Guy Berger

IMHO, our universities seem to generate too many liberal arts PhDs and not enough scientists/engineers. Guy

October 8, 2008 Iceland, in a Precarious Position, Takes Drastic Steps to Right Itself By ERIC PFANNER and JULIA WERDIGIER REYKJAVIK, Iceland — The government of Iceland took extraordinary measures on Tuesday to stave off “national bankruptcy,” as the credit crisis tightened its grip on this remote island nation in the North Atlantic. Iceland’s banks had propelled years of significant growth, lending so freely that their assets ballooned to many times the size of the country’s economy. But now the boom has turned to a bust. In an effort to avoid financial collapse, the government took control on Tuesday of the country’s second-largest bank — its second takeover in two weeks. And, in a measure more characteristic of troubled developing economies than one of the wealthiest in the world, Iceland’s central bank pegged the currency to a basket of others. Most surprising, the government announced that it had asked Russia for a loan of 4 billion euros, about $5.5 billion, to try to keep the economy afloat. Iceland is uniquely exposed to the global economy. Although it has a population of about 300,000 — smaller than that of Wichita, Kan., or Tampa, Fla. — it has played an outsize role in global trade. The country is highly leveraged in international financial markets, and the total assets of its banks grew to nine times as large as its gross domestic product at the end of 2006, from 96 percent of its G.D.P. at the end of 2000. Some estimates place the current size of the banking sector at more than 10 times as large as the G.D.P. And Icelandic companies had been aggressively expanding in Northern Europe and across the Atlantic. The Baugur Group, an Icelandic investment company, for instance, owns the House of Fraser department store chain in Britain, as well as a stake in Saks Fifth Avenue. Another Icelandic company, the FL Group, now called Stodir, has investments in the parent of American Airlines. The boom in the financial sector was a relatively recent phenomenon. The Iceland Stock Exchange was created only in 1985; trading in shares began several years later. Though Iceland has one of the highest per capita incomes in the world, not long ago its economy was rooted in basic industries like fishing. To stanch the current crisis, the government said it had secured the backing for a loan from Moscow. But Russian officials told Interfax that no decision had been made. Iceland later acknowledged that its announcement had been premature. The confusion over the status of any loan added to the sense of bewilderment here over the speed with which the financial situation went from bad to worse. “We are still in the midst of events unfolding, and it’s impossible to see where it’s going to end up,” said Björn Gudmundsson, head of research at Landsbanki, the second-largest bank in Iceland, after Kaupthing Bank. Landsbanki was nationalized on Tuesday under new powers rushed into effect by the government. At the end of last month, the government took control of Glitnir, another lender. “We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” Prime Minister Geir H. Haarde said late Monday. Concerns about the government’s ability to support the banking sector have put the currency into a tailspin. The fall in the krona has pushed inflation into double digits, requiring the central bank to raise its benchmark interest rate to more than 15 percent. Mr. Gudmundsson said new financing, like the proposed loan from Russia, was essential to help the central bank keep the currency from sliding further; it fell more than 30 percent against the dollar in the last month. The central bank said that it had asked Russia about the loan “some months ago” but that the situation with the country’s banks and economy deteriorated so rapidly over the last two days that a loan agreement became urgently needed. It said that Russia — home to branches of Icelandic banks — would grant the loan for the next three to four years with an interest rate of up to half of a percentage point above the interbank lending rate. For Russia, a loan would be a way to show its financial power and willingness to help distressed economies. “It’s a P.R. stunt to reassert Russia’s position in the global economy of the 21st century,” said James Beadle, a fund manager at Pilgrim Asset Management in Moscow. “But Russia also has a lot of cash it can’t use domestically because of the inflation problem.” In Reykjavik, the government reiterated that all deposits in its banks were guaranteed. But the crisis could reverberate in foreign markets where Icelandic banks have set up branches, luring customers with attractive savings rates. Customers of Icesave bank in Britain, controlled by Landsbanki, were not able to access their money on Tuesday. A note on the bank’s Web site did not give any further information. In the meantime, the deposit compensation unit of the Financial Services Authority in Britain was readying on Tuesday application forms for Icesave’s 300,000 British customers, who have an estimated £2.5 billion in deposits with the bank. Icesave provides only an Internet-based service in Britain; its depositors are partly covered by Britain’s deposit insurance system. Customers will probably have to wait a couple of weeks to receive their savings, up to £50,000, a spokesman at the deposit unit said. Britain recently increased the level of guaranteed deposits to £50,000. But in Reykjavic, the government guarantee seems to have reassured many Icelanders about the safety of their money. There were no signs of lines at banks for withdrawals.

I don't understand why gas stations don't hike prices to $5 or $6 per gallon or whatever to solve this problem... I had to wait in line for an hour to fill up on Sunday. Fortunately I can walk to most places and don't drive much, otherwise this would be a serious drag. Guy

Off to my 2nd tri. Guy

The great economist Rudi Dornbusch once said `The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.`

Amen. No, it's not BS. The government definitely did. I just don't think that it played a significant role in what was ultimately, for a while, an extremely profitable industry. Guy

1) An op-ed in which economist Ken Rogoff argues that the cost to US taxpayers of cleaning up this mess will be upward of $1 Trillion. 2) An op-ed from Nicholas Brady and Paul Volcker calling for a resurrection of the Resolution Trust Corporation 3) A review of today's historic events 4) A more general article on the crisisi

