PANIC

DEPRESSION

I'll keep you posted.

They tried to assimilate me. They failed.

"Huge blow to capitalism in America"

"A remarkable fall from grace (Merrill)"

"Our money is falling through a sieve"

"This is unfettered capitalism (not said in a NICE way)"

A definite sense of excitement/anxiety in everyone.

They tried to assimilate me. They failed.

Looking ahead, Goldman Sachs and Morgan Stanley are due to report third quarter results this week. Analysts at SocGen said: "Their earnings should represent a relatively easier barrier for the market to overcome, but we will then be in a vacuum of sorts as far as single names are concerned given that the full reporting season is still some four weeks away."

According to Galbraith's The Great Crash 1929 at the height of the crash the ticker tape was printing so much that it printed 2 hours late. By the time tape-watchers found out their holdings were being wiped out, they were way too late to react.

On the general situation, the collapse of Lehman signals the end of "organised support" (a stock phrase referring to small investors' hopes that J P Morgan would ride in to save them).

Another recycled comment:

Jerome a Paris:

His view is shared by Larry Summers, the former US Treasury secretary, who wrote in the FT last week: "It is not unreasonable to hope that, in the US at least, the financial crisis will remain in remission."

Some analysts also agree. "Increase risk exposures," JPMorgan advised clients in their latest research. The US stock market is up 8.6 per cent from its March low.

This turn in sentiment is based on the idea that radical action by US authorities has put a floor under the financial system

Holy shit, this sounds like the "organised support" during the crash of 1929.

[On 24 October 1929]

In New York at least the panic was over by noon. At noon the organized support appeared.

At twelve o'clock reporters learned that a meeting was convening at 23 Wall Street at the offices of J. P. Morgan and Company. The word was quickly passed as to who was there -- Charles E. Mitchell, the Chairman of the Board of National City Bank, Albert H. Wiggin, the Chairman of the Chase National Bank, William C. Potter, the President of the Guaranty Trust Company, Seward Prosser, the Chairman of the Bankers Trust Company, and the host, Thomas W. Lamont, the senior partner of Morgan's. According to legend, during the panic of 1907 the elder Morgan had brought to a halt the discussion of whether to save the tottering Trust Company of  America by saying that the place to stop the panic was there. It was stopped. Now, twenty-two years later, that drama was being re-enacted. The elder Morgan was dead. His son was in Europe. But equally determined men were moving in. They were tha nation's most powerful financiers. They had not yet been pilloried and maligned by New Dealers. The very news that they would act would release people from the fear to which they had surrendered.

It did. A decision was quickly reached to pool resources to support the market. The meeting broke up, and Thomas Lamont met the reporters. His manner was described as serious, but his words were reassuring. In what Frederick Lewis Allen later called one of the most remarkable understatements of all time, he told the newspapermen, 'There has been a little distress selling on the Stock Eschange.' He added that this was 'due to a technical condition of the market' rather than any fundamental cause, and told the newsmen that things were 'susceptible to betterment'. The bankers, he let it be known, had decided to better things.

Word had already reached the floor of the Exchange that the bankers were meeting, and the news ticker had spread the magic word afield. Prices firmed at once and started to rise. Then at one-thirty Richard Whitney appeared on the floor and went to the post were steel was traded. Whitney was perhaps the best-known figure on the floor. He was one of the group of men of good background and appropriate education who, in that time, were expected to manage the affairs of the Exchange. Currently he was vice-president of the Exchange, but in the absence of E. H. H. Simmons in Hawaii he was serving as acting president. What was much more important at the moment, he was known as floor trader for Morgan's and, indeed, his older brother was a Morgan partner.

As he made his way through the teeming crowd, Whitney appeared debonair and self-confident -- some later described his manner as jaunty. (His own firm dealt largely in bonds, so it is improbable that he had been much involved in the turmoil of the morning.) At the Steel post he bid 205 for 10,000 shares. This was the price of the last sale, and the current bids were several points lower. In an operation that was totally devoid of normal commercial reticence, he got 200 shares and then left the rest of the order with the specialist. He continued on his way, placing similar orders for fifteen or twenty other stocks.

This was it. The bankers, obviously, had moved in. The moment was electric. Fear vanished, and gave way to concern lest the new advance be missed. Prices boomed upward.

That was a Thursday. The following Monday

At four-thirty in the afternoon the bankers assembled once more at Morgan's, and they remained in session until six-thirty. They were described as taking a philosophical attitude, and they told the press that the situation 'retained hopeful features', although these were not specified. But the statement they released after the meeting made it clear what had been discussed for the two hours. It was no part of the bankers' purpose, the statement said, to maintain any particular level of prices or to protect anyone's profit. Rather the aim was to have an orderly market, one in which offers would be met by bids at some price. The bankers were only concerned that 'air holes' as Mr Lamont dubbed them, did not appear.

...

... But no one assailed the bankers for letting the people down. There was even some talk that on the next day the market might receive organized support. -- John K. Galbraith in The Great Crash 1929

"Dutch Disease" was a term coined in the 1970s by the magazine The Economist to describe the syndrome suffered by the Netherlands after the discovery of the massive Groningen field propelled natural gas into the driving seat of the economy. The extractive sector became so profitable that it attracted the lion's share of new investment, and the resulting gas export boom altered the trade balance and boosted the currency, causing difficulties for the rest of an export-oriented economy. And, as with the "oil curse" that has struck other countries, depletion of the resource has since proved to be extremely painful.

