Roubini Interview on CNBC’s Squawk Box
CNBC – Roubini on Lehman, Global Financial Crisis (Click for Video and Report)
CNBC – The financial crisis would have happened even if Lehman Brothers was bailed out, Nouriel Roubini, chairman of RGEMonitor.com, told CNBC. He discusses the anniversary of the firm’s collapse and the state of global financial markets. [9:16]
26 Responses to “Roubini Interview on CNBC’s Squawk Box”
first the second time. guess who I am.
The eldest of the Lehman Brothers?
Barak Obama?”yes we can”
Around the 8:41 mark Dr R discusses the dollar and the temptaion to use the “inflation tax” in repayment of debt which in turn could lead to a collapse of the dollar. Although he assigns low probability for a dollar collapse, that statement seems to imply a high probability that the “inflation tax” card will not be used by the Fed Reserve and the politicos. I am unconvinced that the Fed Res or the politicos have the spine required to resist using the “inflation tax” nor a coherent plan to unwind the expansion of the Fed Reserve Balance Sheet. So, perhaps Dr R could provide a rough outline of the alternatives to the inflation tax and his assignment of probabilities that the Fed Reserve or the politicos have the stomach for what could be a dose of harsh medicine.
Here is the latest from Reggie Middleton… Break’em up, and break’em up now!Today the MSM talking heads are chatting up how we “just missed” a total financial collapse back in January. Well guess what? Nothing has changed! We are still teetering on the edge of financial collapse. Now Reggie has got religion and the numbers…http://boombustblog.com/200909141138/Any-objective-review-shows-that-the-big-banks-are-simply-too-big-for-the-safety-of-this-country.htmlHere is Reggie – (for better table format, see his blog)…We have looked at notional value of derivatives, gross fair value of derivative (before netting) and net fair value (after netting) for leading players in the “alleged” commercial banking industry and have compared them across various metrics.· On an absolute basis (dollar amount), JP Morgan is the leading derivative player in the industry with notional value of derivatives amounting to $80 trillion followed by Bank of America and Goldman Sachs. JPM also has the highest Gross fair value of derivatives (before netting) with $1.79 trillion of derivative assets and $1.75 trillionof derivative liabilities. I have reviewed what this means in terms of implied and explicit counterparty risks in “As the markets climb on top of one big, incestuous pool ofconcentrated risk…”)· Despite higher gross fair value of derivatives, JP Morgan’s net exposure on balance sheet is not the largest (with $97 bn and $67 bn of derivative assets and derivative liabilities, respectively) as the company has netted a significant part of its derivative exposure (trading direct market and credit risks for counterparty risks). Net fair value of derivative receivable to gross receivable for JPM is 5.42% compared to industry average of 9.84% while net fair value of derivative payables to gross payables for JPM is 3.84% compared to industry average of 6.03%.· JP Morgan’s total derivative exposure on balance sheet is $165 bn, or 174% of its tangible equity. JPM’s gross fair value of derivatives is approximately 38 times its tangible equity while notional amount of derivatives is about 850 times its tangible equity.· On a relative basis, HSBC (HSBC_Holdings_Report_04August2008 – retail HSBC_Holdings_Report_04August2008 – retail 2008-09-16 06:38:38 87.28 Kb – HSBC_Holdings_Report_04August2008 – pro HSBC_Holdings_Report_04August2008 – pro 2008-11-06 10:11:09 138.89 Kb) and Morgan Stanley (see “The Riskiest Bank on the Street”) have the largest on balance sheet derivative risk exposure with total fair value of derivatives, net (asset and liability) forming a staggering 683% and 508% of their tangible equity.