On the Necessity of Regulation To Maintain Free Markets

There is an economic school of thought that believes that all government regulation is an impediment to markets. Markets are thought to be in their most perfect state when unfettered by any external interference or restraints. They are naturally self-ordering because of the dominance of a inherently reasonable goodness in the market participants. As this has been popularized there are many who mouth its slogans without serious thought about the assumptions and implications of those assumptions.

The other primary argument seems to be that since regulations are not perfectly sufficient by themselves without any additional effort then we ought to get rid of them. This is of course a logical fallacy since nothing in the real world is perfect and sufficient in itself without tending. Structures in the physical world tend to weaken and decay over time, requiring renewal, refreshment, endorsement, upholding.

Unfettered or free marketism is a modern variant of the 18th century cult of primitivism and the noble savage; mankind is perfect and most effective in its natural state, unspoiled by laws or civilization. It is a proper cult, because the same notion, when logically applied to any other system of interactions and transactions, is quickly seen to be patently absurd and unworkable. We offer the example of a football game, a traffic interchange, a cocktail party.

To say that some regulation is a necessary good does not imply that a surfeit of regulation is optimal. This is another cult called 'statism.' It is this extreme of over-regulation that is used to promote extreme deregulation for its own sake by the free marketists. Cults tend to be infested with cultish minds, reasoning from one extreme to the other, always and everywhere creating inefficient and untractable problems.

Certainly law and regulation can be abused, misused, overdone. But merely cutting regulations down to free the native economy can have unexpected consequences, even towards those who promote mass deregulation to achieve their personal ends.

Sir Thomas More: What would you do? Cut a great road through the law to get after the Devil?

William Roper: Yes, I'd cut down every law in England to do that!

Sir Thomas More: Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat?

This country is planted thick with laws, from coast to coast... And if you cut them down, and you're just the man to do it, do you really think you could stand upright in the winds that would blow then?

Robert Bolt: A Man for All Seasons

KDB and the Artifice of the Deal Part 3 - Offer on the Table?

Here is the story this evening from the Korean news agency Chosun Ilbo. Make sure you check out the second story from The Economic Times of India in which the other Korean banks deny all knowledge of the deal most emphatically.

Lehman closed today with a market cap of $11.20 Billion. If the Korean government approve the deal, KDB seems to be valuing Lehman at about $20-24 Billion which is a handsome premium. If this is the offer that Lehman management considers too low then we'd be a bit surprised.

There is an earlier report in Reuters that HSBC has expressed an interest in Lehman citing sources at ... you guessed it, Chosun Ilbo.

Curiouser and curiouser. A Wall Street bond trader of our acquaintance has suggested that Hank made some princely gestures vis à vis Korea's huge holdings of Fannie and Freddie in return for some sugar on the Lehman problem.

Our own take is that someone is trying to push this deal through their government bureaucracy via the media and is starting to make Jim Cramer of Mad Money look like James Pierpont Morgan.

Let's see what happens and what the details might be. We remain guardedly agnostic.

Korean Banks Consider Bidding For Lehman Brothers
Chosun Ilbo (English Edition)
Sep.3,2008 06:58 KST

Banks such as the Woori and Shinhan Financial Group are taking keen interest in joining a consortium the Korea Development Bank is trying to form to jointly buy Lehman Brothers, the U.S.’ fourth largest investment bank.

A financial industry insider said Tuesday that KDB sent to Lehman a proposal expressing its intention to buy 25 percent of the U.S. bank’s shares for Won 5-6 trillion (US$1=W1,134) and is now awaiting the answer.

Woori and Shinhan reportedly discussed joining the consortium with KDB with the condition that they acquire a comparable amount of Lehman’s stocks to KDB. This raises the likelihood of a Korean bank acquiring a global investment bank for the first time -- if the government does not oppose its bid and Lehman accepts the proposal, whose proposal reportedly includes a term that guarantees a priority right of KDB, so that it can increase its stake in the U.S. bank from 25 to 49 percent.

KDB sent offer to Lehman, Korean banks deny role
3 Sep, 2008, 0848 hrs IST
The Economic Times of India

SEOUL: (Reuters) State-controlled Korea Development Bank (KDB) proposed buying 25 per cent of US bank Lehman Brothers for up to $5.3 billion, media reported, but Korean banks rumoured to be joining a bid consortium denied they were involved.

Media reported on Wednesday that KDB had sent the proposal to the troubled US bank and that leading local banking groups Woori Finance Holdings and Shinhan Financial Group were seriously considering joining. Shinhan and Woori, whose shares were hit hard on Tuesday on concerns about the extent of Lehman's problems and their potential exposure, were quick to deny the media's report.

"We have not seriously considered the idea and have no plans to do so in the future," said a spokesman at Shinhan, South Korea's second-biggest financial services firm. Third-ranked Woori Finance also said in a statement: "We have not received any offer about the Lehman deal nor have we considered it internally."

The smaller Hana Financial Group reiterated its previous denial, while KDB declined comment on the report. KDB confirmed on Tuesday it was in talks with Lehman over a possible joint investment in the bank with other Korean banks, but declined to give details of its negotiations.

The Chosun report also quoted an unnamed financial industry source as saying top European bank HSBC Holdings, several US hedge funds and an unidentified Chinese bank were among other potential buyers of Lehman. HSBC officials in Hong Kong and Seoul declined to comment.

Lehman prefers KDB, whose CEO used to head the US bank's South Korean operations, over other contenders as KDB plans to keep its current management after an acquisition, but the deal may fall through as KDB's bid price is considered very low, the paper said.

