zalo

WSJ's epic The Weekend That Wall Street Died chronicles the Lehman collapse. Here's a free version for non-subscribers. Some great commentary: Felix Salmon. Gawker. The AM Law Daily. WSJ's Law Blog.

Its amazing how a few people in a meeting room had so much power in defining the fate of a whole world, with extreme implications to many populations thousands of kms away, such as Iceland, Ukraine, Ecuador, Venezuela or Argentina.

But, as the full strength of the recession is passing through with lots of economic damage around the world, i must say that since the start of december i have grown upbeat. The Lehman demise and stock market crash changed the sleepy mood of global policy makers to one much more aggressive. Stock markets are now stabilizing and credit conditions, at least for viable governments even in emerging markets (see Mexico, Brazil, Peru) are now more constructive and reaching pre-crisis levels, and this should translate to corporate renewed access to credit at adequate levels in the near future.

Pain is still to occur, but as in every illness, pain is part of the healing process, it is unavoidable. So, in order to get the healing process complete, the world should focus now on avoiding another crack in the system. As in a chain, the weekest link can break the whole chain. Pin pointing, the IMF and the US should quickly move to support aggressively the Ucranian economy. A currency swap line from the US-European central banks are necessary, IMF stronger support to quickly refinance any foreign debt maturing in the short run in order to reprogram the debt maturity profile to match the weaker cash flow generation due to weaker exports. A Ukrainian fail could trigger a new round of chain effects that can be avoided by providing the necessary support.

As a peruvian, i would like investors to check up on the peruvian economy, which until now is running at quite good speed (around 8% for the year) and even in the latter months it has managed strong growth (+7%) despite the global recession. Fiscal results are still very positive (S/ 500 million per month), and thus we have ample capacity to fight the external crisis, government savings run up to 8% gdp (20 thousand millions PEN) plus external reserves of 30% gdp, to the same amount of external debt which has been reesctructured massively to very long term maturities in the last years, thus providing ample flexibility to the government. The fiscal plan for 2009 to fight the crisis is of S/ 10 thousand million pen, which can be covered easily by the fiscal results plus a small reduction of the government savings, without even touching international reserves. Ths peruvian financial system is in excelent shape, balance sheets are extremely clean and its external debt exposure is small compared to the international reserves held. Peru has signed free trade agreements with the US, China and is in the way to sign one with the European Union making it an excelent base for industry and exports to this huge economies. Peru has access to its own gas reserves, providing it with cheap energy resources for its industry. Peru has also one of the most important minerals reserves, which grant important cash flows for the country in the present and the future.

What Are the Chances Ukraine Just Hit the Second Great Depression?

Even though i agree that this recession will be quite strong, i disagree that this will turn out to be a depression. The countries that are collapsing are doing so because of bad debt management at the government and corporate levels combined with a decrease in foreign currency income (from commodities or exports). Huge foreing external dependancy is now taking its toll on them, Iceland and Ukraine are examples of that. But other countries with more balanced economies, thou slowing down, have quite stable economies, like Brazil, China or India and even Mexico.

Lets remember that in the 30s depression unemployment rose above 20% and we had a deflation of nearly 10%, we are rather now at the 7-8% levels unemployment and the worst case scenario i have seen for inflation is -4% for 4Q mainly due to energy costs drop, which actually will be positive for demand in other items.

So, this will be a strong recession, not a depression, but yes, some countries will go under because of their poor debt management.

Compensation Watch: Credit Suisse's PAF Program

Even though i agree that investment bank employees earn quite a good amount of money, probably higher than the average guy at the street, there are other industries that can do quite the same (or more) amountof money. Lawyers for example, they do millions and they probably receive the same aversion from the street guy. Doctors also do a huge amount of money. You would probably say that they do things positive for humanity, but what about plastic surgeons ? hardly you can say that they add value to the world.
Still, i think that a lot of people in the financial industry are suffering due to decisions that weren´t in their power to take or to solve.