On a larger scale, but of similar nature, is the high-profitability disorder that has, until recently, characterised the financial sector.  The biggest single sector in the 2007 S&P 500 market capitalisation index, weighing 7%-8% of US GDP, its share in total corporate profits stood last year at over 40% from below 20% in the 1970s. Net total income growth in recent years has predominantly benefited a relatively small number of people either working directly in the sector or owners of financial assets. In the UK, where the sector's share of GDP rose to 9.4% in 2006, from 5.5% in 2001, City-dominated London received 50% of total foreign investment. Per capita Gross Valued Added rose by between 8% and 9% over the last decade in London while, in all other regions of the UK, it stagnated or fell. In fact, the phenomenon is so firmly based in the money centers of New York and especially London, that the label "Anglo Disease", by allusion to "Dutch Disease", might appear to be no unfair moniker.

How to describe the pathology of this ailment? Financiers, now unchecked by regulation or restrictions on leverage, can monetize many kinds of future revenue streams today, generating instant profits they and their clients can capture. That capacity to create apparent wealth out of thin air without limit cannot be matched by any other sector in the economy. Unsurprisingly, it sucks in talent, resources and skills that are not available for infrastructure investment or other economic activities.

Meanwhile, the investors who have made those immediate profits possible still want to ensure that the future flows that underpin them do in fact materialize--and so they will impose their rules and discipline on the underlying economic activity. The result is an unrelenting focus on profits and shareholder value. Struggling to meet "return on capital" criteria, many non-financial activities experience yet further reductions in capital allocation, and relative decline. Meanwhile, public debate is dominated by financial analysts, as "net present value" becomes the standard prism through which to view any human activity.

Public policy attempts to provide balance are hamstrung by the fact that, from the financial viewpoint, regulations and tax are restrictions on entrepreneurship and profit to be opposed and if possible eliminated. As for labor, return on capital is improved if its cost can be reduced. Outsourcing, offshoring, and labor market flexibility have helped keep wages in check. Hence a major symptom of the Anglo Disease is long-term stagnation of the majority of incomes.

Flat incomes might constrain domestic demand, but easy credit (to the further benefit of the financial industry that channels it) has buttressed household spending. Expansionist monetary policies in the West have combined with Chinese mercantilism to offer rapid asset price increases with no consumer goods or wage inflation, generating high corporate profits. Global trade imbalances and what was a massive asset bubble created an economy blessed with the appearance of strong, inflation-free growth--an illusion that helped validate the underlying policies, despite rising inequality and ballooning, unsustainable, debt burdens. Starting with subprime lending, but now extending to other financial activities, market players have suddenly become scared by their collective imprudence and have engaged in a brutal process of deleveraging. While the credit crunch devastates bank balance sheets, the wider economy is also suffering.  Credit available to businesses is shrinking, and the spigot of house equity withdrawals is turned off for consumers. The reality of declining or stagnant incomes for the majority can no longer be camouflaged. Prospects are dire, and  further damage to the banking sector and the overall economy is likely.

The imbalances will only be unwound, ultimately, if incomes match spending more closely. That can, of course, happen through a consumer spending slump and an  inevitably painful recession. The financial wagers and high-priced assets that surfed on a nicely growing economy will, at some point, have to be marked down as losses, as is happening already. The Anglo Disease will face treatment by the kind of drastic purge that threatens the patient's very life.

There remains another way: higher wages across the board, and a more modest financial sector restrained by regulators and unable to impose the artificially high return-on-capital requirements made possible only by excessive leverage. Making banking boring again is, compared to the alternative, a fairly gentle cure for the Anglo Disease.

John Evans, a writer, and Jérôme Guillet, an investment banker in the energy sector, are editors of the European Tribune, a current affairs website.

John, would you post it again on the FP?

In the long run, we're all dead. John Maynard Keynes

Nouriel Roubini via Angry Bear: If Lehman collapses expect a run on all of the other broker dealers and the collapse of the shadow banking system (September 13, 2008)

It is now clear that we are again - as we were in mid- March at the time of the Bear Stearns collapse - an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). ...

...

... Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

...

What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don't have access to deposit insurance and don't have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.

...

TPM Election Central | Talking Points Memo | McCain This Morning: "The Fundamentals Of Our Economy Are Strong"

Here's the full quote:

"You know that there's been tremendous turmoil in our financial markets and Wall St. And it is -- people are frightened by these events. Our economy, I think still -- the fundamentals of our economy are strong. But these are very, very difficult times."

McCain did refer to the big Wall Street events of here, so it isn't like this was an unintentional gaffe; this is what he wanted to say. Arguably, of course, that could make this worse. Not cutting this line out on this morning, of all mornings, is a serious mistake.

It's the fall of the Greenback Wall.

In light of what we've seen in the last 12 hours, who wants to have a weekly ET prayer group; I'll lead it.

We'll need JE-BUS to get through the next year.

Any takers?

They tried to assimilate me. They failed.

There is clearly a lot more to sell-off.

Maybe this caught everyone by surprise.
More selling the rest of the week.