According to the report, KDB was offering 5-6 trillion won ($4.4-5.3 billion) for 25 per cent of Lehman and also wants a guarantee it can later increase its stake to 40-50 per cent. South Korean authorities have publicly said they are against the state-controlled bank playing more than the role of a catalyst in any purchase of Lehman, preferring private banks to take the lead.

Lehman, which has more than $60 billion of mortgage and mortgage security exposure, is under pressure to raise capital as Wall Street firms continue to reel from the fallout of the subprime mortgage crisis. The fourth-largest US investment bank is looking for buyers for some $40 billion of commercial mortgages and property on its balance sheet.

By 0224 GMT, Woori shares had rebounded to trade 2 per cent higher, while Shinhan was off 2 per cent. Hana Financial dropped 3.2 per cent. The broader Korean share index was up 0.8 per cent.

Where Was the Safe Place for Savings from 1929-1933?

The answer is that there was NO single safe place for your savings, not even 'cash' dollars throughout the three years that marked the stock market crash of 1929-1932. The individual had to use their minds and keep their eyes on the markets to steer through that most perilous of financial times.

Many believe they understand the coming debt deflation and know where THE safe place will be to put their savings. History suggests they may be consumed for their faith in theory rather attention to market reality.

And this was a relatively straightforward case of unwinding and deflation. What twists and turns does this brave new world of derivatives and fiat reserve currencies have in store for us as it unwinds? And what new policy errors unforeseen and consequences unexpected await because of the Fed's continual experimenting in the markets?

We'll be talking more about this in the days ahead.

Korea on the Verge of a Currency Crisis Because of Fannie and Freddie

Korea was on full alert about mad cow disease in US beef but was loading up their central bank with debt from Fannie and Freddie?

And their development bank KDB wanted to buy Lehman Brothers, the poster child for insolvency, while they were quietly having their own foreign reserves liquidity crisis?

There is more to this than meets the eye we think.

Maybe the pressure on Hank to pull the trigger on a Fannie and Freddie bailout will become increasingly compelling, especially if foreign central banks start dumping US agency debt as we show in the graph in the blog entry just below this one. Last one out is left holding the bag.

Here is a quotation for Hank to use as an icebreaker on his call to Seoul to let them know what he is deciding to do with their future:

Flounder, you can't spend your whole life worrying about your mistakes! You screwed up - you trusted us! Hey, make the best of it! Maybe we can help (for a price).

The Times
South Korea heads for a Black September with Won problems
American investments threaten currency
Leo Lewis in Seoul
September 1, 2008

The deepening woes at Fannie Mae and Freddie Mac, badly stretched central bank reserves and a losing battle to support the won are pushing South Korea towards a full-blown currency crisis this month, analysts have said.

Heavy investment by the Korean Government in Fannie, Freddie and other US-related agency bonds has left a potentially huge liquidity problem - perhaps $50 billion (£27.4 billion) - in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea - increasingly desperate-looking verbal and financial measures to fight the market trend - cost about $20 billion in July alone.

Attempts to prop up the won come as South Korea’s household and corporate sectors are wincing from the pain of high energy prices and inflation. A summer of strikes by lorry drivers and mass street demonstrations calling for President Lee to resign reflect rising public concern that the economy is in trouble.

The intervention efforts have failed to prevent the currency sliding more than 7 per cent against the dollar in the past month. The won is teetering at a 44-month low against the greenback and, with the central bank’s foreign exchange reserves still dwindling, economists at CLSA, the brokerage, say that it is “a game that Korea can literally no longer afford to play”....

Korea’s foreign exchange reserves stand at $247 billion. The International Monetary Fund recommends that emerging market economies should hold nine months’ worth of import cover, which would be about $320 billion.

More worrying, according to economists at HSBC, is the level of Korea’s foreign exchange reserves relative to its short-term debt ratio. Korea’s debt maturing within a year has shot up to $215.6 billion because of hedging against the oil price. While that is nominally within the 100 per cent coverage by forex reserves deemed necessary, the Fannie and Freddie crisis in the United States raises the question of whether any sense of security is illusory.

A large part of Korea’s foreign reserves are not government bonds but the kind of US-based mortgage-related bonds that once looked so solid. Depending on how the Fannie and Freddie situation develops, a significant portion of Korea’s forex reserves could turn out to be extremely illiquid, leaving the country ever more vulnerable to external shock.

“The coverage ratio may in reality be not as comfortable as the authorities would like, meaning they have less with which to defend the currency,” said one senior Asia-based economist.

Although few are predicting a financial meltdown such as the one that hit the region in 1997, recent weeks have exposed some unique vulnerabilities in Asia’s third-largest economy. The danger, Sharmila Whelan, CLSA’s senior economist, said, is that South Korea has not recognised the perils of intervention, given the country’s hefty current account deficit.

“The risk is that once investors realise how tenuous Korea’s reserve position actually is, they will start abandoning Korea in droves and send the currency tumbling,” Ms Whelan wrote in a recent note to clients.

Soaring inflation and a legacy of massive borrowings by households add an additional, potent layer of instability. Government insiders in Seoul have told The Times that there is a “credible risk” that the Korean banking system could be ravaged by a self-generated version of the credit crunch that has hit Wall Street and the City.

Analysts predict a rising tide of nonperforming loans, delinquency ratios and bankruptcies and some of the country’s large mutual savings banks are expected to go bust.