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The Worst Financial Crisis Since the Great Depression

Author: Nouriel Roubini  ·   ·   › Share This Print

Regular readers of this blog are familiar with my views. But here below is a repeat of detailed summary of the reasons for my views (as presented on this forum last month) that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument). As I wrote in August:

  • This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
  • At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
  • This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
  • Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.
  • Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.
  • Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L’s that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) – do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
  • In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
  • The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
  • Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
  • Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.
  • Additional earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions’ managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam that auditors and regulators are abetting on a regular basis. An example of such a scam is the recent Merrill Lynch transaction with Lone Start to “sell” its exposure to CDOs.
  • The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loan – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.
  • The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie – to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.
  • The entire Federal Home Loan Bank system – another GSE system that is another effective arm of the government – has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.
  • The ability of US financial institutions to recapitalize themselves is constrained by financial protectionism: the only large players that have funds to put at work are sovereign wealth funds, especially from countries that are strategic rivals – not allies – of the US or from unstable petro-states. Thus, the backlash against such SWF will seriously limit the ability of banks and other financial institutions to recapitalize themselves.
  • This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (August). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.
  • This will be a long, ugly and nasty U-shaped recession lasting at least 12 months and more likely 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects. While an L-shaped decade long economic stagnation is unlikely the recovery of the economy from this recession will be weak as the financial crisis and serious macro imbalances will lead to sub-par (below trend) economic growth for years to come.
  • The US recession has already started in Q1 of 2008 based on the five indicators tracked by the NBER. The Q2 rebound is only driven by the temporary tax rebates and GDP growth will slip into negative territory from Q3 2008 until at least Q2 of 2009.
  • Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. gThus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of US and global stock markets.
  • The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing. Indeed all of the G7 economies are now entering a recession. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
  • The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
  • But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 30% will further reduce inflationary pressure.
  • The Fed will have to cut the Fed Funds rate much more as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial crisis and severe recession cycle.
  • The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.
  • Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
  • This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.
  • This crisis also represents a Crisis of the Suburbian (“McMansions and Gas-Guzzling SUVs”) American Way of Life. The sharp rise in gasoline and energy prices and transportation costs, together with the sharp fall in home prices, will radically change the pattern of living of the typical American household.
  • Some of my views are fleshed out in more detail in my recent interview on Barron’s and in the profile article about me recently published by the New York Times magazine.

  • Since I wrote those words in August financial and economic conditions are severely deteriorated; we are now closer to the financial meltdown that I described in my February paper in my “12 Steps to a Financial Disaster” . Stock prices are sharply down and there is a risk of a market crack; interbank spreads and credit spreads are wider than ever since the beginning of this crisis; Lehman and Merrill are gone and soon enough Morgan Stanley and Goldman Sachs will also need to find a larger partner with deep pocket or risk getting in severe trouble; the biggest insurer in the world – AIG – is teetering near bankruptcy; the biggest US S&L – WaMu – is effectively insolvent and close to going bust; dozens of other banks are near bankruptcy; there is a beginning of a silent bank run as depositors are nervous about their assets; the panic is mounting in financial market; the CDS market is frozen because of the collapse of Lehman and the soon collapse of AIG, WaMu and other financial institutions; many hedge funds are now teetering as their losses are mounting; investors in fixed income – including preferred stocks – have experienced massive losses; overnight LIBOR spiked over 300bps to over 6% as panicky investors seek the safety of cash while the Fed lost control of the Fed Funds rate yesterday as the liquidity demand push such rate from the target of 2% to over 6%; the financial turmoil is becoming global with stock markets all over the world plunging.

    Worst of all policy authorities are now running out of bullet and going towards desperate measures that will end up being counterproductive.

Now that the collapse of Lehman is leading to the risk of the generalized run on the shadow banking system (the other independent broker dealers, the broker dealers that are part of larger commercial banks such as Citi and JPMorgan, hedge funds, private equity funds, the remaining SIVs and conduits, money market funds, other smaller broker dealers) the policy reaction is to try to build a new set of levies while the financial perfect storm of the century has destroyed the first sets of levies. This reaction includes the following steps.

First, the Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.

Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit. Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.

Third, an attempt to bail-in the private sector and provide a private lender of last resort support of the financial system is at work: ten major global banks will each fork $7 billion to create a $70 billion fund; each of these firms could borrow up to a third of such fund or $23 billion. But this private lender of last resort (LOLR) facility will not work since if any firm were to access this facility in case of a run on its liabilities panic will ensue – as the use of it will signal severe trouble – and the run will continue. The IMF created a similar facility to deal with liquidity runs on sound and solvent but illiquid countries; but no country ever used or even signed up for such facility as it would have been associated with “stigma”. Also such private LOLR facilities need to come with rules on their use (“conditionality”); otherwise an illiquid and insolvent broker dealer could access the facility with no restrictions and bankrupt the fund and the other members of the fund. But the new facility apparently does not come with any conditionality; so it is flawed in its design.

Fourth, since Lehman is bust the new line of defense was the takeover of Merrill by BofA. After taking over the insolvent Countrywide now Ken Lewis is making another reckless gamble by taking over at a vastly inflated price another distressed broker dealer. This is dangerous behavior for BofA. The lesson for Mack of Morgan Stanley and Blankfein of Goldman is that they should find a buyer today. After the collapse in six months of three major broker dealers Morgan Stanley and Goldman will be next unless they find a large financial institution with a large commercial bank that provides stable FDIC-insured deposits. As predicted here months ago no independent broker dealer will survive.

Fifth, the Fed may cut the Fed Funds rate and discount rate today. But this policy rate cut will make no difference to the fundamental solvency and credit problems of the economy. The economy does not suffer only of illiquidity; more seriously it suffers of severe credit and solvency problems that the Fed cannot address in any way.

Therefore any rally from Fed actions today will be short lived. When Bear was rescued the financial market rally lasted two months; when in July the Fannie and Freddie legislation was proposed the rally lasted a few weeks; when the actual nationalization of Fannie and Freddie occurred a week ago the rally lasted only one day. The ability of policy authorities to prop financial markets is rapidly eroding as market participants perceive that policy makers are desperate and running out of options. At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck.

PBS (Sept 15, 2008): Uncertainty Hits Wall Street After Lehman, Merrill Meltdown (click for video)

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Bloomberg (Sept 15, 2008): Reshaping Wall Street (click for video)

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Charlie Rose (Sept. 15, 2008): A discussion about the crisis on Wall Street (click for video)

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Advisor Perspectives: Our Interview with Nouriel Roubini

Filed under: Uncategorized

341 Responses to “The Worst Financial Crisis Since the Great Depression”

MIss America • September 16th, 2008 at 10:06 am

Sorry for the repost people… but Nouriel changed lead story’s only a few hours after a post I spent a little bit of time on. I was hoping for some feedback from the master himself… (if not on some of my financial plans… I hope he can be party to the meet and greet night out???)If you already read this… feel free to skip this post.Thanks again, Miss America@ Nouriel… My condolences on the accuracy of your predictions thus far. There must be an inner conflict that keeps you up at night, knowing that if you are vindicated on all your predictions, we’ll be looking at a pretty grim situation. …but if you’re wrong, things might not be that bad.It’s an interesting crossroad to be at, and I don’t envy you. It’s essentially: lose/lose.Option 1 – You’re right (and financial tsunami hits) LOSE on collapse.Option 2 – You’re wrong (and the markets correct) LOSE on credibility.I watched you Sunday night on CNBC and was very bothered. They gave you significantly less air time then all other guests. In addition, they didn’t even spend much time analyzing what you had to say. In my opinion, their lack of acknowledgement comes down to a couple of things…1. What you had to say was just too large for them to cope with. (I’m sure they can grasp it conceptually, but the trait of “denial” in human nature causes us to dismiss.)(Sorry, but I’m about to spew some unsolicited advice)2. Don’t go to your boss (or the public) with a problem, unless you have a few suggestions for a solution. …and by “solution” I mean a “viable solution” that can be backed up.I say this because you stated that GS and MS need to marry up with a bank ASAP. This broad statement is both too much to cope with and not necessarily viable. I say this because I don’t see there being another US bank that can afford to make that purchase. (Yes, it has to be a US Bank for reasons you already know and stated regarding foreign conflicts of interest, and other things of that nature.) I think that potentially Bank of New York / Mellon could be a suitor for 1 of these… but that is only my speculation.(BNY/Mellon has not been roiled in the same losses as the rest of Wall St for a couple of reasons. One important one being they sold/exchange their RE with JPMChase f or more custody. In addition, I do not think they have the available liquidity to buy either… but deals may be potentially negotiated since BNY is where both GS and MS custody most of their assets. In other words… they’re not married… but they’ve been dating for quite some time!)OK… with that said… I’d like to move forward myself. I’d like to come to the table with some solutions. (LB, drop me a line… I’m thinking career change. I’d like to change gears and start working on a correction… and if you know someone on my side, I’d love to meet with them.)First: Perception, Confidence, Truth, etc…This is ground zero for where we are at. It’s not “sub-prime”, “CDO”, “Alt-A”, etc… These water cooler terms have become the lame duck excuse for what has gone wrong so far… (much of the general public still believes that all these problems are because a large group of poor people bought houses they couldn’t afford. They fail to realize that the rabbit hole went much deeper.) They were just part of the problem. Instead, the subprime/etc were just the “triggers”. What’s wrong from a ground zero perspective is TRANSPARANCY. Without transparency, or at least the perception of it, you have a world full of investors flying blind right now.So IMO, solution #1 is an immediate overhaul of this market, to return confidence, price discovery, etc… It takes away a great deal of the concept of the market… but a new style of market will surely emerge. …as lending/borrowing & buying/selling will always be needed. This whole overhaul can and will be accomplished with the creation of different central global authorities on each of the markets. (real time default pricing, priced into a central authority can create price discovery as well as give regulators instant access to overall counterparty risk)LB, it’s time we shop the “Debt Servicing Corp” theory/plan again… but this time on my side of the pond.Second: Hedge Funds and Private Equity “REGULATIONS”As I’ve stated for quite some time… there has been a financial war taking place. The super elite, ultra rich, hedge funds/PE world has been allowed to tear apart the US financial system. Aside from their ability to manipulate markets through shorting, futures, etc… They have stood as the founding fathers of the failed financial model. In the wake of the DotCom bust, your newfound millionaires needed to keep making money. (“give a man a million dollars, and he becomes a frustrated want-to-be billionaire”) In the return of the markets (post 9/11, Enron, WCom, etc…) 3%, 4%, 5%, 6%, 7,% gains were no longer good enough! The new money enjoyed massive financial returns from the 90s and they wanted them again. So along came the HF/PE groups (that were small at the time) promising 20% gains. …and they delivered. (on what we know is a flawed system of leverage that doesn’t allow for downside risk) With the growth of this industry, business at the Broker dealer was being lost. In addition, CEO’s of these major corporations w ere not being adequately compensated by comparison to these small operating HF/PE’s… so the Broker dealer was forced to change to stay in the market.So IMO, solution #2 is an immediate call for regulations on all entities within free trading market. You cannot have a “level playing field” without this!Third: Much like the way financial institutions can write down their value of debt, I believe some sort of immediate legislation can be put forth for homeowners to do the same. I’m not talking homeowner bailout! What we need is a fair market write down over inflated house values for houses that are primary residence.For example, If you bought a house for $300,000 (but that was an inflated price based on the manipulated markets that helped drive prices unreasonably high) I don’t believe you should b e on the line for the manipulated portion of the value of that house. Much the way the Bank can write down the debt, so should the homeowner. So let’s say that house is only appraising at $200,000 now, I believe the new mortgage payments should be adjusted accordingly. …and the $100,000 difference should sit in a receivable status in the event that the value increase or a sale was able to produce more then the $200,000. (So caveats should be drawn is, such that if an owner got lucky and sold that house for $350,000, they would have to pay the remaining mortgage on the $200,000, and the outstanding receivable of $100,000 before seeing a profit)I believe this will stem foreclosures, or people walking away from negative equity situations. By keeping these people in houses, and giving them the chance to build equity, we can reverse a serious downtrend in the confidence of this market. At the same time, this will also decrease the houses being added to the existing glut that already exists.Fourth: Immediately lift our trade sanctions with Cuba. They are dated. Open a door of trade with their gov’t. Provide them with US automobiles to replace the 1950’s Studebakers they are currently driving. (this can help lift the US auto market a little bit),. In addition, it will remove the potential of having an “enemy” landing strip so close to the US border.OK… it’s 3am NYTime. I gotta get some sleep. BE SAFE PEOPLE! …and keep the faithMiss Americap.s. LB, you couldn’t have nailed the 23A thing better! I’ve been screaming about this all day. I’ve talked to
a couple of lawyers about this so far… and they just don’t get it?? I feel like they’re taking crazy pills!p.p.s. Thank you for everything you have taught me Nouriel. I hope the Stern Business school pays you the respect you deserve! Your predictions and analysis are LEGENDARY, and will be much of the ground work for many books in the future analysis of the current wreck.I’d love to meet you sometime. How about a night out? The bloggers here would flock to Spring and Varrick for a low key night out. This is my formal offer to set it up. Your drinks will be on me.

Miss Italy • September 16th, 2008 at 10:08 am

Professor,finally you are gaining the popularity that you deserve. My girlfriend is from Hong-Kong and also their mainstream media is starting reporting your comments.Something that is fascinating in this moment is the level of denial that the majority of people are still in. For most it is just a reaction to everything that is negative, a clear effect of a society/education where the child needs to be shielded from whatever is negative (however true it can be). But even people that are much more able to look behind the smoke screen are soooo slow to move. Only yesterday, after one year and a half that I’ve been warning him, a friend of mine asked: so you really think I should split my bank account to two to be below the limit of FDIC insured limit? Wow I thought he had done that looong time ago….