· As of June 30, 2009 Morgan Stanley’s’ total gross fair value of derivatives to tangible equity stood at 114x.Company Notional Value of derivatives ($ bn) Gross fair value of derivative assets ($ bn) Net fair Value of derivative assets ($ bn) Gross fair value of derivative liabilities ($ bn) Net fair value of derivative liabilities ($ bn) Total Assets ($ bn) Tangible Equity ($ bn)JP Morgan 80,458 1,798 97 1,749 67 2,027 95Bank of America 75,501 1,760 102 1,722 51 2,254 97Goldman Sachs** 47,749 1,094 90 955 68 827 51Citi 33,769* 826 85 809 75 1,849 42Morgan Stanley 39,285 1,536 79 1,466 54 626 26Wells Fargo 4,895 116 28 107 10 1,284 59HSBC 16,920* n/a 311 n/a 299 2,422 89* Includes both trading and non-trading derivatives** Notional value of derivative for GS is sourced from OCC report and pertains to 1Q09All data pertain to latest 10-Q (June 30, 2009)Needless to say, we will be following up with a revamped report on the “riskiest bank on the street” soon.Company Notional Value of derivatives / Total Assets Notional Value of derivatives / Tangible Equity Total net fair value / Notional value* Gross fair value of assets / tangible equity Gross fair value of liabilities / tangible equity Total Gross fair value / tangible equity Net fair value derivative assets / tangible equity Net fair value of derivative liabilities / tangible equity Total net fair value derivatives / tangible equity Net fair of assets / Gross receivables* Net fair of liabilities / Gross payables*JP Morgan 39.7x 849.8x 0.20% 19.0x 18.5x 37.5x 1.03x 0.71x 1.74x 5.42% 3.84%Bank of America 33.5x 778.4x 0.20% 18.1x 17.8x 35.9x 1.05x 0.53x 1.58x 5.78% 2.98%Goldman Sachs 57.8x 938.4x 0.33% 21.5x 18.8x 40.3x 1.77x 1.34x 3.11x 8.23% 7.14%Citi 18.3x 797.9x 0.47% 19.5x 19.1x 38.6x 2.00x 1.76x 3.76x 10.26% 9.22%Morgan Stanley 62.8x 1497.2x 0.34% 58.5x 55.9x 114.4x 3.02x 2.06x 5.08x 5.15% 3.69%Wells Fargo 3.8x 83.7x 0.78% 2.0x 1.8x 3.8x 0.48x 0.17x 0.65x 24.20% 9.33%HSBC 7.0x 189.6x 3.60% n/a n/a n/a 3.48x 3.35x 6.83x n/a n/aFor those who don’t speak banking parlance, tangible equity is the actual “spendable” capital that you have on hand to cover events that you would actually need money for.It excludes intangible nonsense that cannot be spent. What this means is that if Morgan Stanley’s or HSBC’s derivative portfolio moves a few percentage points againt them, theoretically (and actually) their equity can be totally wiped out. Now, what are the chances of that happening? Well, do you see that long list of dead companies in the “credibility” side bar above? Why don’t you ask them? Oh yeah, you can’t can you? That’s because the infallible experts that worked there didn’t think their excessive leverage andrisk taking would turn againt them in such a fashion as described above as well. Not to worry, these “too big to fail” banks have the cusioning of the US taxpayer to save them if they fall. You know, the currently 10% unemployed US taxpayer!I find it absolutely amazing that this country could justify breaking up a telephone company (Ma Bell, ala AT&T) yet allow these monstrosities of unproductive financial riskto grow even bigger and threaten the entire world, not once but twice, with their extreme levels of concentrated esoterica.One would think that smaller banks and the associated banker’s associations would scream bloody murder since they are being surcharged for risks by the FDIC (see More on theFDIC as a Catalyst…) that most couldn’t even afford to take in the first place – the risks that were purposely borne by the big banks. The risks that are still being expanded by the big banks. For instance, Goldman makes nearly all of their profits through trading like a risky hedge fund (VaR is shooting through the roof, despite getting exemptions from accurate VaR reporting from the regulatory authorities), yet is protected by the FDIC, has access to teh Fed window and pays one of the smallest percentages of itsrevenues into the FDIC insurance pool. The smaller banks are being hit so hard by these insurance charges that they are losing over 13% of their gross revenues to it, despitethe fact that thay are not doing anything near as risky as proprietary trading. You guys need to speak up and defend yourself against the big boys. Hey, use this article asa lobbying tool if you have to, but do something are you will soon no longer be in existance, wiped out by the re-emergence of the dinosaurs!
Very Detailed Report, I’m ImpressedI imagine Guest is some type of “insider” in the banking business. I also find the use of “Guest” in this case very appropriate….LOL
What Happened to the $125+ billion?The net worth of Leh at the time of collapse was approximately $25 billion.Losses are estimated at over $150 billion.What happened to all this money that is missing?How is this different from Enron?Is Leh different from the other large financial institutions, or are their balance sheets similarly inflated?Perhaps the market now prices in the future socialisation of all losses of too-big-to-fail financial institutions.What kind of financial system does the U.S. now have?wdm223
Blah, blah, blah…and the market goes higher.
