The Face of a Hyper-Inflation

Your hotel restaurant bill sir....

To Restore Our Economy the Banks Must Be Restrained

Time to Put Investment Banking Back in Its Box
Commentary by Mark Gilbert

June 5 (Bloomberg) -- ``The rulers of the exchange of mankind's goods have failed,'' U.S. President Franklin D. Roosevelt told a Depression-blighted nation in his 1933 inauguration address. ``There must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.''

Fast-forward three-quarters of a century. Financial markets are in disarray. The global economy is throwing a tantrum that could spell recession for some nations. Central banks are publicly pumping billions of dollars into the money markets to keep the banking system afloat, and privately doing God knows what to avert the next Bear Stearns Cos. or Northern Rock Plc.

The importance of the finance sector to the global economy has swollen along with the bonuses it awards itself. Standards of behavior, however, have failed to mature at anything like the same pace. And, so far, nobody in banking has apologized for the chaos caused by lax lending standards and monumental hubris.

``One of the innumerable problems with Wall Street and the City is that they never do seem to learn from their mistakes,'' says Tim Price, director of investments at PFP Wealth Management in London. ``Each generation seems obligated to re-experience the errors of its predecessors. There is little or no `race memory' that might at least mean this year's crisis is brand-new rather than a tired retread of past embarrassments.''

Gathering Force

The backlash is gathering force. Every day brings fresh threats of increased oversight and tighter rules from blindsided regulators and angry lawmakers. The credit-rating companies have finally woken up, with the gradings of Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. all cut this week by Standard & Poor's. Finance-industry chiefs are being pushed onto their swords, albeit with a thick padding of compensatory dollars to dull the blow.

The finance industry ceded its dominant role in the Standard & Poor's 500 Index to U.S. technology companies last month. Banks, led by Bank of America Corp. and JPMorgan Chase & Co., now account for about 15.77 percent of the index, second to the 16.63 percent weighting for computer and software makers such as Apple Inc., Microsoft Corp. and International Business Machines Corp.

In the past three years, finance companies contributed about 20 percent of the S&P 500 Index, with the technology industry a distant second at about 15 percent. Eight other industries, including energy and health care, make up the remainder.

`Overblown Importance'

Fifteen years ago, just 11 percent of the benchmark stock index derived from the finance industry. Companies that relied on discretionary consumer spending, such as McDonald's Corp. and Walt Disney Co., were the most important, with a 16 percent index share. Industrial companies had 14 percent of the index, followed by consumer staple-goods companies with 12 percent.

``Finance is supposed to be a service industry, an aid to the business of genuine wealth creation,'' says Sean Corrigan, who oversees more than $8 billion as chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland. ``Once we accord banks the sort of overblown importance they have enjoyed this past quarter of a century, we become hostage to the megalomania of their executives and head traders.''

Collapsing share prices have eroded the importance of financial stocks. Banks are the worst-performing of the 10 groups in the S&P 500 index this year, posting a decline of 17 percent while the index itself is down just 6 percent.

Creative Destruction

Total writedowns in the banking industry are now running at more than $386 billion, according to data compiled by Bloomberg. To patch up their balance sheets, banks have tapped their shareholders for $283 billion of fresh capital.

There's more to come. Deutsche Bank AG, which has reduced its asset values by $7.6 billion, may report a further $5.5 billion of writedowns, analysts at JPMorgan said this week. Credit Suisse Group may add $2 billion to the $9.6 billion already posted, while Societe Generale SA's $6.2 billion hit may be exacerbated by an additional $2.8 billion, the analysts said.

Meantime, Societe Generale, BNP Paribas SA and Barclays Plc may have to get out their begging bowls to replenish capital, Fitch Ratings said this week. Barclays may need to raise almost $12 billion, the credit-rating company said.

The deals done in the good times are threatening to sour. In Europe's leveraged-buyout space, the ratio of cash that companies have to cover their debts has melted to 2.2 times, from 2.5 last year and 4.0 in 2003, according to figures from S&P. Dwindling cash to pay debts makes defaults all the more likely. So much for claims that the end of the credit crunch might be in sight.

`Unfettered Finance'

``Banking in a fractional reserve, fiat money world is inherently a non-market exercise in legalized deceit,'' says Corrigan at Diapason. ``The unfettered finance which it allows is all too prone to wreak a devil-take-the-hindmost havoc once it becomes unanchored from reality and succumbs instead to the intense, positive feedbacks which operate within it on both a systematic and a psychological level.'' (Can a brother get an "Amen?" Amen! - Jesse)

It is time to put investment banking back in its box. Treat finance as an end to a means, rather than an end in itself. Encourage our brightest and best to become physicists and biologists, programmers and mathematicians, playwrights and artists, surgeons and architects.

Stop glamorizing the conjurors who propagate the confidence trick of banking by magicking shiny coins from behind our ears. Bankers have betrayed Roosevelt's ``sacred trust.'' Until they redeem themselves, that trust should remain withheld from the finance crowd.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the reporter on this story: Mark Gilbert in London at magilbert@bloomberg.net

An Incisive Look at Market Antics Regarding Lehman from the Naked Capitalist

From the "we wish we had written this department..." is a brief excerpt from a much longer original (with updates) that is well worth reading from a favorite site Naked Capitalism.

"...leaking an internal memo with non-public, material financial information to Gasparino is an SEC violation, although I am highly confident it was done in such a way the the firm has plausible deniability if questioned. Don't tell me this may have been an unauthorized employee leak; if this memo was circulated broadly to employees, it was done with the full intent that word would get outside the firm. That happens predictably with mass employee communications. And if it was limited distribution, the recipients, as anyone who has passed a Series 7 exam ought to know, are fully aware that selective disclosure of material information is a big no no under SEC Rule FD.