Guest • September 16th, 2008 at 10:11 am

I keep seeing comments from well meaning people who offer suggestions about how the US Govt must “save the day” by injecting more money into the US financial system. No doubt … that is exactly how the Fed and the Treasury will behave.But for the umpteenth time, can I remind everyone that the USA is effectively bankrupt. If this country had a $10 trillion budget surplus, then I would say that these rescue measures are all excellent plans. But in fact we’re running a deficit that’s probably well over $10 trillion now – it’s hard to keep up with the numbers when so much liquidity goes out the door each week (does anyone REALLY believe this is ever going to be paid back??? Surely not.). The US deficit represents a lien against the future income of the US Government – which is obtained through taxation. The big problem is that the USA has converted itself into a service sector economy. Manufacturing accounts for no more than about 14-15% of GDP (if I remember the figures correctly). So service sector jobs are somehow supposed to backstop this enormous deficit. It was the US financial and banking sectors that were keeping this distorted economy thriving – all based on a credit bubble. That is now collapsing. We’re gonna’ have to deal with reality now folks. This is really NOT sustainable. And the value of the US dollar is REALLY not sustainable.PeteCA

turchin • September 16th, 2008 at 10:15 am

Maybe you will interested in more gloomy view on the world:Global catastrophic risksand human extinction libraryhttp://avturchin.narod.ru/Global.htm

subgenius • September 16th, 2008 at 10:21 am

But the markets are currently ignoring this, usually with a claim that as the reserve currency the USD is the “safe haven”. I would have thought the Dollar should be collapsing in value – but then I am not an economist…

Medic • September 16th, 2008 at 10:26 am

Pete;You are so correct. The biggest obstacle for us to overcome is the fact that we already have too much debt on the books. Couple that with our non-manufacturing economy and we are in deep s&*^.I still think that as palatable as MA’s plan is to most of us – TPTB will never go for something that will lose them money – and so the debt will not be forgiven, it will be passed down to our children and grandchildren.PS – as for any potential McCain supporters out there – just think about how great this country will be with Phil Graham as Sec of the Treasury. And I thought Palin was worthless…….

Cdn Friend • September 16th, 2008 at 10:38 am

My firm has just doubled down on a whole slew of REIT shorts, commercial and office… all of this credit contraction guarantees an oversupply in Manhattan and just about every other financial centre.

Ashu • September 16th, 2008 at 10:40 am

Guys,A lot of counter dynamic hedging was done by the FED(probably) yesterday, so there was a small gain for the $.But in the longer run, expect $ to fall. Having said that, I don;t really see any other currency strengthening except the middle east oil giants’, Chinese, Brasil (mkt has already discounted tht), Indian (provided they don;t derail)

Guest • September 16th, 2008 at 11:02 am

Look at the market volitility today! The VIX is actually down right now which I fund unbelievable! Dow is surging as I type-what interesting times we live in. I guess wall street figures with all of hank’s connections and bernanke’s printing press-we need not fear the darkside…

iNnOsInZ • September 16th, 2008 at 11:09 am

It’s not in the best interest of foreign countries (i.e. GCC, China, BRIC) to let dollar fall.1) They have high exposure to U.S assets.2) All other assets (i.e. commodities) are priced in U.S Dollar.So first, they’ll have to shed their exposure to U.S assets (which would take sometime, 10-15yrs maybe?) and then they can price all assets in some form of currency (i.e. basket of currency, gold etc).Therefore i don’t think the U.S dollar is falling anytime soon (few bumps? sure).

Anonymous • September 16th, 2008 at 11:11 am

A smart young prof named RoubiniSaid, “It’s true just now that you see meDown laden with gloomAnd tainted with doomBut just was til I show you the real me.”

Anonymous • September 16th, 2008 at 11:14 am

hey nouriel,you are absolutely brilliant, but there’s 1 thing I can’t object to. You keep calling the fed’s actions socialist, when in reality there already is a name for “socializing the losses and privatizing the gains” – that name is fascism. I’m sure you know that fascism uses a centrally planned economy without abolishing private property and this is exactly what we’re seeing now.

Martin • September 16th, 2008 at 11:22 am

Alrightie folks, Listen upbrace yourselves for the big pig – The AIG.Tomorrow should be its date.Personally, I got a break yesterday. Feel a lot healthier…

AfA • September 16th, 2008 at 11:31 am

Does the pig has lipstick and other makeup on? And does the pig knows it is where it will be headed tomorrow?LET’S BURN SOME CDS!

Jon • September 16th, 2008 at 11:32 am

Creative accounting? Earnings manipulation? What about Sarbanes-Oxley? Or do the CEOs receive a get-out-of-jail-free card because of a wink and nod from the SEC? Please tell me someone goes to jail for this!

AfA • September 16th, 2008 at 11:35 am

Agree, but I think you are a bit optimistic in regards of the time frame, especially if a panic sellof is waiting down the road (less than 5 years)

Acheson • September 16th, 2008 at 11:35 am

Tomorrow should be it’s date? Hmmm — Is it looking like a bailout/bailin to you? Or not?Glad you got some rest Martin!

Martin • September 16th, 2008 at 11:39 am

Hmmm — Is it looking like a bailout/bailin to you? Or not? We kinda decided “AIG is too big to bail” !We are now making sure that funeral is orderly etc…

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 11:48 am

How can you “orderly” handle the two major funerals in finance history in the same week???Martin, honest, do you stockpile food and gasoline?

GUY FOX in Key West/Havana • September 16th, 2008 at 11:54 am

THREE THINGS:1. Old Coyote Knose that ewe folks reap what ewe $ow!2. Where there is no insight, the people perish!3. Whom the gods would destroy, they first make mad!

iNnOsInZ • September 16th, 2008 at 11:57 am

By AfA on 2008-09-16 11:35:15″Agree, but I think you are a bit optimistic in regards of the time frame, especially if a panic sellof is waiting down the road (less than 5 years)”I think 5 yrs is too pessimistic for the following reasons:1) There is trillion dollars of reserves sitting out there. If there is a panic sell off, that would be too catastrophic not only for the U.S, but for them as well (that’s like shooting your own foot). Therefore i think it’ll take more than 5 years to shed off such assets in a timely matter without disrupting the global market.2) Apart from reserves, they (foreign) countries also own alot of real assets in the U.S (i.e. hotels, banks, etc). These are surpluses being used to purchase such assets. To have a panic sell off again would incur major losses to them which they cannot withstand. They might just collapse themselves with such actions. Therefore, i think this too would take more than 5 yrs to sell off without disrupting the markets. Or they might just keep these assets for diversification purposes.The dollar is there for long haul and it will take time before other central governments take some corrective actions without disrupting the markets (right now they are too busy focused on short-term by pegging to the dollar).

OuterBeltway • September 16th, 2008 at 12:00 pm

I note that while everyone seems to agree with PeteCA’s assertion that a service economy isn’t likely to generate the profits necessary to dig out from under a 10T mountain of debt..that’s where the discussion stopped.While I love MA’s and LB’s ideas to make finance transparent (and I do!), these are process improvements to a process that won’t be occurring so much here in the U.S. over the next few decades. MA is looking to change careers for good reason. Wall Street will soon be reduced to a ghost town of dying delis and offices buildings “re-purposed” to cheap condos.Why is that, you ask? Because most of the business models of Western business are just as underwater as the MBS are, and for approximately the same reason.All our business models depend on consumers that can afford to consume. But the earning power of the middle class is declining. Globalization is the proximate cause, but it’s not the actual reason.Answer me this, if you can: what product or service will you provide next year that no one else in the world can provide so well as you, and at such a value as you?OK, since few of us can answer that question, what about this one: your standard of living is going to fall. Which of the former “essentials” is no longer so “essential”?What you see happening around you is the direct result of not answering those two questions. Every day we defer those fundamental decisions we rack up another few billion in national debt – which doubled from $4.5 to 9 Trillion since Bush took office.For those that say “that debt will never get paid off”, I hope you’re right. But remember, there are nearly 7.5 billion non-Americans out there that have a different opinion.You’re outnumbered 25:1. Are you 25 times smarter than they are?Meanwhile, Wall Street does its best to loot the Treasury before the lights go out.This is heartbreaking to watch.

Guest • September 16th, 2008 at 12:03 pm

NAHB hombuilder index up 2 points this month to 18 off record low of 16. Builders seem to think 1st time homebuyer tax credit combined with phony/fraudy bailout will increase buynig interes in the next few months.

fresno dan • September 16th, 2008 at 12:03 pm

I just love this blog – I can go back and see that everything you say comes to pass. It is so refreshing to see some business and economic analysis that is correct, instead of all the partisan cheerleading and pollyannish gibberish out there.

Anonymous • September 16th, 2008 at 12:07 pm

But the question remains: where do you put your money for the next few months to a year, while all this plays out?

AfA • September 16th, 2008 at 12:16 pm

Agree again,However, all it may take is a small (but smart?) foreign bondholder (some Asian country) to trigger the panic. The small bondholder will have nothing big to lose. Yes, the other foreign countries may try to fill the gap. Then all it takes again is that the foreign purchase of US bonds slows down (a highly possible outcome in a global recession) for “problems” to start to appear (because as you rightly point out “they are too busy focused on short-term by pegging to the dollar”)How long did it take for the Bretton Woods to collapse?

aleister perdurabo • September 16th, 2008 at 12:22 pm

Abstract:The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1156477

Guest • September 16th, 2008 at 12:26 pm

Thank you for your insight and wisdom professor.Your writings have been tough to read, as the truth is hard to hear at times. I took action, and as a result will ride this one out with my eyes wide open and my assets protected.You are the man!

subgenius • September 16th, 2008 at 12:27 pm

I have a background in physics/engineering and from my reading into capitalism, it seems that all “wealth” is created using a mechanism of future expectations. In the past this has been successful due to ever increasing availability of cheap resources (ESPECIALLY energy). The future looks VERY DIFFERENT – we have a massive and still growing population, so even if all else were equal, the per capita availability of resources would be declining. As it is we have massive resource depletion (essentially peak-everything) at the same time.I have no doubt that TPTB will try all they can to keep the shell game going, but (despite what I have seen written by those involved in economics) do not believe there is any way to defeat basic physical limits.Given this, the game is OVER – if not at this moment then very, very soon.PS Before somebody tries the “but what about nuclear/tar sands/bakken formation/solar/hydrogen/fusion” arguments, I recommend they get something approaching an education in the relevant fields.

Sean • September 16th, 2008 at 12:35 pm

I think FED may cut 75 points today, considering they MUST protect the garbage Equity Collateral taken in from now on.That means FED’s balance sheet and performance bonuses is now tied to Stock Market!! :lol:

bytheway • September 16th, 2008 at 12:35 pm

This is a very interesting post from Marketwatch which describes the reps from a poster named Macrotradinggod:Dear Gentlemen,Little do you all know we got robbed. Our country just got robbed by criminals and thugs, Rove, Cheney…Your Social Security, your 401K (financials) have been depleted as a result of bad Federal Laws and Rulings by appointed Federal Judges. All this money it went towards a bad gamble. A gamble that if we invested the right amount of money we could have Middle East colonies. I used to be President of the Republican team at my University. I traveled to D.C. and worked on many Republican things until I started putting things together. I don’t think it came together until I graduated college. I have seen the front lines of this debauchle and it is not pretty. I’ve seen my old peers who went to Georgetown and will probably become senators say the most disturbing things – “We need to imperialize and force slavery, we need to nuke middle east countries and say it was a bad nucelar reactor, etc”. It’s very scary. At first I thought it was a leftist movement or people hating Repubs telling me these things were disturbing then I noticed it was actually the repubs the whole time miscontruing and lacking integrity. It has taken months to try to regain my integrity I lost while Republican President. Under the three years of my life traveling to conferences around the nation, learning my “morals” from Republicans I was taught to cheat to get ahead and to use Machiavellian tactics, and I’m not sure there will ever be any catharsis as I can’t escape my past.It’s definitely troubling to know that a great deal of people have not noticed. Our country is going bankrupt. Our deficit is getting much too large and we have no intent or ability to repay it. We aren’t the country we were in the 60′s, we can’t fight senseless wars anymore, because we can’t afford it. While we have wasted time and money on these propositions other countries are beating us. They are beating us in clean technology, innovations, engineering, space discovery, nanotechnology, vaccinations, savings, list goes on.I guess it’s kind of sad to be honest, sad that nobody is seeing they are getting robbed by an elite organizaiton targeting nations with napoleonistic goals. I just keep hearing the same words that McCain is the hope or the best option or he will save us from our economy. But I’ve heard it all before, heck I’ve said it all before, but it’s all the same, no difference, no hope.

Guest • September 16th, 2008 at 12:42 pm

@ Wolf in the Wilds: The USD is now officially backed by worthless securities instead of US Treasuries (fiat currency system).That says it! The demise of 23A provides a whole new meaning to the term fiat currency. Before fiat currency was essentially backed by nothing: now it’s backed by toxic waste and gaming losses.

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 12:43 pm

Anybody knows what this statement from the FED means:Statement Regarding Open Market OperationsSeptember 16, 2008Shortly, the Desk will arrange a large overnight repo. The Desk stands ready to arrange further operations later in the day, as needed.In addition, at around 9:30 am the Desk will conduct its typical Tuesday morning $20 billion, 28-day single-tranche repo, settling1-day forward.http://www.newyorkfed.org/markets/operating_policy_091608.html

Anonymous • September 16th, 2008 at 12:44 pm

Ike probably left a swath of water damaged real estate in the midwest. That could go a long way to resolving the housing glut.

Anonymous • September 16th, 2008 at 12:50 pm

We really have been the greatest country, at least we were from about 1945 – 1968, but now it’s time to leave and let those responsible pay to the extent possible. The common man didn’t cause this insanity, those who can get out should do so to avoid having to pay debts endlessly.This guy finally woke up to what Republicans are. But are the Democrats better, or just similar poison in a different bottle?

mammon • September 16th, 2008 at 12:50 pm

A little Geopolitical Development! The Pakistani Government has just discovered their sovereignty and is warning that American Incursions intoPakistan will draw fire if not cleared with them. Wired -Danger Room- is myfavorite site to get Geopolitical and Military News.

Shrug2 • September 16th, 2008 at 12:51 pm

MA & LB Would like to thank you both for forcing me to do something I have not done for several years ….THINK! I won’t pretend to have any answers as I am still forming new questions. Naturally, Nouriel deserves major Kudos, not for just his forecasts but risking his career. As for the informal night out, even if I can’t fly in from Hawaii, I’ll be more than happy to stand for a round. Thanks again, and please keep posting.