Compensation Watch: Credit Suisse's PAF Program

I think that it is completly incorrect to treat employees of the investment banks, like Merril, or insurance companies like AIG in the way it is beeing done. For example, John Thain, he saved Merrill from collapsing and he came to Merrill from a stable position at the NYSE when everything was pretty much imploding. Why wouldn´t he be granted a bonus for his great job? Is anything of this debacle his fault? Or is this the fault of the prior very senior management and shareholders who failed to oversight adequatly their business? Or is this the fault of the government who failed to regulate adequatly?
Every time i hear that bank employees must get their bonuses cut, their end of year parties closed, their job trips foregone, and being critized, etc, i feel that there is a lot of unfairness in it, and that in reality it is not based on the financial debacle, but by the envy a lot of people always had on this bankers group.
AIG employees deserve what they would deserve in any other US company. They did the job that was required from them, but because a wrong decision taken at the head of the corporation, now they have to work practically for free and sacrifice themselves?. That is nonesense.
Do Credit Suisse employees had really anything to do with the management decision to get into the illiquid instruments they are now going to receive?
All this is witchhunting at the professional level that was not responsible for the debacle. People should look for accountability at the government who failed to regulate adequatly and at the board and shareholders of the banks that decided to get into risky assets.
If a country looses a war, it is no the fault of their soldiers, or the middle rank officers. It is the fault of their generals and leaders.

General Motors (GM) has hired a high-profile team of lawyers and bankers to consider whether to file for bankruptcy protection - and perhaps in the hope of impressing upon lawmakers the urgency of its need for funds. (WSJ)

Done. Tomorrow the market will fall, but will not be an armageddon....futures are only around 4% down.....lets hope that it holds there. Actually the healing process of this yearly old decadency process of US automakers have started today.

General Motors (GM) has hired a high-profile team of lawyers and bankers to consider whether to file for bankruptcy protection - and perhaps in the hope of impressing upon lawmakers the urgency of its need for funds. (WSJ)

and by the way...if these companies go to bankrupcy, it is a huge lie to say that they will collapse and everubody working in them will loose their jobs....bankrupt industrial corporations has a much much much higher probability of being saved than banks

General Motors (GM) has hired a high-profile team of lawyers and bankers to consider whether to file for bankruptcy protection - and perhaps in the hope of impressing upon lawmakers the urgency of its need for funds. (WSJ)

Let the auto companies go to bankrupcy. This will clean their balance sheets of debt, so actually this will protect the jobs of a great part of the workers in those companies (with the caveat that some benefits will be lost also, but it is better something now than nothing afterwards). Putting in money without reestructuring the balance sheet structure will only delay the inevitable.

Even with a bailout, automakers would still be running on fumes, Rick Newman at FlowChart says - so get ready for a second, a third, or even a fourth. "No matter how much money Washington sends to Detroit, it won't give consumers a reason to buy cars."

GM, Ford and Chrysler should be sued by lying to the people. It is not true that if they go into bankrupcy 4 million jobs will be lost. Even if they get rescued, plants will be shut down to adapt to to the lower demand, so jobs will be lost either way. If the companies go into bakrupcy, the shareholders and boldholders will get toasted, but in the end the companies will get leaner with fewer debts. Viable companies, which is what you can get from the bankrupcy procedures, is much better for their employees.

Playing the Auto Bailout With Yields as High as 45%

Buy bonds, prefereds, etc in the face of a bankrupcy situation? This is a value trap, yields doesn´t matter at this point, only how much from the face value you will get back.

How to Deal with GM's Bondholders?

Bondholders of GM new about the situation of GM a long time ago, this instruments are junk bonds (everybody new that) and i didn´t heard any bondholder complaining about the large yields they were earning. So, if bondholders new in what type of risks they were entering and happily received their interests, then let them get toasted now. Or do taxpayer money has to be put at risk to keep on paying this bondholders high returns? No way Jose.

