Monthly Archives: October 2008

Not Good Enough! U.S. to Buy Stakes in Nation’s Largest Banks –

The latest stage of the rolling rescue of the US financial system is the plan to buy preferred stock in banks. But apparently the Treasury has no plan to get any of the upside for taxpayers in case of bank recovery since the preferred is straight not convertible. And there is no oversight either since the equity position apparently does not come with either a board seat or voting rights.
Who negotiated this deal?!
Here is my letter to the Financial Times on a similar proposal vetted there today by George Soros:

George Soros in “How to capitalise the banks and save finance” (Oct. 12, 2008) is certainly correct that now is the time to take advantage of the flexibility built into the Paulson/Bernanke rescue plan to re-capitalize the banks through the purchase of convertible preferred shares by the federal government. Convertibility into common stock provides the public with some participation in the possible upside of a turnaround in the fortunes of the banks.

However, Mr. Soros makes no mention of whether these are to be voting shares and no mention of whether they come with a seat on the board of directors of the banks fortunate enough to be the recipient of a rescue at the expense of the wider public.

The real danger in the current situation is that a financial crisis – finally recognized – becomes a legitimation crisis that undermines a deeper faith in our basic political institutions. Thus, accountability and transparency must be the order of the day.

Any preference shares issued by the private sector financial institutions must come with appropriate voting rights and at least one seat on the board of directors of the rescued banks. That is only way that the general public, which after all is footing the bill for this rescue after having been victimized by the de-regulation of the last twenty years, can rest assured that the banks will now turn in a direction that is socially and fiscally responsible.

Such a move will, in and of itself, send a measure of reassurance to the wider public and have an impact on restoring general confidence in our core financial and political institutions.


Stephen Diamond, JD, PhD
Associate Professor of Law
Santa Clara University School of Law

U.S. to Buy Stakes in Nation’s Largest Banks –

The End of Hope or the End of Speculative Finance?

Valuable analysis from one of the most astute observers of the world of global finance, Doug Noland, of Prudent Bear:
Hoping There’s Hope:

This is the first all-encompassing global dislocation of contemporary finance, impacting virtually all economies, markets and asset classes. The media is now all over the “Wall Street” and “banking” crisis. I am of the view, however, that the collapse of the hedge fund industry has moved to the forefront – that it is now at the epicenter of global market upheaval. To watch silver lose more than 20% of its value today in intraday trading; to see the collapse in energy prices; to see the entire commodities complex absolutely routed; to view global currency markets in complete disarray, with double-digit intraday drops in the Brazilian real and Mexican peso; to witness major currencies such as the Australian and Canadian dollars suffer precipitous declines; for benchmark Fannie Mae MBS yields to surge 62 bps in three days; to see Brazilian dollar bond yields jump almost 200 bps in four sessions; for global equities indices to suffer rapid double-digit drops throughout both the developed and “emerging” markets; to witness a 1,000 point intraday swing in the DJIA. All the favorite trades are blowing up, and the leveraged speculating community is in a panic de-leveraging.

There is no doubt that markets are in the midst of an unprecedented liquidation of positions across virtually all asset classes and a vicious unwind of a multitude of investment and trading strategies. The Massive Pool of Global Speculative Finance is being drained. Investors and speculators alike are desperate to flee risk. Having watched the ballooning of the hedge fund industry over the past few years in absolute awe, I can say today that an industry collapse would entail the sale (voluntary and forced by the margin clerk) and unwind of literally Trillions of positions. It has been history’s most spectacular speculative Bubble and, especially over the past few years, it became very much global in nature and infiltrated virtually all asset classes. This Bubble is in a full-fledged collapse – entailing unprecedented liquidations – and it’s taking global markets down with it.

The situation is dire, as is now commonly recognized. The media is in a tizzy, and Wall Street makes for an easy and generally deserving villain. I fear the rapidly mounting anger. But I guess for this evening there is something about coming home after a distressing week and spending time with my little four month old baby. My wife and I gave our smiling and laughing little guy a bath and I just kissed them goodnight. I just don’t have it in me right now to analyze and to write gloom. I’d rather Hope there is Hope.

Perhaps things will stabilize once the hedge fund liquidations run their course. Treasury (TARP) purchases will commence soon. Fannie and Freddie will be aggressively expanding their market purchases. The Fed is now buying commercial paper, and the Fed and Treasury are working to resolve the dislocation in the “repo” market. Across the globe, governments are in full crisis management mode. There appears universal resolve to bolster financial sectors and stem the collapse. And there were actually some positive indications of stabilization in our Credit system late in the week.

I also hold out Hope that the Trillions of reserves held by global central bankers will provide some buffer to stem financial system collapse. In particular, I am Hoping that China, India, Russia, Brazil and the Middle East have today sufficient reserves to somehow avoid a ‘90s style financial and economic meltdown. I am Hoping that demand from China, India, Asia and Latin America will help offset inevitable economic downturns in the U.S. and Britain and, hopefully to a lesser extent, Europe. I am hoping that the collapse in energy and commodities prices is more a reflection of acute financial market dislocation rather than a harbinger of synchronized global economic upheaval. I am hoping there is more substance to the dollar’s rally than simply an unwind of bearish dollar bets. And I am hoping that with large capital infusions our deeply impaired banking system will retain the capacity to finance a much less robust but at least functioning U.S. economy. I really Hope everything is not as dire as it appears.

Credit Bubble Bulletin

GM Workers Deserve a New Chance….

A new chance to vote on the sham of a contract that was forced down their throats late last year by the UAW and General Motors. 

GM is on the verge of bankruptcy and yet it was able to shovel billions in health care liabilities onto the backs of its workforce in a sham collective bargaining agreement.
Here is a critique I wrote at the time of the deal and here is a protest letter I wrote on behalf of two UAW GM workers to the Securities and Exchange Commission and here is my draft brief arguing why the UAW violated federal labor law in its conduct of the GM contract ratification vote.

Bubble, Bubble, Trouble, Trouble: Roubini on Global Meltdown

Nouriel Roubini is the only mainstream economist to predict the current financial meltdown so he is worth paying attention to. 
In his words:
“a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.”
(I helped start a discussion list a few years ago called Meltdown to discuss the possibility but never predicted it would actually happen – actually, I was always a bear on the thesis of that group.)

RGE – The world is at severe risk of a global systemic financial meltdown and a severe global depression

Should we just blame deregulation?

I am a critic of the de-regulation ideology that helped shape the conditions that led to the asset bubble that has now most decidedly burst. We opened up huge holes in the federal securities laws through which both Main Street CEOs and Wall Street financier were more than happy to drive through over the last two decades.
But Sebastian Mallaby is not wrong about the price we have paid to enjoy the China price – the low cost consumer goods produced by horribly abused sweatshop non-union labor kept in line by a strong arm regime favored by so many American CEO’s and, pathetically, labor leaders like Andy Stern and Jimmy Hoffa.
And it is not just mainstream analysts like Mallaby who agree the China issue is a problem. Radical economist Michael Perelman is worth a read as well.

Sebastian Mallaby – Blaming Deregulation –

Anatomy of a Financial Meltdown

I gave a talk to the law school this week on the ongoing financial crisis.  You can look at my power points here.  I will post a link to the video once it becomes available. I was interviewed here by The and here by the San Jose Mercury News. Meanwhile if you remain unconvinced of the importance of the Paulson/Bernanke proposal PLEASE read this analysis by the Financial Times’ columnist Martin Wolf.