Gloomy • September 16th, 2008 at 1:00 pm

LOOK OUT FOR THAT OTHER ELEPHANTYes, AIG is a rampaging elephant. There is another elephant racing down the path to the edge of the cliff. Its name is General Electric. If you think AIG is a crisis, wait until GE makes it to the edge.

Guest • September 16th, 2008 at 1:08 pm

that’s one of the things U.S. is currently doing – fueling aggression around the globe as its economical sinking is accelerating. Wonder why? For contingency reasons? In case its economy is no good for anything else than the military business, that there will be enough military activity going on around the world?

Gloomy • September 16th, 2008 at 1:09 pm

ILLEGAL GOVERNMENT ACTIVITIESIllegal government activities by officials and regulators will not be stopped and protesting about them is a waste of breath as all is deemed fair in these useless attempts to forestall armageddon. Our only choice is to defend ourselves as best we can. It is clear to me that the dollar will eventually be trashed, after this supposed flight to safety rally is over. The bailouts have just begun and Breton Woods will soon unravel. My gold mining stocks and my leap put options are my only solice in this dark time.

Guest • September 16th, 2008 at 1:10 pm

“Wake up America,” some said. “It’s a shadow government. Banksters! Behind the curtain!”“Ha, ha,” laughed America. “We’re scared! Now run along, you’re blocking the 10 o’clock news.”Perhaps now, though, in light of recent financial events, it might be time for the grinning American to put aside the remote, come into the bright light of the kitchen, splash three fingers of bourbon into a water glass, pull up a chair, and listen to what’s become of Franklin’s “republic, if you can keep it.”Like Bob Wills’ “Faded Love,” the republic idea quickly slipped away in wars, greed, “Square Deals,” and “New Deals.” On the chopping block lately, however, is the last chunk of America’s gift to its people and to the world: representative government. Through the years, a succession of Chris Dodds, Bushes and LBJs have handed over to private profiteers, every last precious key to the vaults that hold America’s treasure.Private interests walk in and out of the federal treasury at will. Private interests print all the U.S. currency in amounts they select (with their name on it) and now even conceal the true numbers. Private interests rate how much the currency is worth and cause all official reports on this value to be as they stipulate. Private interests use the federal treasury to keep companies they alone select from failure. And private interests, using the U.S. stock exchanges and the financial sector of these exchanges as propaganda to the public as a measure of the economy, use the federal treasury to keep equity indexes as high as possible. Private interests, so central to the nation’s financial affairs, use this leverage to manipulate, bribe and force the political establishment to bend to their every will.In all these matters, these private interests have caused their members to become the most wealthy and the most powerful men on the planet, purchasing estates and corporations from L.A. to Beijing to Dubai, all the while using credit and the U.S. Marines to gain influence with foreign governments, foreign labor and foreign resources.These private interests, now being represented by international investment banks, primarily Goldman Sachs, claim government authority because Congress, unwilling to stand up against this financial power and plunder, will give them virtually anything they ask.On the way they have gutted your savings, your 401k, your pensions, your Social Security, your wages, your standard of living, your children’s future and your institutions. Your tax-supported government is in debt to the tune of $100 trillion based on calculations by the Dallas Fed Chairman All this, and yet it is not the primary issue at stake. That issue is nothing less than the loss of your liberty.

Guest • September 16th, 2008 at 1:14 pm

Democrats are not any better than Republicans. Haven’t Americans learned it yet? If not, weird.To put it simply: it does not matter whom you vote into the oval office. The country will not look that different afterwards, whether the President is a Republican or a Democrat. You will still have the poor and the uninsured among you. The economical collapse will still continue. Domestic spying in the name of security will still continue. Warfare around the world, started and/or fueled by U.S. will still continue.WHY IN THE NAME OF GOD DO YOU GUYS EVEN BOTHER VOTING? HELLLOOOOOO???????

Guest • September 16th, 2008 at 1:20 pm

Lehman case has now brought to the fore the possibility that the Fed will have to further lower interest rates. This could then cause the U.S. dollar to collapse, just in time for the November election. Is this a case of perfect timing for something? It sure looks like it, but for what?

Medic • September 16th, 2008 at 1:22 pm

Thank you again Martin.You are a most welcomed poster.I am happy you managed a few hours of rest. People don’t think clearly when sleep deprived.Too big to bail – I like that. Soon, after all the bad debts we have taken on, that size may be closer to the corner bakery.

Anonymous • September 16th, 2008 at 1:24 pm

the fed is just trying to create liquidity in the repo markets. Repos are widely used for investing surplus funds short term, or for borrowing short term against collateral. Dealers in securities use repos to manage their liquidity, finance their inventories, and speculate in various ways. The Fed uses repos to manage the aggregate reserves of the banking system. The libor rate is so high no banks are willing to lend to each other. Thus, the fed is trying to brake this patteren.

Guest • September 16th, 2008 at 1:24 pm

This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.

With all respect to Professor Roubini but based on what data is this second to the Great Depression?

Guest • September 16th, 2008 at 1:32 pm

Fed stays on hold-stocks very volitile!! They are going to try their hardest to close this green today-stocks are surging North as I write!!!

Free Tibet • September 16th, 2008 at 1:36 pm

First: Perception, confidence, truthConfidence comes after transparency. We’ll have to wait for that.Second: RegulationThat should be first. And it has to be out in the open (transparent). See LB posts. He’s out front on this.Third: debt reliefI don’t know if yours is a cockamamie idea or not. What really needs to happen is that FRE & FNM go away. No more subsidies to unproductive investments.Fourth: Lo siento guapa. Cuba just isn’t important. Though there are lots of things I could say about trade in general. There will be “regime change” there whether we like it or not. The recent globalization trend is dead. Don’t get me started.

Guest • September 16th, 2008 at 1:42 pm

How the hell do you commit money to this market??? You can’t even get an order placed because the market moves 100 points in 2 seconds!!!

Guest • September 16th, 2008 at 1:43 pm

RUMORS FLYING NOW ON BLOOMBERG-AIG GETTING RESCUE PACKAGE FROM FED. RUMOR TO PROP THE PRICE?? SHARES STILL DOWN 27%

Guest • September 16th, 2008 at 1:49 pm

AIG should fail. It is a free market, so they say. WHy should the tax payer be on the hook for more of this crap. This correction is long overdue and only more painful since it has been prolonged for much to long. Maybe the ought to put the board of directors in jail. Or perhaps use China’s method when the corporate leaders do wrong. I think it might be a firing squad or a gallows.

Guest • September 16th, 2008 at 1:49 pm

The Fed needs to bail out all major investment banks, regional banks, small banks, large insurance corporations, businesses, and consumers…in essence, the entire country!

Free Tibet • September 16th, 2008 at 1:52 pm

HELLO???The only thing keeping the $ alive is IB sales of foreign assets to make their $ denominated margin calls.

Guest • September 16th, 2008 at 1:53 pm

I agree that there is no clear path to improving the US economy, especially as so much has shifted to services. With the collapse of finance, the major profit making sector, certainly in the productive sphere, is the US military, which absorbs about half of the state’s budget. Is the only available recourse selling more weapons or fighting more wars to “rebuild” the economy?Additionally, BWII is coming to an end, perhaps as soon as next year. Inflation has become a serious problem worldwide and no one will be happy with the outcome of US financial decline. Countries will have to decouple from the US.The collapse of BWII will end the overwhelming inflows of capital to the US, import a flood of inflation, and perhaps undermine military funding, which would be a further blow to exports and massive state subsidies for domestic military production and labor.But apart from geopolitical implications, the end of BWII will end the free lunch of exchanging capital and commodities for bonds. Without this substantial subsidy from worldwide wealth and without sufficient export production, I don’t see how there will be a “recovery” in 18 months. In fact, when BWII falls apart, the other side of this US financial collapse would seem to be a serious depression.Since it is clear that the collapse is happening, it appears quite important for the regular contributors to this blog, who should not be shocked about recent events, to work out the possible consequences of the end of BWII to the economic condition of the US after the “systemic meltdown” Roubini postulates.Whitey

Mickey7 • September 16th, 2008 at 1:53 pm

I am not an economic wiz and consider myself to be in way over my head in economic policy discussions (but, hey, at least I know what I don’t know which is more than can be said for some current Vice Presidential nominees), but I too am troubled by the fact that the American government has no money to be bailing out anybody. Where is the bailout money coming from (in the short term–I realize it will come out of all of pockets in the long term)? Are we borrowing to keep the financial system afloat? Isn’t that a very, very bad idea that will ultimately just compound the problem? I get that if we don’t save these greedy institutions from their own bad behavior, it will be very painful for all of us, but it’s going to hurt either way. I’ve watched my friends and family get sucked into this ridiculous mortgage mess over the past few years. What on Earth would make someone believe they can afford a $350,000 mortgage on $30,000 a year? What possible rationale could a lender use to make such a loan? Where was common sense in all of this? I was roundly criticized for not taking advantage of the easy mortgage money that was available over the past five years, but frankly my estimation of what I could afford did not match at all with the sums I was being “qualified” for and I felt strongly the the housing market was seriously overpriced. Why would I pay too much for something just because I could? Why would a mortgage company? It was runaway crazy and it had to come crashing down at some point.I’ve concluded that, besides being a woefully financially ignorant society, we are also an incredibly immature society who thinks we are entitled to everything regardless of our ability to pay. It’s time to grow up now and maybe having to endure a little pain will be the maturing factor we desperately need.

Average Jane • September 16th, 2008 at 1:55 pm

You are one hundred percent right. There are a few of us out there lamenting just this and we are outraged at our helplessness. We are being dismissed out of hand. We The People are, after all, Fungible.

Guest • September 16th, 2008 at 2:11 pm

Bank, Thrift & Broker/DealerSNL EXTRAPAULSON: AIG NOT RECEIVING BRIDGE LOAN FROM GOVERNMENT U.S. Department of the Treasury Secretary Henry Paulson said in a Sept. 15 press conference that the government is not providing insurance giant AIG with a bridge loan.Referenced Tickers: AIG9/15/2008 2:22 PM ETYeah, the Treasury may not give them the loan cause the Fed will!

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 2:13 pm

Do not look at the market daily gyrations, that’s mostly hedge fund exchanging money to one another.

Anonymous • September 16th, 2008 at 2:15 pm

Yes for some time now I think Roubini has been quite the opposite of Dr. Doom. He has been persistently optimistic, refusing to modify earlier forecasts when events have surpassed them.In some ways this is worse than GD, there was no day there where two major financial institutions went out business. But the effect on Main Street has not been as severe and let’s hope that continues.

Guest • September 16th, 2008 at 2:20 pm

‘In our view, this [Fed policy] statement is either very brave or very reckless.’— Ian Shepherdson, High Frequency Economics

aleister perdurabo • September 16th, 2008 at 2:22 pm

AIG, the global insurance conglomerate, used offshore jurisdictions such as Barbados, Bermuda and Luxembourg to help the company move debt off its books, launder profits to evade U.S. taxes and hide insider connections in supposedly “arms-length” deals. Goldman Sachs helped it set up Coral Re, an offshore Barbados reinsurance company, which AIG secretly owned, and when state insurance departments found out about it, AIG stonewalled and bullied the agencies into declining to take action against the company. AIG’s luck changed when New York Attorney General Eliot Spitzer discovered some similar current cases.http://www.corpwatch.org/article.php?id=12039

Guest • September 16th, 2008 at 2:26 pm

Bear Stearns – too big to failFannie Mae/Freddie Mac – too big to failAIG – too big to fail…WaMu – too big to failWachovia – too big to fail……

Anonymous • September 16th, 2008 at 2:30 pm

It’s really funny seeing the business anchors reluctantly bring in Prof. Roubini at the end of their shows as if he was some kind of leper. Wake up silly people!But Prof. Roubini needs to get a copy editor, there are too many typos. Here are two that really irked me:-running out of “bullets” instead of “bullet”-your missing a parenthesis in the paragraph that starts with “First, the Fed is accepting even more toxic collateral”.

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 2:32 pm

Dodd says ‘disappointed’ in SEC’s Cox over short-sellingDodd says he hasn’t seen SEC action on short-sellingFirms lose billions in reckless bets, and who do you blame? Those who are helping the market, at their own risk, to discover the real worth of these stock (zero, that is).Silly.

Guest • September 16th, 2008 at 2:40 pm

3:32 p.m.Dodd calls for more homeowner aid, possible second stimulusWhy don’t you make contributions from the hundreds of millions of $’s you have gained from your political endovours over the years!

randy • September 16th, 2008 at 2:42 pm

I’m a small business man. Maybe I should run my company into the ground and then go to my bank for a bailout!I cannot believe the “whiff” of a rumor the FED might help AIG afterall causes the DOW to scream up 150 points in 5 minutes!Man what manipulation. NR was right………we now have direct FED intervention in our “free” markets!!

Guest • September 16th, 2008 at 2:42 pm

Russia halts trading after 17% share price fallBy Catherine Belton and Charles Clover in Moscow and Rachel Morarjee in LondonPublished: September 16 2008 15:07 | Last updated: September 16 2008 19:11Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.http://tinyurl.com/5wj7zx

tutterfrut • September 16th, 2008 at 2:43 pm

JPMorgan Gave Lehman $138 Billion After BankruptcyBy Tiffany Kary and Chris ScintaSept. 16 (Bloomberg) — Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.One advance of $87 billion was made on Sept. 15 after the pre-dawn filing, and another of $51 billion was made the following day, according to a bankruptcy court documents posted today. Both were made to settle securities transactions with customers of Lehman and its clearance parties, the filings said.The advances were necessary “to avoid a disruption of the financial markets,” Lehman said in the filing.The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn’t say if the second amount was repaid. Both advances were “guaranteed by Lehman” through collateral of the firm’s holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.Lehman disclosed the advances in a motion seeking court permission to give JPMorgan’s claims special status in its attempts to recover any advances. Lehman said that if that status isn’t granted, JPMorgan may not be able to make future advances needed to clear and settle trades.http://www.bloomberg.com/apps/news?pid=20601087&sid=aX7mhYCHmVf8&refer=homeSmelly constructions, no?

