Yesterday and overnight, there was a ton of news in Europe, in banking and in geopolitics. So, I am going to alter the format of the round-up slightly and give you a rundown with links mixed in.
The long and short is that the banking sector is in dire straits, economies are tanking and geopolitical tensions are rising. Real positive, right? Well, take a look nonetheless — some very interesting things are about to happen because of these events.
Banking sector
The banking sector is a mess. Let’s start off with the comments coming from Dutch National Bank Head Nout Wellink. He gave an interview with a major Dutch newspaper where he basically said the ECB was going to stop providing so much liquidity to the banking sector (see my translation and comments here). This story has caught on as the Wall Street Journal and the Telegraph both sounded off about the implications inside and outside of Europe. Yves Smith over at naked capital does a great job putting the issue together — with all the attendant implication for Spanish and Dutch banks in a missive last night. Dutch banks are stressed as Fortis desperate for cash, is shedding assets as it just sold a stake of the ABN Amro assets it bought last year to a Old Mutual for 2 billion Euros. This is a very big deal because the stress weaker lenders might feel from this could actually lead to bankruptcies in the Eurozone.
Then, there’s Lehman Brothers. They are in big trouble. The fear is that Lehman will report a large loss for Q2 on credit writedowns, will run into liquidity problems and fail. There had been a lot of speculation about Lehman writing down $4 billion. Even the Fed is so concerned, they hauled Credit Suisse in to ask them if they were cutting lines of credit and then went and told everyone on the Street that lines of credit were not being cut. Lehman’s bosses are on the case and Dick Fuld and co. are exploring multiple options. The writedowns might mean Lehman needs a capital injection. On Wednesday, I wrote about Lehman’s desperate attempts to get money anywhere (Korea and China), anyhow (majority stakes from SWFs) based on stories broken by the NY Post and the Financial Times. And Lehman would even consider selling its crown jewel asset management business Neuberger Berman. Needless to say, all of this speculation is making investors very nervous about the U.S. financial sector, one reason that the dollar is weaker against a bevy of currencies and oil.
The positive side of this is that Temasek, the Sovereign Wealth Fund from Singapore, is ready to pony up even more capital for shares in the Western financial sector. Would the Feds accept Lehman or Merrill being owned by an Asian SWF? I wonder. Even Germany is looking to close that possibility off despite allowing dreaded a buyout shop, Lone Star to buy the collapsed IKB bank.
And then we’ve got the Auction Rate scandal, a lawsuit feeding frenzy. Merrill, Goldman and Deutsche bank are the latest companies to make settlements. But, more lawsuits are in the offing. The LA Times has reported that the Auction Rate securities probe has expanded to include nearly 40 brokerages. It looks like the Feds and states will be getting their pound of flesh. Many of these securities look to be ‘worthless.‘ Can you say “writedowns?”
Don’t forget Fannie and Freddie (or Phoney and Fraudy as Barry Ritholtz calls them). Even Warren Buffett thinks the government is going to have to step in on Fannie and Freddie. As the Washington Post opines, it’s time for Hank Paulson to get his damn bazooka out and use it.
Ultimately, this whole mess is the result of the Fed in particular holding interest rates too low for too long and increasing them too slowly. This caused safe assets to have unattractive returns and caused investors and financial companies to look to riskier assets to make up the return. “Profit Without Risk? Not Likely.” So says the NY Times about the bogus models investors were using during the Fed-induced credit bubble.
Given the facts above, this crisis is obviously far from over. The ECB comments and the Lehman story point out the real risk of a large bank failure as predicted by former IMF head Kenneth Rogoff earlier this week. Smart investors like Warren Buffett believe the debt levels in the U.S. will be a problem going forward, hence the need to deleverage. Another sage pundit in South Africa, Johann Rupert, is predicting a decade-long unwind to this whole mess. Thank god, it’s Friday. I’m going to need a drink after this week.
Britain
The UK has revised down its second quarter estimates for GDP growth from 0.2% to 0.0% i.e. no growth. The fear now is that the UK is in or is headed for recession (see story from the Guardian). British regulators say this slump could be as bad as the early 1990s. Obviously Sterling is taking it on the chin as a result.
Evidence of an increasingly slow British economy comes from the lending sector. Halifax (part of HBOS and once Britain’s largest mortgage lender) is closing 53 estate agent offices around the country. Bradford and Bingley couldn’t place their shares as investors shunned their rights offering and so the underwriters, Citigroup and UBS, have gotten stuffed with 70% of the issue.
All the while, UK consumers continue to ta
ke it on the chin from an inflation perspective. Gas prices are set to rise on a leak in a Norwegian gas pipeline.
At least shoppers keep spending money. But, then again, the British statistics guys may actually be cooking the books.
Geopolitics
If you haven’t noticed Russia is on the prowl. The events in Georgia and Russia’s refusal to pull out quickly have really roiled the markets. Oil was up $5 yesterday and foreigners are leaving the Russian bourse and bonds and pulling money out of Russian like rats leaving a sinking ship. The confrontational approach taken by the Bush Administration has caused tensions to mount between Russia, the U.S. and NATO. I can’t see this as a good thing.
Let’s not forget Pakistan. The Pakistan Coalition Rift Widens as Zardari Skips Judges Meeting. With Musharraf gone, things there are going to get very messy in Pakistan.
Oh, and by the way, the Chinese are definitely moving in on Iraq. Look at this oil deal they just signed. The Chinese are definitely looking to take a larger strategic role in world economics. Here’s another story for you that says so: ICBC Plans Sale of $14.6 Billion Subordinated Bonds. The world’s biggest and most profitable bank is showing its muscle. By the way, did I mention they’re Chinese?
As far as the U.S. is concerned, you can sum all this geopolitical news up in one sentence: that ain’t good.
Odds and Ends
Conventions bring river of cash to host cities. Democrats? Republicans? Who cares. Show me the money.
GM is looking to unload Hummer. I’m sorry, but with oil at $120, I can’t see this being a good time to sell. GM should have sold it when the getting was good. This is another case of weak hands selling on the cheap.
Barry Diller has finally broken up IAC. It’s about time. These assets were undervalued as there were few synergies between them. Sheesh, was he trying to be the James Ling conglomerate of the 21st century (what’s this decade called anyway?).
Gold coins are in flavor. People want real money so much more than paper money that the U.S. Mint can’t make enough of the things. Methinks the pullback in gold is just a technical move.
Property lending in Ireland is at a 11-year low and mortgage-related lending is at a 17-year low. I can’t see Ireland escaping from this without a severe recession.
Storm Drenches Florida After Bush Declares Emergency. Our heart goes out to the victims there and we have to think this can’t be good for real estate.
Americans skip Labor Day trips as costs rise. Don’t think because the Europeans are getting their comeuppance that things aren’t going to get worse in the U.S. too.
There it is. Have a good weekend! Drink plenty of alcohol.