As far as I know that has not happened... yet. I am sad to say, but the US government is going to have to step in and bail out the guys who are responsible for much of this mess - the banks. It's going to be ridiculously expensive, foreigners are going to own massive amounts of US assets, but that's a small price to pay to avoid an implosion of the US (and maybe global) financial system. Guy

It doesn't decouple the loans... but it does decouple the lender. This isn't necessarily a problem in and of itself if the lending process is well-supervised/regulated or if the person who purchases them is intelligent enough to remember the incentives faced by the lender. But neither of these things happened, apparently. For what it's worth, securitization of loans existed for a long time before this crisis, and it will come back. It just got extremely out of hand this time around. Guy

So Greenspan holding interest rates way down year after year after year had absolutely NOTHING to do with it? Greenspan is also culpable from a regulatory standpoint. That said... this crisis has many, many fathers and I would hesitate to put Greenspan in the top 5. Guy

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther... Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view. 1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government. The primary reason why subprime mortgage lending by banks and other institutions grew so rapidly during the past 5-6 years was that it was immensely, immensely profitable. While the argument you made surely does account for some of the expansion, I would assume this was a tiny fraction of the whole. Guy

Yes. The basic connection is that right now there is an extreme fear of risky assets (what people call a "flight to quality"), hence a massive outflow of capital from Russia's stockmarket. Furthermore, if Russia's banking system is similar to that of others around the globe, its banks have "exposure" to Lehman/whoever or someone who does. It's like a giant ball of yarn, once you pull on one end you may end up unraveling the whole thing. Guy

...AND (and I'm not making this up), AND... "in return, the federal government will receive a 79.9% stake in the company." The government just paid $85 billion dollars to buy 80% of AIG??? What the holy motherfucking fuck???? source It's a loan, not a transfer. It's unclear how much of this loan will be paid back. Guy

A government bailout of AIG is very BAD news. Worse than AIG actually going under? Again, I don't profess to know the particulars. I'm reading the posts of those who do with great interest. Disclaimer up front: I work in the financial services industry, so I am not a disinterested party. Here's a summary of why an AIG bailout matters. 1) Financial institutions currently have on their balance sheets many assets whose value is maintained by the fact that it is insured by AIG. That is, even if the underlying asset goes down in value, AIG promises to pony up the difference. 2) This in turn implies that if AIG is no longer able to honor its insurance, those assets drop dramatically in value. 3) So an AIG default would imply further writedowns for those financial institutions. 4) Such writedowns would leave financial institutions even shorter on capital at a time when such capital is scarce. i.e., bring them closer to possible insolvency. 5) Even those that do not become insolvent will become more tightfisted with lending in order to conserve capital. 6) Thus -- whether through insolvency of financial institutions or tightening of lending standards -- the functioning of the financial system will become further impaired. Guy

From my understanding of G-S and G-L-B (which admittedly is superficial), this is not a convincing argument. Bear Stearns, Lehman, Merrill Lynch - these are investment banks, hence the repeal of the law did not affect them. And the depository institutions that have failed so far had very little, if any, investment banking activities. The root cause of this crisis - excessive lending/borrowing - could have occurred with or without the integration of investment and depository banking under one roof. Guy

I went to the CNN site and read the entire article. While I don't understand all of the particulars, it sounds really bad and a little frightening. You should be particularly frightened because people in the know don't understand all of the particulars. Guy

Yup. There were even CDOs of CDOs, titled CDO^2, CDOs of CDO^2s titled CDO^3. Staggering.

Doubt it's just CDO investments. I've been hearing that AIG trading desks have some seriously underwater/mishedged CDS (credit default swap) positions. This may betray my ignorance, but prior to your post I would have considered a CDS to be a type of CDO. Isn't a CDS essentially a firm-specific CDO? No. a CDS is an insurance contract on debt -- guaranteeing against default of that debt/bond. So if the debt/bond does default, the insurer pays out. Hence credit default swap. a CDO (collateralised debt obligation) is a bond with assorted underlying financial assets as collateral, also generating the interest payments. Lots of these use subprime bonds as collateral.

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck. Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months. The ironic thing is that people's money is safer in mutual funds right now than in a bank. Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not. Guy FDIC is woefully underfunded and there is sufficient doubt that it could handle a full blown crisis. I still prefer my mutual funds, thank you, as I don't think all their holdings would necessarily go to zero. The FDIC is underfunded, but it is a (near) certainty that the US government would make sure that all deposit insurance would pay out. To do otherwise would generate a massive countrywide (excuse the pun) bank run which would truly cripple the US financial system and completely defeat the purpose of having deposit insurance in the first place. Of course, there is the possibility that the US government itself would be unable to raise debt or taxes sufficiently to cover all insured deposits, but I would say this is extremely unlikely. Is that true about insured deposits requiring up to a year to be paid out? I was not aware of that. edit: Checking the FDIC's website: Looks like there is a distinction between regular deposits and brokered deposits; the former are paid out pretty quickly - if not, that would again defeat the purpose of deposit insurance. I should note - I am not arguing that people should liquidate their mutual funds and move the money to FDIC-insured accounts. As Conn said, a well-diversified mutual fund is not going to go to 000 and in the long run stocks will probably bounce back. It's just that if short-run safety is your paramount objective, FDIC-insured accounts are the way to go. Guy

Rick did not play on The Final Cut at all. However, he did play on A Momentary Lapse of Reason as a session musician. As far as Rick - a real pity. It was nice to see one of the major obituaries acknowledge him as the dominant musical sound on the group's early recordings. Later on, he was overshadowed by the larger personalities in the band - but the group made its based recordings while he was contributing as a composer. Guy