Guest • September 16th, 2008 at 2:45 pm

J. P. Morgan bought Bear Stearns with a taxpayer bailout. Ditto the Bank of America/ Merrill arrangement. Bank of America can raise capital for the transaction because it can produce billions in collateral, namely all those FDIC-insured savings deposits and checking accounts in their 5700 retail branches. All bulletproof collateral.Conveniently, Paulson dynamited the 23A firewall that limited to 10% the “passthrough” financing to banks’ investment affiliates, and opened the way for them to take their stocks to the discount window as collateral for loans. Maybe even their own stocks. As London Banker put it: “There is now no firewall between Treasury credit and speculative lending to investment bank affiliates by FDIC-insured banks.”As Denninger on market-ticker said: ”Note carefully folks – this effectively makes The Fed LONG (that is, a “buyer”) of STOCKS… What’s even better is that they don’t eat their own losses if there are any – they’re yours!”If Bank of America eventually staggers to the bankruptcy window like a drunken sailor off a buying binge on depositors’ money, all those insured depositors would get their FDIC guarantee. And where does that money come from?From you and me. Bailout!!B of A’s clients include 98% of the Fortune 500 companies in the US and 79% of the Global Fortune 500.

Guest • September 16th, 2008 at 2:47 pm

it is weird why the media is focusing on Lehman and Bear Stearns when the worst situations are with Morgan Stanley and Goldman Sachs…Level 3 Assets Divided by Equity (as of a few months ago):Morgan Stanley 251%Goldman Sachs 185%Lehman Brothers 159%Bear Stearns 154%Citigroup 105%Merrill Lynch 38%

Guest • September 16th, 2008 at 3:05 pm

LOL On the NYSE today, over 9.5B shares traded today! Higher volume than yesterdays sell-off volume, Looks bullish right? LOLOLOL, not really! There were 22 new highs and 1163 new lows and decliners led advancers 58% to 40%. Hardly bullish internals but only the “big recovery day” will make the headlines. “DOWN SHEEPLE, DOWN”!!

PeterJB • September 16th, 2008 at 3:07 pm

Speaking of the FedRes expected cut:There is / was NO need of a rate cut at all: the “Moral Hazard’ is now a totality; any and all Laws will be and have been broken to keep the status quo and this mentality will become ubiquitous and pervasive across the whole spectrum of the socio-econommic phenomena.You can now see all Government Agencies as well as the political fronts adopting this “new” strategy AND, as well all threatened corporations are eagerly following the lead of the FedRes, the SEC, etc. Manipulation of accounts and accounting by convenience is “expected” by the Regulators and the Authorities. There is now here else to go except to extend the lawlessness to a fait accompli. We have been here before.Expect this to be extended; the USA has officially become a “banana state”. No republic exists.This is not economics it is pure chicanery.Ho hum

Guest • September 16th, 2008 at 3:10 pm

Funny AIG closed the day dwon 21.22% and yet stocks finished up anywhere from 1%-2% today and banks stock index was up almost 8%!!!

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 3:14 pm

But, they have obligations that need to be financed tomorrow.No cash? You’re dead. (I’m not saying they will go boom, just they have no way to wait until Friday without the $70bn in cash tomorrow)

Guest • September 16th, 2008 at 3:15 pm

Roubini must read and observe at light speed, his brain a sponge. As an economist, his assessments are stingingly accurate, written at racing speed. I awoke in the night and thought, will Roubini address 23A? Here it is!Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit. Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.

Guest • September 16th, 2008 at 3:15 pm

From CNBC:”With a private sector solution looking highly unlikely, the government is once again considering providing American International Group with some sort of financial support a day after such a potential lifeline was denied, according to investment banking sources involved in the meeting.The New York Federal Reserve is currently meeting to discuss the fate of the troubled insurance giant, these people say.The government’s decision to reconsider providing some sort of the support to AIG comes under pressure from New York Governor David Paterson and policyholders AIG, who have asked the Fed to reconsider.The outcome of these talks remains highly uncertain.As these talks continue, sources close to the situation said a private sector solution to AIG’s situation is definitively dead.”

Guest • September 16th, 2008 at 3:20 pm

and as to “service sector economy”, it is based on the “idea” that when an economy matures and everyone already has everything, that less things need to be manufactured and more things need to be serviced.Even with this definition the problem is that folks in the U.S. are buying less and less of stuff nowadays.

Guest • September 16th, 2008 at 3:21 pm

I guess like teh govt now does, the street is rewarding poor performance and failure!4:14 p.m.[MS] Morgan Stanley late-shares up 12% after Q3 figures released

Guest • September 16th, 2008 at 3:23 pm

From BeSpoke:A few minutes ago, CNBC’s Charlie Gasparino reported that in discussions at the NY Fed regarding the fate of AIG, the prospect of the government providing some sort of assistance was on the table. On that news, the S&P 500 staged a 1.8% rally in a matter of minutes. In terms of market cap, the S&P 500 added $192 billion. Minutes later, that $192 billion evaporated when another CNBC reporter said that the government’s previously stated position regarding AIG (of providing no assistance) had not changed. When hundreds of billions of dollars are created and erased in a matter of minutes like this, saying that the market is in a state of anxiety is quite an understatement.

furiouscalves • September 16th, 2008 at 3:28 pm

i remember way back last august when somebody posted such numbers and i said to myself “i like david lynch much better than i like morgan freeman”. i made a point to remember that – lucky i didnt trade on it.

Guest • September 16th, 2008 at 3:29 pm

Which political party running in these national elections, when both are stressing support of the troops and national defense, has informed us that U.S. casualties in the current war are 70,000 and the AWOL list amounts to 80,000? Answer: neither.

TIredOfWankers • September 16th, 2008 at 3:33 pm

“your” [sic] a freaking genius, at least sign your name if you are going to pick on someones work.

Guest • September 16th, 2008 at 3:35 pm

Funny how the US and Russia have switched roles. Russian stocks halted down 17% on the day and even though the US is in the midst of its worst credit crisis EVER, the worst one day sell-off we are allowed to have is 4%! Russia needs a PPT and a new socialist regime and then everything will be ok…

Miss America • September 16th, 2008 at 3:36 pm

@ outerbeltwayFirst, just let me say that you were added a while ago to my “must read” list of bloggers.2nd, let me also say… that I am happily employed at a “non western” Fin Inst.3rd, Rumors of the financial system’s death have been greatly exaggerated. Oh no doubt the investment side needs an overhaul… but I believe you may be pigeon holing the industry? Have you taken into consideration:Custody, (mutual fund, pension, institutional, private, etc…) along with Private banking, ADR processing, GDR Processing, Corporate Trust, Security Lending, Insurance, Money Transfer, FX, Trading (fixed, equity, CD’s TD’s Repo’s, etc…) loans (Corporate, private, Home/auto from: bank inception –thru- 2002 and 2007 –thru- forward) Underwriting, personal banking, safekeeping, credit lines, M&A, etc…Not all of finance lost its way. (just the greedy side)@ Alles-solothankfully, my wife2k is a BK lawyer.@ HloweLast week you asked where to go? My reply was dollars. I said they would “horde them”. It looks to be the case.@ NourielSurely your schedule must allow for a night out???Miss Americap.s. UGH!!!! I just had an idiot friend ask me: “did you hear about Lehman?” Luckily for him, there are laws in place that do not allow me to slap the sh!t out of him!!!…I sometimes fear for us!

Guest • September 16th, 2008 at 3:41 pm

It has been mentioned here before that Richard S. Fuld of Lehman Brothers is on the Board of Directors of the Federal Reserve Bank of New York. The Fed’s reonsideration to financially support AIG is a reminder of how centralized, incestuous and tyrannical America’s financial system has become. It is the New York Fed that literally gives the first and last word on who gets what and when in financial America. In other words, when Paulson and Bernanke pick their winners and losers, it’s here where the decisions are made–The directors represent Lehman, JP Morgan, GE, Goldman Sachs, et cetera.Board chair is Stephen Friedman, retired chairman of The Goldman Sachs Group who currently serves as chairman of Stone Point Capital, LLC.

Alessandro - http://castellidicarte.blogspot.com/ • September 16th, 2008 at 3:45 pm

Your call that the next leg down could be triggered by a events in a saver nation didn’t materialize too well (apparently the US has plenty of local next-leg-down fodder by itself), but sure the BRIC are bleeding badly.

Russia halts trading after 17% share price fallRussian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.

http://www.ft.com/cms/s/0/6ff9306c-83f1-11dd-bf00-000077b07658.html?nclick_check=1“did you hear about Lehman?”LOL! did your sleep suffer from LEH BK?

Guest • September 16th, 2008 at 3:48 pm

Another sleezy wall street con job! The late rumor sucked in shorts and sheeple all the while the smart “informed” money eagerly sold to them knowing full-well, what was about to happen to AIG and now, after-hours, shares plummet once more! Poor sheeple! Miss America, please tell me your friend didn’t buy AIG today…

Ashu • September 16th, 2008 at 3:50 pm

Ample amount of news coming in MS, AIG, LEH………..i’m excited……….hope all u guys made a lot of money in MER & LEH(as discussed yesterday).Now the market will give us some clue by 2mrw morning (before trading hours), so wait and watch. MS looks good till 2mrw noon.Cheers!

MA • September 16th, 2008 at 3:53 pm

no lost sleep….and who said that “next leg down” has been triggered yet???What I will gladly admit to being wrong about is the depth by which oil has fallen. My call was for a rapid decent to somewhere between 96-110. It looks like I may have to revise that number down?!?!?! …but that’s one I’m happy to be wrong on.Miss America

Guest • September 16th, 2008 at 4:00 pm

U.S. casualties in the current war are 70,000 and the AWOL list amounts to 80,000

that’s interesting, where did you get that data from?

Guest • September 16th, 2008 at 4:03 pm

From “In Government We Trust?” by Ron Paul[I]f sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver? Why are you still being paid in fiat dollars, and why can’t you pay for gas in gold? The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions. In light of this, Gresham’s Law takes effect. Gresham’s Law states that bad money drives out good money. Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value. Any good money you have, you will hoard. Eventually, real money is driven out of circulation and under people’s mattresses, so to speak. In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.Related to legal tender laws, contracts in gold are not enforced. Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts. But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange. One is also expected to pay sales tax on the purchase of gold. This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters! The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!Legal tender laws should be repealed at the Federal level. Congress has the Constitutional duty to protect the integrity of our money. However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter. Free people should be free to associate and do business in ways that benefit them. Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

Anonymous • September 16th, 2008 at 4:09 pm

Who are these stupid people who keep buying into these bear market rallies. I can only think they are the media tarts who constantly predict we have hit bottom. Even the most conservative estimates say losses of 1 trillion and we are only just over half way there. I would have thought it is pretty simple to suggest what to do. Put your cash into a swiss franc bank account and hibernate until we hit the trillion mark, then when house prices start to rise pile in to the companies that actually produce something rather than the paper shufflers. Pardon me whilst I go back to sleep

tutterfrut • September 16th, 2008 at 4:10 pm

“4:52 p.m.Bush meets with top financial advisors”Mmmmh, let me guess…he needs a HELOC on the White House?

Guest • September 16th, 2008 at 4:11 pm

What do the following two have in common within the psyche of what seems to the typical American:

1. Israel, the special status of2. Pentagon military spending

Answer: you would never hear any discussion of changes to the status quo.Attempt to make a major change to #1 and you will be branded an anti-Semite. Weird as U.S. is like a slave to “Semitims” (in other words: you the U.S. politician X will support us, Israel, or you are an anti-Semite).Attempt to make a major change to #2 and you will be branded as unpatriotic.I know this is not a political discussion but could some of you analysts tell me what underlying system is used to get both of these such a persistent “holy cow” status? I would try to sell the secret to the Georgian government to make some extra dough.

Guest • September 16th, 2008 at 4:15 pm

This sounds logical. As does MA comment from previous thread. “From the US side, we sell foreign assets, to buy US assets, and USD at distressed levels for the purpose of recap. That in turn, drives those foreign markets down faster. Once “stable”, the US side can repurchase fgn at a deeper discount.”With our growing dept and foreign buyers backing away from buying Treasuries, How much more do we have available to sell? Without a new war, can the dollar remain up for even 6 months?hlowe

EEngineer • September 16th, 2008 at 4:20 pm

Nouriel, excellent post and comments as usual. Have you thought about posting free standing MP3s of your interviews? That would make offline listening possible. I doubt I’m the only one with more to do during my computer seat time than time to do it. Drive time is a complete waste on the other hand.

Anonymous • September 16th, 2008 at 4:49 pm

That’s a pretty negative way of looking at things. I prefer the positive approach–at least we’ll die young because we can’t get health care and won’t fully realize what a load of trouble we’re in economically and historically because we can’t afford higher education. If ignorance is bliss, we’re the happiest people on the planet! I’m sure the founding fathers would be so proud.

OuterBeltway • September 16th, 2008 at 4:52 pm

MA: I take your point. Yes, there’s more to finance than derivatives and mis-allocated investment, and I was painting with a broad, black brush. More circumspect next time. OB.Dr. Roubini, I hope you’ll join MA for a drink. You certainly deserve a round of toasts in your honor, and you might get in a few laughs, too.

ComicPro • September 16th, 2008 at 4:59 pm

In the utopian world of common sense your valid yet radical solutions would hold muster. However, the blame game and it’s your fault and not mine mentality will not bring clarity and meaningful change to this madness. There will continue to be the old way of thinking that involves a bailout. I commend you Miss America for your thought out process. Maybe there can be a median ground of sorts that include some of your ideas. Unfortunately that would make the powers that be come here and get real knowledge and insight and I can assure you that is not going to happen! All I can say is I am a true fan of Nouriel and feel like a breath of 100% oxygen has been blown my way. CNBC sure as hell did not let him talk. I noticed the “cheerleaders” are very careful how they spout the party drivel when he is around as he does not argue or talk over people but just waits to drop the knowledge. Nouriel is the “Oracle”!

Anonymous • September 16th, 2008 at 5:09 pm

Erm. I’m not picking on his work. I sent it on to some friends, after changing the typos so it didn’t look like some quickly hacked together blog post. It’s linked off Bloomberg and since a lot of people are going to be reading it I thought…but nevermind, you guys are too sensitive.

