The banks must be restrained and refocused or all the efforts to support the system with public funds are just adding to the debt, the imbalance in wealth, the malinvestment, and misappropriation of capital that has undermined the real economy.
A large part of the problem is that all the obvious things that Joe Stiglitz points out in this essay were denied and dismissed repeatedly at every turn by Alan Greenspan and the Fed, Wall Street and their economists-for-hire, and the financial media.
And the pity is that we have not yet made any progress in actually fixing the problem and restoring balance to the system. The deception and fraud continues impeded only by the dire condition of the victims. Without reform, the financial sector will merely go in search of others.
The New Republic
Falling Down
by Joseph Stiglitz
Wednesday, September 10, 2008
No manufacturing. No new ideas. What's our economy based on?
...The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system's latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits--private rewards that were not commensurate with social benefits...
One should have suspected that something was wrong with the economic system when millions of Americans owed billions to credit card companies and banks in "late fees," "penalties," and a variety of other charges, transforming a high annual interest rate of 20 percent into a truly usurious effective interest rate of 100 percent or more for those who fell behind in their payments...
Perhaps the worst problems--like those in the subprime mortgage market--occurred when non-transparent fee structures interacted with incentives for excessive risk-taking in which financial managers got to keep high returns made one year, even if those returns were more than offset by losses the next. Behind the subprime crisis were mortgages designed to encourage repeated refinancing of homes--a pyramid scheme that generated billions of dollars in fees for the mortgage company as long as home prices continued to soar...
To put it another way, had those in the financial sector allocated capital and risk in a way that fueled the economy, they would have had handsome profits. But they wanted more, and so established incentive structures that encouraged gambling. If they gambled and won, they could walk away with a share of the profits. If they gambled and lost, the investors would bear the consequences. It was almost as if the entire financial system was converted into a giant casino in which the system was rigged to guarantee those running the games huge returns, at the expense of the players.
But in Las Vegas and Atlantic City, the games are near zero-sum: The gains of the casino owners approximately equal the losses of the players. The financial-system-as-casino, on the other hand, is a negative-sum game. Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us...
The current woes in America's financial system are not an isolated accident--a rare, once-in-a-century event. Indeed, there have been more than one hundred financial crises worldwide in the last 30 years or so. Here in the United States alone, we have had the S&L crisis in 1989, the dot-com/WorldCom/Enron problems of the early years of this decade, and now the subprime-morphing-into-the-beyond-subprime collapse.... In each of these instances, financial markets failed to do what they were supposed to do in allocating capital and managing risk...
In short, the problem with the U.S. economy is not that we have allocated too many resources to the "soft" areas and too few to the "hard." It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generously... Too much energy has been spent trying to make an easy buck; too much effort has been devoted to increasing profits and not enough to increasing real wealth...
Joseph Stiglitz is University Professor at Columbia University, winner of the 2001 Nobel Memorial Prize in Economics, and co-author of The Three Trillion Dollar War.
03 September 2008
Speculation Nation
Tokyo Mitsubishi Another False Rumour about a Potential Lehman Bid
Bloomberg News reports that Mitsubishi Financial Group denies any knowledge of a bid or interest in bidding for Lehman Brothers.
The conduct by those involved in both the financial press and the investment community in these false Lehman rumours has been disgraceful.
It deserves to be thoroughly investigated. All sales of Lehman stock of size should be recorded and examined for possible price manipulation by hedge funds and other inside trading. Lehman's use of off balance sheet entities should be examined prior to their earnings announcement.
Readers know that we have been suspicious of Lehman's claims that they were on sounder footing that the market was giving them credit for and had put the worst of their financial woes behind them. Our doubts were fueled by the number of open questions surrounding their claims of deleveraging and their extremely aggressive spin management and use of leaks to the press between earnings announcements to bolster their case. The combativeness seemed not merely to be a magnification of CEO Dick Fuld's famously pugnacious personality, but also a backs-against-the-wall reaction, a de facto admission that their situation indeed verged on desperate.
Lehman Expected to Post Another Loss
Mitsubishi UFJ Says It's Not Bidding for Lehman Stake
By Finbarr Flynn
Bloomberg News
Sept. 4 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, denied a report it is considering entering the bidding for a stake in Lehman Brothers Holdings Inc.
``We are not preparing to bid or considering a bid for Lehman,'' said Takashi Miwa, a spokesman for the Tokyo-based bank.