I always wanted to ask the following to someone who ‘gets’ things better than myself. basically the notion of ‘too big to fail’ is beacuse all the big financial institutions have some form extremely large bets (derivatives) placed with each other based on a certain ‘silly’ thing not happening such as GS not failing (or house value not falling).It seems to me that the correct strategy to go handle this web of derivative mess is to go the other way first. I mean if these insolvent institutions are forced to merge with each other. that way these derivative overhang should nullify (correct me if i am wrong). The only caveat is that ALL the major player have to be mandatorily merged together, & nobody substantial can be left behind.Once that is done then we can go about playing the ‘good bank – bad bank’ game and segregate the bad assets into a separate entity which can actually fail just by itself. this scheme would seem like a better play then current ‘pretend, extend’ way of things.I only fly in the ointment i can think of with this scheme is that of derivative trades with foreign banks. that’s where USGs influence ends. does it makes sense?
Is that the Best You Can Do [RE: Guest reply to Guest]?Well, with 80% of polled Americans rating the economy as poor, little good the short-term gain in the market does the lion’s share of us. It still lost about 18% YOY too….what affects most of our 401Ks.AP Poll URL on Americans think were in a poor economy:http://news.yahoo.com/s/ap/20090914/ap_on_bi_ge/us_meltdown_ap_poll
No, we shouldn’t.
Doesn’t matter. The Inflation Tax has been the tried and true way out for politicians for millenia. We would be fools to expect better of the current crop.
You would be amazed how many un-recorded liabilities arise as well as how many current assets, e.g. receivables, vaporise in a bankruptcy.
Well said Reggie. I’m with you all the way.PeteCA
Like I have been saying the Big 5 BANKS ARE INSOLVENT!
Can any institution that is backstopped by the government be truly insolvent?
A,My exact point – Dr R indicates that the dollar collapse is certain if the inflation tax is used. And I agree that we are fools not to expect the inflation tax. So, the logical conclusion is inflation at a level to offset several trillion in debt. Not a particularly pretty scenario.
It’s quite common for economic analogies to be made with medical examples. Many of the words in both paradigms are similar (e.g. “recovery”, “stimulus”, etc.); Sometimes the analogies are very apt, and sometimes they are not or are not used exactly.One of the analogies that I haven’t heard used, but which I think is quite appropriate to the current situation, is that sometimes when a patient is dying slowly, some of his cells in order to survive turn cannibalistic and consume other cells which are absolutely essential to the continued survival of the entire organism. In the current situation, the “cannibalistic cells” would be large banks, various Wall Street firms, large automobile fabricators, etc., and the consumed cells would be the poor, lonely, and unsupported average American middle class tax payer.If a patient is fatigued and incapacitated (like a bicycle racer who has “hit the wall”), it is probably not at all a good idea to give the patient stimulants (e.g. caffeine or amphetamines). We will soon know is this is also true in the economic realm.An example of a misuse of the analogy is with the word “recovery”. For example, if a diabetes patient has very severe near death problems, and doctors in a near miraculous effort manage to restore all the patients health parameter to normal (e.g. pulse, blood pressure, blood sugar level, etc.), but the patient ends up blind and/or has had a leg amputated, his doctors would be very reluctant to use the term “fully recovered”. Also, a doctor would never say that a patient is “recovered” if he is still on a life support system (the current administration seems to have no such reluctance). Obviously, when taken off the system, the patient may relapse and have to be put back on the system. This probably would not be possible in the economic situation.Perhaps the greatest difference between the two paradigms is that both the life support and stimulation scenarios, the doctors have an unlimited source of medicament (oxygen, blood products, amphetamines, etc.) and can obtain these without in any way harming the patient or his environment. This is obviously not the case with the economy where the “medicament” is borrowed and printed money, and its procurement is unsustainable and extremely damaging to the economy in the long run (and perhaps devastating in the short term).
They can be if the citizens ever refuse and/or are unable to pay taxes.
Is it even a case of too big to fail? The stats shown above clearly draws the conclusion that there are just too many derivatives contracts in the first place. Breaking up the large players doesn’t necessarily reduce risk, in fact it could increase risk, as the smaller players may take on more bets thereby increasing the size of the derivatives market and the financial industry as a whole grows too big to fail. I think we’ve already seen this and nothing so far has been done to limit its size. Seems to me that regulation and outright banning of some of the derivatives products are in order.
Good day, May I download the photograph and employ it on my personal web site?