Guest • September 16th, 2008 at 5:10 pm

“How the Masters of the Universe ran amok and cost us the earth “By Bill Jamieson in The Scotsman – 16 September 2008:SLAM. Slam. Slam. Slam. Like a scene from a gathering of Mafia dons, the doors of 30 black Lincolns slammed shut as their besuited occupants stepped out into a Manhattan downpour – and into a global financial storm.That storm broke yesterday, with stock markets tumbling around the world. In London, the FTSE 100 plunged almost 4 per cent to 5204.2. Scotland’s banking giants were among the biggest victims. HBOS slumped 17.5 per cent; Royal Bank of Scotland lost 12.2 per cent. In the US, the Dow Jones industrial average suffered its biggest fall since 9/11.The collapse effectively began at 6pm last Friday. The place: the offices of the New York Federal Reserve. The occasion: an emergency meeting of the most powerful figures in American banking and finance aimed at staving off a massive bank collapse.Those who stepped from their limousines to be present included Richard Fuld, the chairman and chief executive of Lehman Brothers; John Mack, the head of Morgan Stanley; Jamie Dimon, of JP Morgan Chase; Vikram Pandit, of Citigroup; Lloyd Blankfein, of Goldman Sachs; Bob Diamond, the head of Barclays Capital; and senior representatives from Mellon Bank and Royal Bank of Scotland.”We are the biggest overseas bank in America”, explained an RBS spokeswoman. “There was an ‘all points bulletin’ from the Fed and they called us in”.Awaiting them along one side of the boardroom table was the United States Federal Reserve chairman, Ben Bernanke – nicknamed Helicopter Ben for having slashed interest rates and showered Wall Street with money earlier this year to avoid the very disaster that was about to unfold.Flanking him was Hank Paulson, the US treasury secretary, and Tom Geithner, chairman of the New York Fed. It was Geithner who opened the meeting – and presented Wall Street’s finest with the fright of their lives.Either there was a Wall Street rescue for Lehman, or the investment bank would have to face the consequences. An eerie silence ensued.An analyst at RBS Greenwich in New York summed up the most dramatic meeting of America’s top bankers thus: “I thought last weekend was crazy, but this one was even more chaotic.”Everyone expected to hear by early Sunday evening that the Fed/Treasury had managed to arrange a shotgun wedding for Lehman with someone – Bank of America, Barclays, private equity. A funny thing happened on the way to a deal.”The New York Fed called in all of the head honchos and said that they had a great deal for them. One lucky participant would get to buy Lehman’s business and their ‘good’ assets for a bargain price…The full article contains 2833 words and appears in The Scotsman newspaper ~http://thescotsman.scotsman.com/latestnews/-How-the-Masters-of.4494032.jp

PhilT • September 16th, 2008 at 5:12 pm

…Not all of finance lost its way. (just the greedy side)…

Pleased to make your acquaintance Miss America.OK … there is a greedy side and (my addition to your comment) a wholesome side to the financial industry.Is it too simplistic to then say that greedy=shadow financial system AND wholesome=real financial system (referring to your description above as to the components that are (still) worthwhile/not greedy )?Given the recent/current environment of mergers of broker/dealers with commercial banks containing large deposit bases, and the lack of transparency/(appropriate)regulation, what is the likelihood that the greedy side will contaminate the wholesome side?Best…

ComicPro • September 16th, 2008 at 5:17 pm

Nouriel great post and keep dropping the knowledge on the knuckle draggers on the Street. I love it when you are on TV and the “technical” clowns start their drivel. I can see the smoke coming out of your ears yet your composure and ability not to butt in is noteworthy. My 16 year old daughter actually reads your site now as well (economics is her favoite subject) and I swear you are becoming quite the chick magnet:). You migt want to get a haircut and pull your tie up though!! Again thanks for being that breath of realism in a sham world.The ComicPro

ComicPro • September 16th, 2008 at 5:20 pm

Come on man the guy is giving you the best financial and economic data in the world (Marc faber close second) and you are complaining about typos? No cult type here my friend as I don’t drink Kool-Aid!

OuterBeltway • September 16th, 2008 at 5:21 pm

Guest: The special status of Israel is rooted in the fact that the U.S. is still solidly Christian. Remember the Crusades? Not much has changed, except that the alliance between the Zionists and the Christians was cemented at about the time of George W. Bush’s first campaign.Regarding the military, President Eisenhower said “beware the military-industrial complex”. The military contractors have evenly spread themselves throughout the country, in every congressional district. They are master congress-managers; they have fully penetrated both parties, and have successfully wrapped themselves in the flag.Neither of these forces will be giving up their position on the corpus of the American body politic until the death rattle comes.

Anonymous • September 16th, 2008 at 5:26 pm

Jim Cramer on CNBC is going off BIGTIME right now on Chris Cox and the FCC for allowing the lax regulation contributing to this mess…

Guest • September 16th, 2008 at 6:04 pm

Totally good idea!!!If possible, could you please put them in mp3 from including all the archive. We are so interested in listening what you said two years ago that came real!!!

Guest • September 16th, 2008 at 6:15 pm

No taxation without representation! That’s what it will come to down the line for us or our children. You can’t get blood from a turnip.We are not represented by people owned by lobbyists and investment banks.

4822 • September 16th, 2008 at 6:39 pm

U.N. agency eyes curbs on Internet anonymityhttp://www.hitsearchlimited.com/news/9991390/5th September 2008 4:37 pmZDNet having published a report stating that a group made up of, amongst others, the UN, the US government and the Chinese government, is drafting a series of technical standards to define methods of tracing the source of internet postings and curbing the ability of web users to remain anonymous.*** Chinese government *** – no thanks!

Guest • September 16th, 2008 at 6:44 pm

How does this reconcile?ny times:In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

Guest • September 16th, 2008 at 6:50 pm

how bout a European nation doing that,how bout Russia??The war has started..http://www.ft.com/cms/s/0/6ff9306c-83f1-11dd-bf00-000077b07658.htmlRussia halts trading after 17% share price fallBy Catherine Belton and Charles Clover in Moscow and Rachel Morarjee in LondonPublished: September 16 2008 15:07 | Last updated: September 16 2008 19:11Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell.The heads of the Russian central bank, the finance ministry and the financial market regulator met on Tuesday night for an emergency discussion on ways to halt the crisis.Earlier, trading had been suspended on both the Micex and RTS stock exchanges as investors ignored assurances by Russian officials and a cycle of distrust set in amid liquidity fears.Margin calls forced domestic traders to liquidate positions and brokers pulled credit lines. At least one Moscow bank failed to meet payments.The rouble-denominated Micex Index closed 17.75 per cent down, the sharpest one-day drop since the August 1998 financial crisis, while the dollar-denominated RTS index closed down 11.47 per cent, its lowest lvel since January 2006.Interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.Chris Weafer, chief strategist at Uralsib investment bank: “We’re in completely uncharted territory where the prevailing emotion is of fear and numbnes. No one knows where this could stop”.

Gloomy • September 16th, 2008 at 7:25 pm

CNBC was reporting that the Fed’s model of a Lehman bankruptcy (stress test) underestimated its effects by a wide margin. They weren’t making that mistake twice. It was inevitable that AIG would be nationalized. Lehman was the last large company bankruptcy you will see for a long long time. As I have said numerous times, CDS counterparty risk means bankruptcy of any member of the S&P 500 cannot be tolerated. Nationalization of the banking system, auto industries, airlines and others will now proceed in an unincumbered fashion. Say adios to the dollar (after the “flight to quality” reaction recedes). Better own some gold.

Guest • September 16th, 2008 at 7:39 pm

So AIG bailout is it certain??it’s still in RUMOURS mode right??so how bout morgan stanley and goldman ??that is crazy.. nations will shun US debts.. unlessthat is what the gubment intends to do, the debt wontbe repaid anyway…..

2cents • September 16th, 2008 at 7:51 pm

Looking on the bright side, with all the taxpayer money, depositor funds and securities being ‘loaned” to the financial corporations, we should soon begin to gain public access to the books and representation on the board(s). If AIG needs our money then give us some board seats and let everyone see the books. I have to know and understand who I’m lending money to!Another bright side, is the fact that we are in fact very quickly gaining on the National debt in terms of comparable size ( 1-3 T vs 10T). The 10T took decades to ferment, the new loans have managed to do 10- 30% in mere months. We no longer have a Medicare/Medicaid, Social Security and pension debacle for politicians to fret over. Now we have a bona fide interloper and true showstopper. This will all morph into a grand financial/social restructuring done in true save the planet superhero form. A great political opportunity beckons.Who will be the superheroes? They will not come out of the blue nor in the dark of night. No, these supers are idly cooling their jets as we watch this all unfold.

K in TX • September 16th, 2008 at 7:54 pm

As of 12 minutes ago:September 17, 2008Fed Readies A.I.G. Loan of $85 Billion for an 80% StakeBy MICHAEL J. de la MERCED and ERIC DASHIn an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that could be exchanged for an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.A person briefed on the matter said the agreement does not require shareholder approval.If the Fed takes a controlling stake, it is likely that it would want to replace A.I.G.’s board as well as its chief executive and chairman, Robert B. Willumstad.The Fed’s action came after Treasury Secretary Henry M. Paulson and Ben S. Bernanke, president of the Federal Reserve, went to Capitol Hill on Tuesday night to meet with House and Senate leaders. Mr. Paulson called the Senate majority leader, Harry Reid, Democrat of Nevada, about 5 p.m. and asked for a meeting in the Senate leader’s office, which began about 6:30 p.m.The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for A.I.G. to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium could not complete the deal in time.Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.Attending the meeting on the Capitol Hill were Democratic Senate leaders that included Charles E. Schumer of New York, Richard J. Durbin of Illinois, Christopher J. Dodd of Connecticut and Kent Conrad of North Dakota A contingent of Republicans was led by Mitch McConnell of Kentucky, the minority leader, and included Richard C. Shelby of Alabama, Jon Kyl of Arizona and Judd Gregg of New Hampshire. House leaders included John Boehner of Ohio, the Republican leader; Spencer Bachus, Republican of Alabama; and Barney Frank, Democrat of Massachusetts. Members of the leaders’ staffs were asked to leave the meeting shortly after it began.

Jason B • September 16th, 2008 at 7:55 pm

They can’t trash the dollar, the treasury still has to sell t bills tofund 2 wars with tax cutsback fannie and freddie bondsbuy fanne and freddie bondsfund the FDICfund the gubmnt

Guest • September 16th, 2008 at 8:02 pm

Kin TXbetter read the news againIn an extraordinary turn, the “FEDERAL RESERVE WAS CLOSE” to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.it is not certain yet..

4822 • September 16th, 2008 at 8:15 pm

http://www.federalreserve.gov/newsevents/press/other/20080916a.htmPress ReleaseRelease Date: September 16, 2008For release at 9:00 p.m. EDTThe Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

AnnS • September 16th, 2008 at 8:22 pm

Well they did it. They have basically nationalized AIG with this stock nonsense and heaven knows where the costs will end. The amount needed started at $20 billion, jumped to $40 billion, closse to doubled to $70-75 billion and aare now claimed to be $85 billion.Now we known Lehman wasn’t big enough to be ‘too big to fail” but AIG is. Just need to figure out the mid-point now.It will be years before the AIG mess is sorted out – and those of us out Main St get stuck with the bill in the end while the CEO and upper level execs swan around in their millions of dollars apartments and second homes!One of my degrees is in the political, social and economic history of the 1930s. The next time I hear a ‘free market’ type call FDR a socialist, I will probably have to metaphorically slap them into next week and then remind them that:(1) The US Gov’t basically took over a private insurance company(2) That the company is the 18th largest in the world!(3) That is was done by a Republican administration which has been bleating non-stop for years about(a) the glories of the free market system; and(b) government intervention in anything is 8th Deadly Sin.(4) That FDR or no other Democrat HAS ever done what the Bushies have done by intervening and taking over a private corporation like this.(5) This ‘nationalization’ surpasses just about any nationalization done by any government at anytime given the sheer size of AIG.After the takeover of the GSE’s, Martin Wolf at the Financial Times(UK for those who don’t know) wrote “I have little objection to the bail-outs. For reasons laid out in my article earlier this week (“No alternative to nationalisation”), the US government could not let institutions with combined liabilities equal to 40 per cent of US gross domestic product collapse. It can, however, spare us homilies on the sacred role of free financial markets for a long while.”Does this mean that for at least several decades we shall be spared the Republican lectures about the glories of the ‘free markets’, the virtues of deregulation and how the ‘markets will take care’ of just about everything?

AfA • September 16th, 2008 at 8:39 pm

The day free markets were exhumed from their sarcophagi and vandalized then stabbed … AGAINSo, now that I own a mortgage lender and an insurer, do I still have to pay my mortgage (if I had one) and make insurance contributions?LET’S BURN SOME TRES … er … NOTES … CDS

Guest • September 16th, 2008 at 8:46 pm

owwwh im loving it,come on Fed, there’s more to absorbed..i wanna see the mkt rally to 15,000 – 20,000 before the elections!!!yesterday was only +ve100++ upwards,make us see a DOW 1,000 points rally, it will be the supreme medicine, please purge us from our stupid anxieties and fear,and bring the needed light to our worthless lifefor in you we put our trust and soul

Ashu • September 16th, 2008 at 8:47 pm

Why market shorted AIG, Morgan Stanley:Let me explain you in an easy way.Credit default Swap(CDS) is an instrument by which a party looks for protection against a credit event. This protection is sold by the counter-party going long on the credit event risk. The buyer pays a periodic fee to the protection seller until the contract expires or a credit event occurs.Now, when a credit event occurs, the protection seller has to pay out the initial amount. Its just like insurance (but with a greater risk).So now, AIG was the counter party to many such companies (like Lehman) which confronted a credit risk event, thus asking AIG to pay back. This made a significant dent to its balance sheet and hence collapsed 90%.Basically, the investment banks (starved of margins) acted as high risk high return unregulated insurance companies. When one firm unwinds, the domino effect will sure prevail taking down the other firms, thus creating a financial tsunami.FED provided AIG 85 B$ to stop this Tsunami.Please correct me if I’m wrong.