Legendary hedge fund manager Michael Steinhardt says now's a good cyclical time to invest in equities. "It wouldn't shock me if it were the bottom."

I have performed many studies to try to see whether we are at a bottom and my conclusion is that we can be in one as well as we could not be in one. There is still fragility as individual events can make us come back to crash mode. Lehman took us here and Citi could have taken us much lower...but what can happen next?. Really, nobody knows, not even the more trained economists, governments, banks, analysts, etc can arguably predict with full certainty what can happen.

Having said that, i think this is the second best opportunity for the market to get out of its bottom if things flow as they seem to be. Thus, an increase in equity positions should be advisable at this point, but without putting all the meat in the pan.

What is true is that a lot of leverage has been reduced and that professional managers are underinvested in equity at this point. I am underinvested in my institutional portfolio, my country equity market has slashed 75% of leveraged equity positions to a multiyear low, investor confidence has touched extreme lows, governments has stepped up agressively and rates has been slashed agressively, oil is down to stimulative levels, credit markets are slowly recovering, etc. My feeling is that slowly confidence will come back and this will help to stimulate a little bit more the economy.

So, why not putting something in. For short term portfolios i would recommend a +10% equity raise, for a longer term portfolio i would recommend a +25% increase.

Timing the Cycle: Mixed Messages

Bottoms tend to originate when the market feels that its in a never ending free fall, and that happened in October/November. In fact if you read any strategy summary of any investment bank they all, by concesus, speak of keeping recession trades i.e. buy government bonds, underweight cyclicals, etc. When they all say that, its probably a good time to do the contrary.

Impact of the horrific attacks in India on that important emerging market: "It doesn't look like the Mumbai massacre will cause the Indian stock market to collapse, but for the first time Islamic extremists have targeted tourists and the financial district. Both are critical to India's growth and international standing."

This is strange...why would extremists target India, a huge pakistan neighbour and regional atomic power, which, until now, wasn't actively involved in the US - afghan-pakistan-irak war ?. ...hummmm....India will have now the excuse to exert pressure on the Pakistan government to control the radical movements within its borders....

Citigroup: The End Draws Near

Saying that Citi will go through the same road as Lehman or AIG is totally incorrect. Citi has a HUGE base of deposits that neither of those had and additionally, Citi has access to the FED discont window, which means that it has access to illimited liquidity. Furthermore, Citi can issue debt guaranteed by the government if necessesary.

Saying that Citi´s business model explains the stock price crisis is crazy. Maybe its not the best model, but this is not new information so why now this would explain the price crisis. Furthermore, some months ago a lot of analysts said that actually the business model worked when they saw what happened to Lehman.

So actually you don´t need the government to take over Citi to tae the pressure out of it, you just need the government to say that Citi is well capitalized, that it has adequate liquidity (and illimited access to them) and that it doesn´t need government funds and that the government stands back behind Citi´s debt, as it does with other banking institutions.

Short sellers will get crushed with this kind of statement.

The Hypothetical Automaker Bailout Gets Another Supplicant

The government should not bailout the automakers. The BIG mistake in the US is thinking that they need to keep alive inefficient companies running for the sake of the employments. By doing this, they keep excess capacity running in whole industries and this makes it worse for the sector. For example, by allowing airlines permanently going into chapter 11 instead of liquidating them, excess capacity remains in the industry which endangers the profitability of the whole industry. By allowing the offer side to shrink, the remaining more efficient companies could actually raise prices and take pressure out on themselves. Solvent more powerful companies would appear instead, which in the long term is much better for employment conditions. The same is for automakers. Let them go bankrupt and shrink down. Automakers carry too heavy health and pension burdens combined with inefficient strategies and excess capacity. Bankrupcies would reduce this burdens and clean up capacity in the industry, allowing the surviving part, though smaller, run smoother. So, save the employees with the $25 billion through job insurance, but do not save the companies.