax is what gives the currency its value insofar as taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfill a tax obligation, but the money is already in existence, not "created" by the revenue.