ComicPro • September 16th, 2008 at 8:49 pm

Great post and your anger is well felt by all who know the rich are getting bailed out by the FED. Lehman was the exception but somewhere in closed rooms there are conversations that are being whispered to get them money as well! Every FED nationalization the American taxpayer should get shares in the company! At $85 Billion and with roughly 400 million people that accounts to how many shares?

kilgores • September 16th, 2008 at 8:52 pm

Interesting question. Could be to give the Fed control where a super-majority vote is required, I suppose. Often times, for example, Articles of incorporation will mandate that certain actions, such as selling substantially all corporate assets, must be preceded by a vote of more than a simple majority vote of the shareholders, say, 2/3 or 3/4 or 80% of the ownership interests.On the other hand, it could be something else entirely, perhaps even coincidence.SWK

Ashu Shukla • September 16th, 2008 at 8:55 pm

The market needs an immediate 200 B$ to stop this financial tsunami.80 B$ from AIG. Another 75 billion from ECB. They only need another 45 billion to stop the tsunami which will not be difficult.Thats why I’m +ve on the market. In fact, the market will sustain for another 4-5 months with this kind of money (provided the new home sales stays as it is).Cheers!

Guest • September 16th, 2008 at 8:56 pm

might as well nationalize all businesses now in the US across the country – maybe this way all the citizens will be federal government employees and thereby be entitled to national health service

ptm • September 16th, 2008 at 9:08 pm

Investment banks acted as high risk high return unregulated insurance companies

This is all part of Phil Gramm’s Commodity Futures Modernization Act and is the exact intent of Credit Default Swaps (CDSs). However, since the insurance industry has been the source of a lot of fraud in the past, it is highly regulated from state to state. Therefore, the language of the CDSs were carefully crafted to avoid any “insurance jargon” and disguised the insurance aspect of the instrument. In this way they avoided any local state insurance industry regulation. Now you tell me this was not fraud with a capital F from the get go?Since home values had never declined in the history of the country, many banks thought their CDO and CDS bets were so safe that they included them as assets on their balance sheets, but now we know they bet wrong, the CDOs and CDS have become liabilities that are “written down” as losses. Moreover, Phil Gramm’s Commodity Futures Modernization Act also allowed off-book betting, so no one really knows how many of these bets the banks have off of their public balance sheets.

Guest • September 16th, 2008 at 9:10 pm

Thats why I’m +ve on the market. In fact, the market will sustain for another 4-5 months with this kind of money (provided the new home sales stays as it is).i like it when you said another 4-5 months :D how do you get the 200B amount?? your estimation is against what?and wouldnt GS and MS pose problems this week/next week??IMO the damage has been done3 big co’s are now gone

Anonymous • September 16th, 2008 at 9:17 pm

The significance of the 79.9% stake is this: an 80% stake would make them owners under certain accounting rules whose three letter acronym escapes me at the moment. At 80%, the FED would have to add the liabilities to its balance sheet; this way they can claim that they own an asset, the $85B worth of shares, without the $1 trillion dollar liability.

Guest • September 16th, 2008 at 9:20 pm

you can almost hear the comments now being made in Russia/Eastern Europe:”For the last twenty years after the collapse of our USSR, we have heeded the preached advice of our American comrades and moved away from state ownership of the economy and towards privatization of previously stated owned enterprises, and we are booming and flourishing as a result. Even our tax rates are continuing lower down to 18% and now down to 15% flat tax across our entire region…But it seems like now our American comrades are headed in the opposite direction…What gives?”

ptm • September 16th, 2008 at 9:22 pm

This is looking so bad for the Republicans. With the take over of AIG there will be no more hiding and dodging. I predict the outcry and outrage will push the Democrats into office by a landslide. I also predict the Republican party will have destroyed itself and be replaced by Ron Paul’s Liberty Party or some other third party.

Anonymous • September 16th, 2008 at 9:32 pm

Oops. Yes, GAAP, pronounced GAP. This is the reason for the 79.9 percent stake in fannie and fredie, as well. Quite fraudlent, actually as the taxpayer exposure is the same whether the liabilities are off balance sheet. I guess for political reasons the Fed didn’t want to raise the deficit ceiling another trillion. On the other hand, if under the august stewardship of the Fed, AIG not only pays off its loan in under a femptosecond, but makes a profit of ten to the 67% per attosecond, them the deficit could be repayed, all loans forgiven and every imaginable social program could be payed for several times over.

kilgores • September 16th, 2008 at 9:39 pm

Here is the 9:00 p.m. press release from the Treasury Department this evening:Release Date: September 16, 2008For release at 9:00 p.m. EDTThe Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.Here is the applicable provision of the Federal Reserve Act that give the Fed authority to make the loan to AIG:Section 13. Powers of Federal Reserve Banks3. Discounts for Individuals, Partnerships, and CorporationsIn unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]___I presume one of the “limitations, restrictions and regulations” that the Board of Governors of the Federal Reserve System would require for a corporate loan under these circumstances would be the ability to exercise plenary control over the corporation. Technically, I guess, it would be the Treasury Department exercising control, as the shares in AIG would be owned by it, and not by the Federal Reserve Bank of New York, which, I believe, is the bank within the Federal Reserve System actually loaning the money to AIG.SWK

Anonymous • September 16th, 2008 at 9:39 pm

An entrepreneur told me today that his buddies on the street expect UBS, WaMU and Wackovia to croak later this week. That may have some bearing on the AIG takeover. Gee those Republicans are such compassionate conservatives, at bottom. The thought of their buddies waiting on bread lines moves them to tears! Such softies.

Ashu • September 16th, 2008 at 9:40 pm

OK.GS is more risk averse than MS.MS has a better equity trading n proprietary trading group……they take more risks (and hence the quarterly profit).GS ran out of ideas and is going under massive cost restructuring (believe me they are trying to save every penny)MS is 33 times leveraged but the fact is now mkt has already discounted that (i got MS at 24 odd $s today)I came up with a rough figure of 200 B$ examining the concepts of leverage, money chain, CDO correlation structure and VIX………my figures might not be correct as I’m still trying to get the whole thing (but I wonder who can be sure on this?) :)

Guest • September 16th, 2008 at 9:43 pm

there is a chance the AIG deal does not go through within the next 24 hours – if this happens, equities globally to tank

Ashu • September 16th, 2008 at 9:43 pm

Wachovia will merge with someone big! Try buying when you see value.UBS………i really don;t understand their business n writeoffs……….anything can happen to the companyWaMu is already in god’s hands :D

Anonymous • September 16th, 2008 at 9:51 pm

I also think that the biggest problem in the whole crisis was MBIA and people working in it. They abused their AAA rating to max

AfA • September 16th, 2008 at 9:52 pm

I do not quite understand how the deal is structered.I mean I know it is a bridge loan, and from the press release that the loan will be Super senior (collaterized by all AIG’s assets) and that in return for the “liquidity facility” (if used, but why not?) the Fed controls 80% of equity.Now, I wonder which of 85B or 80% ownership is fixed overtime. If tomorrow AIG uses the facility and the Fed becomes owner of 80% of stocks at $1 for example.What would happen if the stock price slide to 50 cents?LET’S BURN SOME CDS

Anonymous • September 16th, 2008 at 9:57 pm

Then the Fed would have to pay on its own default. Incidentally, the US is now the counterparty to god knows what. My guess is that the credit default swaps are arranged in an intransitive ring, such that if any of the counterparties defaults, they all do.

AnnS • September 16th, 2008 at 10:02 pm

And the worst blasted part is the I am a Mayflower descendent (Winthrop) and that moron in the White House is my 12th cousin! (At least it is not closer.) Knew that branch of the fmaily should have been located in the attic rather than having been packed off to Texas! YIIIEEEEE!Never trust us old-family New Enlgand Puritan WASPS to run anything – not even a lemonade stand. Too damn much inbreeding in the past 380+ years.I want TR back (of course I am in the begining of acnetury but it happens to be the wrong century by about 100+ years….)

Anonymous • September 16th, 2008 at 10:05 pm

Slightly more seriously, most counterparty risk models assume that the default of one counterparty is correlated with the default of others. The Fed may have postponed the default of AIG, but this was an artificial intervention that is unlikely to postpone the default of related counterparties–for very long.

Guest • September 16th, 2008 at 10:20 pm

assuming $64 Trillion in credit default swaps, there is usually about 20% only in netted trades, which amounts to $12.8 Trillion in netted swaps – this is still a massive figure and about 1/4 of the total GDP of the planet

Guest • September 16th, 2008 at 10:26 pm

comeee ooonnreefllaaatttee theee coommoodittieessguys, oil is up 3 dollars now,imagine a world with endless bailouts, USD200 oil???hahahahahahaand to put icing on the cakewe have to pay extra abundance taxeshahahahahaha

Stratonovich calculus • September 16th, 2008 at 10:31 pm

The Fed decided that reports of AIG’s death have been greatly exaggerated.What happened Martin?!I’m going to commission a Maoist propaganda poster with Ben, Hank, and W’s portraits: Here’s a good poster for these three:

“Industries should learn from Fed, creditors should learn from Fed, and everybody should learn from People’s Liberation Bank”

For those who prefer Lenin to Mao, here’s a Communist Banner Generator to advertise your support of the People’s State.

Guest • September 16th, 2008 at 10:35 pm

Martin – what funeral?The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance.The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. ……………

2cents • September 16th, 2008 at 10:36 pm

@ SWK.Possibly, but it would appear that @ 79.9% they are trying to stay under a “limit” as opposed to meeting or exceeding a limit. I thought I read something regarding the F&F deal stating that it was to enable the government from officially observing the debt.

AfA • September 16th, 2008 at 10:40 pm

SWKI heard slightly similar explanation when the treasury put F&F under conservatorship. A 80% ownership or greater would have obliged the Treasury (and the Fed now) to assume the liabilities of the target.If someone has more specific information, please.

Anonymous • September 16th, 2008 at 10:41 pm

“It Is Real, It Is Taking Place, It Will Overcome You”http://www.marketoracle.co.uk/Article6270.htmlNow the money and markets, then the society…

PhilT • September 16th, 2008 at 10:42 pm

Very well said, and reminiscent of a particularly good radio interview aired back in April, entitled: Our Confusing Economy, Explained

April 3, 2008 · Perplexed by the U.S. economy? You’re not alone. Law professor Michael Greenberger joins Fresh Air to explain the sub-prime mortgage crisis, credit defaults, the shaky future of other types of loans and what we can expect from the U.S. financial markets. Greenberger is a professor at the University of Maryland School of Law and the director of the University’s Center for Health and Homeland Security.

Radio Interview => Our Confusing Economy, Explainedhttp://www.npr.org/templates/story/story.php?storyId=89338743(Podcast may also be available from the above link)

2cents • September 16th, 2008 at 10:42 pm

The balance sheet issue may be valid, but I don’t believe the government follows GAAP anyhow. In fact, they don’t even follow their own rules, regulations or restrictions when push comes to shove!That said, 79.9% is mighty peculiar twice!

Guest • September 16th, 2008 at 10:45 pm

I love Ron Paul, ptm, and all you write, but don’t get distracted by party labels. The Federal Reserve was conceived in secrecy by private financiers and birthed a banking cartel to protect its members from competition. Adminstrations come and go but the Fed has been with us for nearly 100 years – desert-making on behalf of greed throughout the world. It is engulfing mankind, devouring America. These financial rulers and their Congressional puppets on both sides of the aisle, are implementing greed and ignorance, taking this great nation into servitude.Look who was at the meeting, wheeling and dealing away all our subsistance:”Attending the meeting on the Capitol Hill were Democratic Senate leaders that included Charles E. Schumer of New York, Richard J. Durbin of Illinois, Christopher J. Dodd of Connecticut and Kent Conrad of North Dakota A contingent of Republicans was led by Mitch McConnell of Kentucky, the minority leader, and included Richard C. Shelby of Alabama, Jon Kyl of Arizona and Judd Gregg of New Hampshire. House leaders included John Boehner of Ohio, the Republican leader; Spencer Bachus, Republican of Alabama; and Barney Frank, Democrat of Massachusetts. Members of the leaders’ staffs were asked to leave the meeting shortly after it began.”Greed and avarice and exploitation and the devastation of our treasury and that of our children can be laid at the door of finance — the unemployed who haunt the streets, the elderly shivering in their homes, the college grads without futures, the average man with no manufacturing or small business place to go, the young mothers shoveling fries and waiting tables, the children alone and home from school behind locked doors…

Guest • September 16th, 2008 at 10:48 pm

AIG WAS A $25 STOCK JUST ONE WEEK AGO….The system is imploding at hypersonic speed.October, if we can make it that long, is going to be lights out – (literally?).

2cents • September 16th, 2008 at 10:49 pm

Maybe the FED gets 79.9% stake of all assets, but AIG has large international assets. What happens when the government tries to collect Japan’s and Europe’s collateral someday? My guess is it won’t try. So it’s 79.9% on paper and something much less based on all the financial gimmickery and political roadblocks cooked into the mix.

kilgores • September 16th, 2008 at 10:53 pm

2cents:That makes more sense to me, too. Someone below mentioned something about a GAAP rule that would provide some accounting advantage. I just shot an e-mail over to a C.P.A. I know who is a former IRS agent and might have a clue for us.SWK

PhilT • September 16th, 2008 at 10:56 pm

The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.Entire FT Article => US to take control of AIG

kilgores • September 16th, 2008 at 10:59 pm

I fail to understand how an acquisition of corporate stock, even if it were 100%, could obligate the stockholder to assume the liabilities of the acquired company. I suspect, if anything, it has more to do with manipulating accounting for public relations purposes by being able to characterize the acquisition in a light more favorable to the government.SWK

kilgores • September 16th, 2008 at 11:05 pm

Unlike private concerns, which are motivated by a desire to avoid and minimize their taxes and other liabilities, the government wouldn’t seem to have a motivation to arrange its books for any other reason than to achieve accuracy (a product of government integrity) or to achieve inaccuracy (a product of political interests).SWK

GreatGambler • September 16th, 2008 at 11:08 pm

How much can the Government afford to spend before it affects its creditworthiness. We’ve been told that Fed has already committed to $900 billion in aid to shore up the financial system.Bear Stearns, Fannie Mae, FHLB and now AIG?I know my views differ from most here, but I think the government may actually pull it off. Given the international weakness and relatively unchallenged position (yes, so far) of the dollar in the world as the common currency, US may be able to print enough notes to keep its house in order.Now that these bailouts are borderline illegal is a different matter.I think the government can afford a further $500 billion in bailouts before it runs out of options.Now that the government has unashamedly discarded the ‘hands-off’ policy, it might as well put its capital directly to shore up the housing market – this may be cheaper than to save all the financial institutions from going bankrupt.Most financial institutions are highly levered and will not be able to survive a further 15% decrease in house prices.