So why wouldn't Lehman disclose the sort of information it has been leaking to the Times and Gasparino (or more charitably, handled in such a way so as to guarantee that it would get out), particularly since they are favorable to the firm? Ah, the firm would be liable for the accuracy and completeness of any such disclosures.

So that says that these leaks are highly likely to be less than what they appear to be on the surface. More bluntly, Lehman doesn't dare say in public the stories it is presenting privately because they are not fully accurate. Otherwise, they'd be broadcasting them.

This stinks to high heaven. I spent a few years in the industry a long time ago, and the SEC requirements were taken pretty seriously. Now skirting around the edges, particularly the ruse of using plants with the likes of Gasparino in lieu of proper disclosure has become common. And it's a favored device with embattled companies. To me, this fact pattern alone is enough reason to be short the stock. Management is acting as if all is not well in Denmark."

Dirty Tricks at Lehman? - The Naked Capitalist

Trichet to the Fed

Le message est clair.

Le Fed pète plus haut de son cul.

(with a tip of the hat to the Irish gnome in Zurich for the pic).


Trichet Says ECB May Consider Raising Rates in July

June 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said officials may raise interest rates next month to combat the fastest inflation in 16 years, sparking a surge in the euro and pushing bond yields to the highest level since 2001.

``It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,'' Trichet said at a press conference in Frankfurt after the ECB left its benchmark rate at 4 percent. ``I don't say it's certain. I said it's possible.''

Trichet's remarks, coming two days after Federal Reserve Chairman Ben S. Bernanke stepped up his own inflation-fighting rhetoric, suggest central bankers are now more worried about spiraling prices than faltering economic growth. Euro-region inflation, which the ECB aims to keep below 2 percent, accelerated to 3.6 percent in May and Trichet said policy makers are watching it with ``heightened alertness.''

``This is the clearest signal we're going to get'' from the ECB, said Dario Perkins, an economist at ABN Amro Holding NV in London. ``It looks like an interest-rate hike is imminent. We're now looking for data to prevent a rate hike rather than for something that would allow them to raise rates.''

The euro, which was down about 0.5 percent before Trichet's comments, jumped almost two cents to $1.5564. The yield on the German two-year bond rose 28 basis points to 4.61 percent by 3:54 p.m. in London, the highest since May 2001. The Dow Jones Stoxx 600 Index shed 0.2 percent to 316.31, reversing earlier gains of as much as 0.5 percent.

`Quite Shocked'

``I'm quite shocked,'' said Steven Bell, chief economist at hedge fund GLC Ltd. in London and a former U.K. Treasury official.

Policy makers ``noted that risks to price stability over the medium term have increased further,'' Trichet said. Unlike the Fed, which must control prices and boost employment, the ECB's primary mandate is to target inflation.

Expectations for rate increases as measured by Eonia swap contracts jumped and show investors have now fully priced in at least two quarter-point rate increases from the ECB by the end of the year.

Central banks have spent the past nine months combating a global credit squeeze that still threatens to push the U.S. economy into a recession. The Bank of England, which has reduced borrowing costs three times since December, today kept its main rate at 5 percent for a second month.

The ECB abandoned a planned rate increase last year and the Fed has slashed its benchmark rate by 3.25 percentage points since September, taking it to 2 percent.

Shifting Stance

Now they're shifting their stance as demand from China and other emerging economies drive oil and food prices higher. Bernanke said June 3 that policy makers are ``attentive'' to the impact of the falling dollar on inflation expectations. Bank of England Governor Mervyn King on May 14 said policy makers' priority must be to get inflation back under control.

The ECB today predicted prices would rise by about 3.4 percent this year and 2.4 percent in 2009. Its previous estimates, published in March, were for 2.9 percent and 2.1 percent. The International Monetary Fund says inflation in advanced economies will be the strongest since 1995 this year.

Trichet said the ECB's shift was aimed ``to secure the solid anchoring of inflation expectations.'' The so-called breakeven rate on five-year French inflation-linked notes has jumped in the past two months, climbing to 2.39 percent from 2.19 percent in April.

`Tough Situation'

``Every central bank is now looking at commodity and energy prices with increased concern,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former senior economist in Congress. ``They want to prepare people that, if this continues, they may have to raise rates. It is a tough situation for everyone as economies are still struggling.''

Europe's economy is showing signs of slowing as a stronger euro makes exports less competitive and consumer spending is damped by record oil prices and higher credit costs.

While Trichet said today that the economy is still ``sound,'' manufacturing and service industries barely expanded in May and retail sales suffered the biggest annual decline in April since records began. German manufacturing orders unexpectedly declined for a fifth month in April, the government said today.

The price of oil has surged 87 percent in the past year, climbing to $135.09 per barrel on May 22. The euro has increased 14 percent in the same period, rising to as high as $1.6019 in April.

Weber Wins Support

``I disagree completely that growth is sufficiently robust and I think they are severely underestimating risks to growth,'' said Marco Annunziata, chief global economist at Unicredit Markets and Investment Banking in London.

Trichet's remarks suggest Bundesbank President Axel Weber, one of the ECB's toughest inflation-fighters, is winning supporters on the bank's 21-member Governing Council. Weber in January dismissed speculation of a rate cut as ``wishful thinking'' and last month called for the bank to consider raising rates at today's meeting.

The ECB ``will follow words with action,'' Weber told ARD German television after Trichet's comments today. ``We're alarmed about recent price increases and we won't stand by as citizens' purchasing power is lost.''

``We expected tough words from Trichet, but not quite as tough,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``It's almost as if Axel Weber stood right behind him.''