Mitsubishi UFJ's main banking unit may seek control of Lehman, the London-based Times newspaper reported earlier, citing people close to the lender it didn't name. The Japanese bank, which has enough funding for a large acquisition, was expected to wait until after Lehman announces third-quarter results next week, the newspaper said.
Korea Development Bank this week said it's in talks to buy a stake in Lehman, the fourth-biggest U.S. securities firm. Lehman has renewed talks with Korea Development about a capital injection of as much as $6 billion, the Sunday Telegraph reported Aug. 31, without saying where it got the information.
Lehman spokesman Mark Lane declined to comment when contacted by Bloomberg News.
Last Updated: September 3, 2008 20:00 EDT
Tokyo Mitsubishi Expresses an Interest in Lehman... Maybe
Tokyo Mitsubishi says they might be interested by will proceed conservatively and wait until after Lehman announces its third quarter results next week to see what they have to say.
Apparently a trip to the US to perform a due diligence in New York with a look at the books such as the Korean government performed was not in the budget.
T-M says that if the price drops sufficiently after the announcement they may be in a position to make an offer.
We hate to sound cynical, but with all this media posturing about maybe deals we suspect that some folks are fishing for a backstop such as JPM received for Bear, and are using the media to float their trial balloons. Or in the worst case, some insiders are using media leaks to cover the sale of shares prior to the Lehman third quarter results next week.
And the search for a suitable husband for little Lehman by her father Hank goes on far and wide. Stay tuned for the next exciting chapter.
Tokyo Mitsubishi 'interested in buying' Lehman Brothers
Leo Lewis, Asia Business Correspondent
September 3, 2008
The Times
Japan’s biggest megabank, Tokyo Mitsubishi UFJ is poised to enter the bidding for a substantial stake in Lehman Brothers, and may even seek control of the ailing Wall Street titan, according to banking industry sources in Tokyo.
Senior sources close to the Japanese group say that the possible acquisition is being treated as a “once in a lifetime” opportunity but that the notoriously conservative bank will proceed with extreme caution. (Buying Lehman with extreme caution. Is that an oxymoron? Or a hint that a backstop from the Fed is required? - Jesse)
Tokyo Mitsubishi, which has ample sources of funding for a multi-billion dollar acquisition, is expected to keep its powder dry until after Lehman announces its third quarter results next week — an event that traders around the world believe could see yet another bout of “kitchen sinking” and another potential dip in Lehman’s share price. (If they are serious about an acquisition they cannot perform due diligence and simply look at the books with Lehman's management as did the Koreans? - Jesse)
Traders believe that, in addition to its ongoing woes, Lehman’s results could result in the bank being probed by analysts and investors over activities related to R3 Capital Partners, a hedge fund. The fund, which was established this spring by a former senior executive at Lehman and which has the bank as a “passive, minority investor”, has become the focus of rising market concern that it may provide yet more bad news for Lehman.
Lehman has consistently said that all its transactions with R3, as an investor and a seller of assets, are at arm’s length. The bank is understood to have sold perhaps as much as $4.5 billion (£2.5 billion) of assets to R3 since May. Traders in Tokyo and Hong Kong said that the next few weeks would show whether R3 represents an Achilles heel for Lehman in the way that hedge funds related to Bear Stearns contributed to that firm’s downfall.
The head of one Hong Kong-based dealing room told The Times that the results announcement was expected to be the turning point for Lehman. From the point of view of Tokyo Mitsubishi — or any other potential bidders — the period immediately after the results could present the same opportunity that is currently on the table but at a much cheaper price.
If Lehman surprises the market with more bad news or fails to convince that it has a decent capital injection on its way, its shares will fall again and that is when the big Japanese bid will come in, said a source at a large Tokyo brokerage. (And what sort of 'put' shall we call this? - Jesse)
The possible emergence of a Japanese-backed capital injection into Lehman comes as the troubled US firm remains locked in negotiations with the state-backed Korea Development Bank over the sale of a possible 25 per cent stake. (A media circus might be a more appropriate description for this entire sorry episode - Jesse)
Chosun Ilbo, South Korea’s largest daily, today reported that HSBC, a trio of US hedge funds and an unnamed Chinese bank may also be eyeing big stakes in Lehman. But a spokesman for HSBC told The Times: "We're not interested in acquiring an investment bank. We're focused on growing in emerging markets, not developing markets." HSBC is not thought to be interested in acquiring any parts of Lehman. (The Chosun Ilbo is either completely inept at checking sources prior to printing major stories, constantly citing sources of interest that later vehemently deny it, or they are complicit in the manipulation of markets through leaked misinformation from anonymous sources. Take your pick. - Jesse)