Guest • September 16th, 2008 at 11:10 pm

Been monitoring my 401K for five years now, 15% contrib + plus employer match, yet lost 25% and getting worse.Any serious advice what to do will be appreciated.

Guest • September 16th, 2008 at 11:13 pm

The AIG development, at first blush, comes in as a major body block to the taxpayer. This is correct. But step back a moment. While the bailouts keep coming, a true picture emerges: the nation’s banking system is caught in the eddy of a whirlpool, breaking apart.It’s to be expected that the rats will grab all the bread they can reach as the waters pull them under. And as the Fed throws in the widows and orphans as the hits keep coming, the nation’s confidence in its bankers is finally ebbing.America is getting ready to listen to facts.The drastic measures taken by America’s shadow government — from the inflation tax to bailout mania — are not fixes, they are spectacular failures. And that, finally, carries the clarion ring of truth.

kilgores • September 16th, 2008 at 11:14 pm

Well, Congress can pass any law that does not violate the Constitution or a treaty obligation of the United States. It certainly, then, can pass legislation blocking the Treasury from accepting ownership of the AIG shares, and I don’t see why it couldn’t pass legislation delimiting the power of the Federal Reserve System to carry out such a deal, since it created the Fed an its powers in the first place. That’s why the Fed and the Treasury work so closely with Congressional leaders to get them on board with their plans before they move forward. In general, while the Congress does engage in extensive oversight of the Fed, it really tries very hard not to interfere in Fed decisions. This is really not much different than the idea behind lifetime appointments of federal judges — it is thought that the Fed, like federal courts, if it is to carry out its essential function, should be free to make decisions independently without undue political influence.SWKSWK

Guest • September 16th, 2008 at 11:19 pm

pull it off?Honestly, can the govt repay their debt obligations??why is USD so important that it cant be discarded??

Guest • September 16th, 2008 at 11:32 pm

So, if your house in Houston got blown away last week and your homeowner’s insurance refuses to pay (for whatever reason), and that policy is a part of AIG, which is now owned by the US government, how would the dispute get resolved? Federal court would have a conflict of interest – another reason why the situation is completely fubar and becoming more so by the hour.

Guest • September 16th, 2008 at 11:35 pm

Our foreign creditor friends are beginning to flee the US…Saudi Billionaire to Wall Street – See You Laterhttp://www.time.com/time/world/article/0,8599,1841548,00.html?xid=rss-topstories

PhilT • September 16th, 2008 at 11:43 pm

Can a new/different Administration undo specific items if it is determined that the undoing of such items is actually beneficial to the citizenry OR are we all going to be harnessed by these unprecedented actions?

kilgores • September 16th, 2008 at 11:49 pm

An interesting question is whether Congress could pass legislation retroactively to make the deal with AIG illegal. The Contracts Clause of the Constitution applies expressly to the States, not to Congress; however, Congress is granted only such powers as are expressly set forth in the Constitution. Courts have recognized that Congress has the power to impair retroactively the obligations of private contracts through the Bankruptcy Clause of the Constitution. I’m not sure it could enact legislation now to expressly prohibit the AIG deal, since it is essentially the product of a private contract between the Federal Reserve Bank of New York and AIG. It could, perhaps, fashion legislation based on the Bankruptcy Clause that would prohibit the Fed from lending money where a corporation such as AIG would have recourse under the Bankruptcy Code (which, I imagine, AIG does have at this point), making a bankruptcy filing AIG’s sole remedy for insolvency.All this being said, Congress extended these powers to the Fed in the 1930s for a reason, and I imagine Congress does not want to be tinkering with those powers in the middle of what is, as Alan Greenspan characterizes it, a once-in-a century financial crisis. If the Fed manages to steer the economy through this turmoil, Congress can take credit. If the Fed can’t do so, Congress can lay blame. If, however, Congress pulls the rug out from under the Fed’s independence now and things go further south (which they are bound to do), Congress will suffer the blame. I think we all know how this will turn out, then…SWK

kilgores • September 16th, 2008 at 11:54 pm

Well, if it can muster Congressional support, then yes, it can. Even the Constitution can (and has) been changed from time to time as this becomes necessary or advisable. The problem with unprecedented events, though, is that nobody really knows for sure how best to respond to them, or what the ultimate consequences of the chosen response will be. As unpalatable as these bailouts may be, I suspect that some of them may be preferable to the pain that would accompany the onset of an acute, systemic financial and economic collapse which could follow the disorderly unwinding of a Fannie Mae, Freddie Mac, or AIG.SWK

kilgores • September 16th, 2008 at 11:58 pm

It would not present a conflict of interest for a federal court. The judiciary is independent of the executive and legislative branches. The U.S. government gets sued successfully in federal court by individuals and companies and state and local governments all the time.SWK

Martin • September 17th, 2008 at 12:04 am

This is a loan. In the last minute, there was serious pressure fron Asian countries. Its getting incredible down here.

sleepys • September 17th, 2008 at 12:30 am

Forget the 401k there’s a new financial product that is all the rage! Everyone will be stuffing their money into it in no time! I suggest you open one up and start stuffing whats left in your 401k into it too! It’s called the M-A-T-T-R-E-S (you can leave off the last S for savings)

friend of washington mutual • September 17th, 2008 at 12:54 am

Prince alwaleed make sure you wash your hand after your bowel movement, because I know the custom in Saudi Arabia is no one washes their hand with soap after bowel movement. Mayor Giuliani will second me for thisAdvice.

Wolf in the Wilds • September 17th, 2008 at 1:13 am

Yeah, but GECC will take a slower run than AIG. I see GECC as a 2 yr problem. Their main assets are consumer finance and equipment leasing. They will suffer significantly as individuals and corporates start to go under as the economy invariably races towards a depression. They are not a mismatched in terms of funding and I guess they have off loaded a lot of the toxic stuff already. Still, it will be stressed.

Little Saver • September 17th, 2008 at 1:41 am

This is a loan. In the last minute, there was serious pressure fron Asian countries. Its getting incredible down here.(By Martin on 2008-09-17 00:04:11)One consequence of being in debt is to not to be in charge of things anymore, seems we already are so far at the moment.

Guest • September 17th, 2008 at 1:42 am

I fully agree! The mattress is simply great! No need to worry about some fund managers decisions and it is immune to bank runs. In a worst case scenario where your bank sinks and takes your credit cards with itself, you will have good old cash available.

London Banker • September 17th, 2008 at 1:49 am

Good morning, All! I was in the City last night. Down the hall a major global universal bank was holding an emergency board meeting that will probably see them taking a slice of Lehman or AIG or someone else today to aid the efforts to shore up US markets for the election. Get ready for the bounce as various M&A deals are announced and the flood of money out of Russia, China, etc. gets repatriated to US dollar and US markets in a “flight to safety” move.As someone else noted above, the Federal Reserve and its infinite leverage are now LONG STOCKS (at least US stocks), and that implies that so long as the US has access to foreign credit, the US markets will remain supported to the satisfaction of the Fed. I’ll be watching Brad Setser’s numbers on capital flows even closer now for signs of weakening US credit, but expect it to hold up on the “flight to quality” propaganda for a little longer.BTW, I’m not referring to Barclays which had already agreed to buy Lehman’s US investment bank.

Guest • September 17th, 2008 at 1:58 am

BEn/Paulson arent you the jokersagent of chaosi think these guys are anarchist..”Primary Reserve, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.”Reserve Primary Money Fund Falls Below $1 a Share (Update3)By Christopher CondonSept. 16 (Bloomberg) — Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.The fund, whose assets plunged more 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Primary Reserve, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.Money-market funds are considered the safest investments after cash and bank deposits, and Reserve Primary’s losses come as confidence in financial markets has been shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial banks and Lehman’s bankruptcy yesterday. The only other money-market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.“This is uncharted territory,” said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. “That’s certainly a stunner.”Reserve Primary, run by closely held Reserve Management Corp. in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund’s board revalued the Lehman holdings as worthless effective 4 p.m. New York time, the company said today in a statement.Unable to Prop Up Fund

Guest • September 17th, 2008 at 2:13 am

wow, look at Russian/chinese mktsonly question, are they going back just to prop the mkt before elections OR the hot money is going out for goodmiddle class of russia/china will be batteredwill there be any retribution??

fedwatcher • September 17th, 2008 at 2:20 am

Dr. Roubini,There is one part of your argument I disagree with:“But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010.”It is not the first part of the statement, but the end: “it bottoms sometime in 2010”.I think that a bottom in 2010 is the best we can hope for.· In 2010, people will have seen four to five years of downward real estate prices, while seven years is the usual span.· In 2010, early baby boomers will be 64 years old and looking to downsize. This downsizing will continue and climax around 2022.· In 2010, people will see a house as a liability and not an asset to use as an ATM via a HELOC.· In 2010, people will see renting and the ability to be close to work as more desirable than an hour commute with $6.00 a gallon gasoline. After $65/barrel oil we will see a return to $150/barrel oil.· In 2010, house prices will still be greater than 5 times median incomes in many areas.· In 2010, although house prices will hit bottom in many areas, the West and East Coasts will still be overpriced and inventories of large homes will be large.In some areas, real estate needs to decline by a total of 75% from peak to trough. In many areas median home prices are still 10 times median incomes. In a bubble correction, we often overshoot to the downside. That would mean overshooting the long term traditional multiple of 2.5 times gross income to less than 2.5 times. This will not happen everywhere and markets will become more ‘local’.We will likely see a ‘false’ bottom between late 2009 and early 2010 that will suck speculators in and provide new foreclosure fodder in 2011 and on.I believe the ‘de-levering’ process we are in, although accelerating in pace at the moment, will drag on for years and give us a new mindset, or a return to the mindset of those who lived through the great depression. I am not one. I am a baby boomer. Talk to those 80+ year olds who still remember while you can.

tutterfrut • September 17th, 2008 at 3:29 am

HBOS is well capitalized, they say…It’s reassuring, yes?And possible merger with Lloyds, they say…That’s good news, no?

London Banker • September 17th, 2008 at 3:30 am

This sort of racist comment isn’t appropriate here, any more than the religionist rants of the commenter above you. With America crumbling and the Gulf states gleaming, America bankrupt and the Gulf states prosperous, one could be forgiven for being confused as to which is the more “civilised” and “modern” culture.If I became ill without health insurance, I can assure you I’d rather be in Dubai or Riyadh than Washington.

Little Saver • September 17th, 2008 at 3:59 am

Yes, very. Everything well contained. Regulators vigilantly watching. Nothing can go wrong with all those good folks waking over the interests of little investors and tax payers. Soldiers in Iraq very safe in the hands of Halliburton.

London Banker • September 17th, 2008 at 3:59 am

I had to look it up: Wife2KSeriously, you are right that there are essential and good functions served by the financial sector, despite the destruction and misery currently being reaped by excess. I think when we begin to redesign the structures in a few years time (until then we’ll keep trying what is proven to have failed), we will find that mutuality is as critical to stability and control of moral hazard as good regulation.There is a reason that the most successful stock exchanges, clearinghouses, insurance companies and banks had strong mutuality built into their governance. The demutualisation and deregulation of these structures facilitated the lack of review and constraint precipitating the troubles we have and the troubles yet to come.

Little Saver • September 17th, 2008 at 4:06 am

ps Nothing more reassurung than insurance companies being insured against failure. The best of all worlds, no?

London Banker • September 17th, 2008 at 4:37 am

It seems the FSA leaked a story of Lloyds TSB takeover of HBOS to the BBC. The market in HBOS shot up massively, burning the hedge funds who were heavily short. The FSA’s Sants seems to be taking lessons from NYFed’s Geithner these days.Market is pissed at the false market and failure to follow procedure for sensitive information releases.Watch in real time over at FTAlphaville. It’s being likened to a Sumo wrestling match between the regulators and hedge funds. Popcorn optional.

Guest • September 17th, 2008 at 4:44 am

Russia halted trading!!!!this is meltdown..i cant believe its happening so fastit is true thenthe damn has broken..

tutterfrut • September 17th, 2008 at 4:49 am

Lapsus from the anchor woman on Bloomberg Television just made me spill my coffee all over the screen:”…watching the termites…erm…turmoil surrounding AIG…”

Little Saver • September 17th, 2008 at 4:57 am

Yes, seems that free market means the freedom to interfere at will for some and regulators having the free choice of whom to prosecute. Little investor’s freedom to punish badly run companies is toast, who cares?Fun site overthere at FTAlphaville.

Pseudothyrum • September 17th, 2008 at 5:07 am

“After taking over the insolvent Countrywide now Ken Lewis is making another reckless gamble by taking over at a vastly inflated price another distressed broker dealer. This is dangerous behavior for BofA.”The reason Bank of America is snapping up so many insolvent companies at bargain basement prices is that they know that the FED would NEVER, I repeat NEVER, allow the Bank of AMERICA to fail…i.e. just because the bank has “America” in the title they realize that the FED will be there to back them up whenever necessary because if the Bank of AMERICA as to fail it would be a humiliating blow to American financial prestige around the world.

Guest • September 17th, 2008 at 5:13 am

U.S. regulators try to find WaMu buyer: reporthttp://news.yahoo.com/s/nm/20080917/bs_nm/washingtonmutual_dc

U.S. federal regulators recently called a number of banks asking if they would consider buying Washington Mutual Inc (WM.N) should it eventually falter, the New York Post said, citing sources.

Should it eventually falter? Hmmm…looks rather like it definitely will falter. Also because of its credit rating having now been reduced to junk, according to this article:Federal bank insurance fund dwindlinghttp://news.yahoo.com/s/ap/20080916/ap_on_bi_ge/bank_deposits_safety

… …Standard & Poor’s Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody’s and Fitch last week…. …

Friday is nigh…

Anonymous • September 17th, 2008 at 5:13 am

European realestate/housing-crash will be as severe as the on in US. I live in a European country and reckles lending, major risktaking, is why the banks have had their results growing to the sky. This is about to stop and we will se the same type of losses in Europe as we have and are seeing in the US.This crisis has, in ny wiev, every possiblitiy to surpass the Great Depression.

Anonymous • September 17th, 2008 at 5:13 am

European realestate/housing-crash will be as severe as the on in US. I live in a European country and reckles lending, major risktaking, is why the banks have had their results growing to the sky. This is about to stop and we will se the same type of losses in Europe as we have and are seeing in the US.This crisis has, in ny wiev, every possiblitiy to surpass the Great Depression.

Guest • September 17th, 2008 at 5:15 am

HaHa London Banker — true! I wish America was more like Cuba in terms of health, housing, welfare, and education…America now resembles a twisted form the Soviet Union minus the healthcare and housing and subsidized food, only the atmosphere is much more shark-tanky.

Anonymous • September 17th, 2008 at 6:00 am

And further to London Banker’s comment, as a North American I lived and worked over in the Middle East region and I believe their hygiene habits are better than North America/western world – after a bowel movement they mostly use water instead of toilet paper to clean, this is much more hygienic as all of the area becomes clean and not partially clean as is the case with using toilet paper

London Banker • September 17th, 2008 at 6:19 am

Good point. Factually speaking, the Middle East and Asian peoples prefer to wash thoroughly after a bowel movement (with a spray hose customarily fitted to or near the toilet for the purpose). They consider washing makes them cleaner than smearing feces around the area with a bit of tissue.

Alessandro - http://castellidicarte.blogspot.com/ • September 17th, 2008 at 6:31 am

7:27 a.m. [UK:UK:BARC] Barclays looking at options for Lehman’s U.K. business

Anonymous • September 17th, 2008 at 7:52 am

Fair point. Sorry for nitpicking, Professor. When the economy tanks the OCD kicks in, so I’ve upped my dosage as suggested above. I’m feeling much better now.

friend of washington mutual • September 17th, 2008 at 8:07 am

Well I knew they washed their rectum with water after bowel movement, because I have been in Saudi Arabia in the past, but they do not use soap to wash their hand after rectum washing, so what happened is some of the stools still stick on your hand.

bytheway • September 17th, 2008 at 8:20 am

From http://www.express.co.uk/posts/view/61804/Don-t-let-the-spivs-destroy-BritainDON’T LET THE SPIVS DESTROY BRITAINexcerpt:But the Prime Minister Gordon Brown seemed more concerned with saving his own neck than tackling the economic emergency which was unfolding and his Chancellor Alistair Darling has been written off already as hopeless.Throughout the 20th century, free market capitalism proved itself to be the best economic system for delivering higher living standards. The Cold War was won for the West as much because of communismís palpable failure to secure prosperity as its hostility to freedom.While people behind the Iron Curtain suffered permanent impoverishment, free markets and a free society went hand-in-hand in the West and material gains were available to anyone prepared to work hard.But in the past few years that unbeatable economic recipe has gone awry. Most of the benefits of capitalism have been enjoyed by an ever-diminishing number of people in finance houses and corporate boardrooms.Currently, there are many examples of what was once termed ìthe unacceptable face of capitalismî. As well as the wrecking tactics of speculators, bankers and oil barons, ordinary families are having to put up with the antics of domestic power firms preparing to raise charges yet again so that consumers bear the cost of the Governmentís energy ìrescue packageî for the poor.The lives of hard-working people in Britain are increasingly blighted by a feckless underclass whose indolence they are forced to bankroll through the tax and benefits system and a ruthless overclass which siphons off billions.Unless action is taken to stop all these spivs in their tracks, decent people will lose faith in the dynamism of free enterprise and the moral imperative of striving for self-reliance.It is a horrible thought but the greed of a few bankers and corporate fat cats could hand an undeserved lifeline to the failed creed of State socialism. It must not be allowed to happen.Same game everywhere!

Anonymous • September 17th, 2008 at 11:49 am

No Sweden and I to clarify it is $50-60k/year.Of course they do not have to pay any mortages. A lot of lenders only pay the interest. Smells subrime doesn’t it

Guest • September 17th, 2008 at 7:04 pm

Hear, hear!Apparently some anus-focused Giuliani lovers don’t realize that they are cleaner after washing.Darkie

Guest • September 17th, 2008 at 7:13 pm

It seems that “friend of washington mutual” is a racist baby.I’ve also heard that WaMu is soaked in filthy toxic debt and they can’t wash their hands without some foreigners’ clean and healthy cash. Sounds messy and disgusting. Is it true?Darkie

Scorpio69er • September 17th, 2008 at 8:07 pm

re: “the worst financial crisis since the Great Depression, not as severe as the Great Depression”You mean, not yet.

birdseye • September 17th, 2008 at 10:31 pm

@ Miss America1. It’s enough for the messenger to deliver the message – and for that we all should be thankful to Prof. Roubini -, solutions can be provided by others.2. Confidence is the glue of a fiat money society, clarity a prerogative. The problem is, how can one provide openness and clarity when one doesn’t know what one is doing? It looks like the quants have too many fat tails.3. Hedge fund regulation? Obviously, it is not the smart money that appears to be bringing down the system, no it’s the buerocrats and bankers that failed. The former, to regulate. Wasn’t the FED in charge of mortgage regulations? The latter because they had no idea what their traders were doing, while they were facscinated by they $ 50MM bonus payouts. And the traders thought, the fact that they spent 2 years at B-school, qualified them to shuffle around billions.4. It wasn’t the mortgage biz per se, which was only the catalyst. It was the insane leverage that is bringing the system down. The fat tails worked when their was no leverage, but they got fatter as leverage increased.5. Writing down the liability of a borrower seems a nice and sociable idea, but how does the investor get paid? If billions of due payments get sucked out from the system, as they are now, the lenders capital base is destroyed and there will be no more lending, which is what we experience now.6. If the Gov feels like subsidizing the markets, why not pay the interest for the defaulting mortgages for a while. No middle manno past due, no write offs, the shares of the banks will go up and the banks can raise new capital.7. It is a no brainer to observe that home prices and production could not sustain the levels. If income does not increase, and it didn’t for the past eight years in nominal terms not to speak of a 25% inflationary reduction in real terms, then there are only two more variables (excluding tax variations) that can make a home more affordable: Interest rates and LTV ratios. The latter was a ligitimate reason, if not financed at floating rates, and the abandonement of the conventional LTV ratio was the result of restless bankers that farmed out the due deligence process to ex used car dealers, who had migrated to the quick buck mortgage broker biz, in order to save salaries for their in house mortgage bankers, who stood to loose their jobs, if they made too many bad credit decisions. Hence they had a motive to be conservative. The control of the conservative LTV ratio was certainly in the purveiance of Mr. Greenspan, the same man who told the public to “borrow short, becausse it is cheaper”.8. I fail to see any connection to this and Cuba, if US cars were so desirable, the world import markets would have swollowed them up already. But with 15 miles to a gallon that seems a rather wishful undertaking, when other countries have CAFE standards that by far exceed the US gas guzzlers in efficiency.

birdseye • September 17th, 2008 at 10:41 pm

The dollar has long anticipated the wreckless behaviour of the US eco. The Euro doubled! in value co-incidential with the Bush administration. There seems to be a connection somehow that whenever there is a man from TX in the White House or Treasury and a dollar collapse of at least 50%. Go back look into history. Starting with John Conally “The $ is your problem but our currency” under R. Nixon. The fact that we had a most recent dollar correction appears to be merely co-incidential at this point. However, if there are enough opportunistic exporters that accumulated dollars in order to promote their export and in the process create millions of jobs a year, the dollar does not need to go down as long as those accumulators are willing to hold ever more worthless dollars (purchase powers).

birdseye • September 17th, 2008 at 10:49 pm

Bretton wood lasted so long because the US was in investment mode and Europe after reconstruction slowly created export surplusses. From a US perspective that was desirable: The $ bought overseas investment cheaply, which was welcome by the host countries that had very little to show for. When the post war investment period was completed, the US thru its foreign ownership greatly profited in the export boom and ad the same time the foreign assets were revalued throug higher currency translation. So both partners where happy.

Eric von Schonberg • September 17th, 2008 at 11:50 pm

The mess that is Iraq will soon be getting (more) connected to the mess that is the US economy. Whatever the motivation was for invading Iraq, the powers that be will soon figure out that the US economy could sure use an Oil colony … Let’s see, why don’t we stay here a little longer, and show you how to set up a democracy. In the meantime, we’ll help you guys get the oil fields humming along again, and we’ll even buy the oil directly from you guys for a price we’re sure is fair, so you won’t have to trouble yourself with having to sell it on the world market. Let’s see, $5 a barrel seems fair, and we’ll provide jobs for everyone in Iraq too. Then, with cheap oil heading towards the last remaining superpower, a lot of problems in the US economy get solved over night.The bottom line is that countries do well when their economy is based upon their strengths. Switzerland has build up quite a bit of expertise with watches, and making them works out well for their economy. Japan has built up a capability for building reliable cars. Let’s see … What strengths does the US have. Being a superpower, and not much else, if the US wants to have a good economy, its only option is plundering the rest of the world.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:00 am

Since I routinely travel between the US and the Eurozone, I’m very familiar with the fact that even in minor cities of Europe, real estate is often priced higher that comparable property in the most expensive and major of US cities. I can easily see that real estate prices were poised for a major crash in Europe.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:14 am

One thing you may not have noticed is that the decline in real estate prices in the US is not happening in all areas. The general theme is that areas that are far from the jobs, requiring long commutes burning lots of gasoline, are declining even if they are relatively inexpensive. Areas that are close to the jobs are seeing little decline, or even increases in some cases. For example, some expensive areas of Silicon Valley (San Francisco Bay area of California) are experiencing at worst modest declines and some of the most desirable areas are actually increasing in value. But, less expensive areas of the Central Valley of California, from where people commute to the jobs in Silicon Valley, are suffering huge declines and lots of foreclosures.Not many people realize the big picture of what happening – the United States is transforming from living in suburban areas to living in urban areas, and energy prices is the stimulus.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:20 am

Don’t worry. The US Government will come to your rescue, just as they did after the Katrina disaster in New Orleans.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:27 am

I’m sure some people will be asking you for advice instead. They will be wondering how you managed to lose only 25%. Pretty soon, you’ll have book deals with catchy titles like “How I lost only 25% in the US Stock market”Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:41 am

Let’s see, I think it works this way:Chairman of the Fed: We’re running out of greenbacks with all these banks and insurance companies needing bailouts.Secretary of the Treasury: I’m sorry, the new guy we hired last week wasn’t keeping an eye on how much ink we had left, and we had to stop printing. But, the ink just came in, and we should able to fill your order soon. Can you tell me how many tons you’ll need for next week, so we can make sure we don’t run out of ink next time.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:48 am

The FED “invested” in AIG, so that they could see it go under in slow motion instead of right away.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:53 am

Oh yeah, The Constitution. That brings back memories. I remember when it was the law of the land. Some day, I’ll have kids who will say, “Daddy, did you live during the days when the United States had a constitution”Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 12:59 am

That’s going to take the treasury a long time to print. We’re going to need some good old fashioned American ingenuity to come up with a way to print that in a reasonable amount of time. I mean, come on, the wheels of the economy need greasing, and these old fashioned printing presses just aren’t good enough anymore.Eric von Schonberg

Eric von Schonberg • September 18th, 2008 at 1:09 am

Don’t bet on it. Even if the polls showed Obama ahead by 15%, McCain would still win by a landslide, because of the Bradley effect. After the election the biggest story will be how the Republicans managed to keep the Whitehouse when so many expected a Democratic win.

Little Saver • September 18th, 2008 at 2:15 am

Let’s see … What strengths does the US have.Innovation. Information technology and biotech first come to mind. This could be expanded to energy technology given the right investments. Longer term: social innovation.Let’s see … What weaknesses does the US have.Spendthrift (wasting oil as an example), greed (demand for short term profit dominates behavior), inflated military (patriotic feelings abused by a minority that feeds on them by diverting colossal amounts of capital to a defense system that by far exceeds real defense needs), leadership in the hands of big money (could be seen as part of the greed problem).Shortlists open to correction and supplementation, but great potential for improvement clearly visible.

Maling • September 19th, 2008 at 5:56 pm

Gorbachev had it right.WE need “Perestroika” (restructuring of debts) and “glasnost” (openness of asset values).

Guestvalerie • September 21st, 2008 at 2:21 pm

No dear you are wrong. I am afraid that a fascist economy privatizes it’s gains and strictlyv invests it’s gain the military industrial complex.Valerie

Kuradji • September 21st, 2008 at 9:12 pm

Sorry Eric, you’re on the right track, but missing the mark.The US has used Iraq as its personal “oil colony” since – well forever – (starting in 1908) Read “The Seven Sisters”. (Anthony Sampson)Read “Petrodollar Warfare”. The evidence is that the US invaded Iraq to protect its petro-dollar hegemony. The only reason the US can run the deceit (deficit) it does is because of its nifty petro-dollar recycling pea-and-three-cups trick.(Read “Confessions of an Economic Hit Man” to learn about the “Great Saudi Money Laundering Affair) which was birthed in the Oil Crisis of the 70s.

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Another thing I’ve noticed is that for many people, below-average credit is the reaction to circumstances above their control. By way of example they may are already saddled through an illness so they have large bills for collections. It might be due to a job loss or even the inability to go to work. Sometimes breakup can truly send the finances in an opposite direction. Many thanks for sharing your notions on this weblog.

Przewozy Autokarowe • June 17th, 2011 at 5:48 pm

Thank you for the sensible critique. Me and my neighbor were just preparing to do a little research on this. We got a grab a book from our area library but I think I learned more clear from this post. I’m very glad to see such excellent information being shared freely out there.

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