October 23, 2008

CRASH TALK THURSDAY OCT 23

Phil Mattera, Dirt Diggers Digest - It's now clear that Treasury Secretary Henry Paulson is seeking to use the Big Bailout not only to resolve the credit crunch but also to remake the banking sector of the U.S. economy. Going on the dubious theory that bigger means better and stronger, Paulson is encouraging giant banks to use federal money to take over their smaller counterparts. . . The big players are getting the message. The Wall Street Journal and the Washington Post have pointed out that executives at major banks such as J.P. Morgan Chase and BB&T are openly considering using capital infusions from the feds not to make more loans but to purchase competitors. . .

What Paulson conveniently ignores is that the crisis gripping the country was brought on primarily by major financial institutions through their reckless lending and investing practices. We've already had years of consolidation both among commercial banks and between commercial and investment banks, resulting in the likes of Citigroup, with assets of more than $2 trillion. Rather than being rocks of Gibraltar, many of the big boys have been both causes of economic distress and victims of it. Moreover, if the reports of widespread federal fraud investigations are accurate, many executives at the megabanks may soon be too preoccupied with indictments to focus on business.

Instead of creating more Frankenstein-monster megabanks that would be "too big to fail," we should be considering, as economist Joseph Stiglitz told a House committee yesterday, breaking up the leviathans into smaller institutions that focus on making prudent loans and investments rather than gambling in exotic financial casinos. But that's not the kind of policy we're likely to get as long as a veteran Wall Streeter such as Paulson is running the show.

Louise Story, NY Times - The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. . . This unregulated, at times volatile corner of finance - which is supposed to make money in bull and bear markets - lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.. . .

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry's woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.

Amit R. Paley Washington Post Executives at the country's leading credit-rating companies, whose optimistic assessments of risky investments helped fuel the financial meltdown, have privately acknowledged for more than a year that conflicts of interest contributed to the industry's failures, according to internal company documents. The disclosures emerged at a heated congressional hearing where lawmakers grilled the heads of the three major rating companies, accusing them of betraying the public by letting corporate greed trump their responsibility to provide unbiased appraisals for investors. . . In one of the confidential documents obtained by the committee, Raymond W. McDaniel, chief executive of ratings firm Moody's, said analysts and executives are "continually 'pitched' by bankers, issuers, investors . . . whose views can color credit judgment." "We 'drink the kool-aid,' " he wrote in a Oct. 21, 2007, memo to the board. "Unchecked, competition on this basis can place the entire financial system at risk."

The three major credit-rating companies -- Standard & Poor's, Moody's and Fitch -- assigned some of their highest ratings to mortgage-backed securities whose risks were grossly underestimated. As homeowners began defaulting on subprime mortgages, it became clear that many of those securities were overvalued. The companies finally downgraded thousands of those securities over the past year, contributing to the collapse of major firms and heightening the economic crisis.

Washington Post In September, there were more mass layoffs -- instances in which employers slashed 50 or more jobs at one time -- than in any month since September 2001, the Labor Department said yesterday. And nearly half a million Americans have filed new claims for unemployment benefits in each of the past four weeks, the highest rate of such claims since just after the terrorist attacks seven years ago. Anecdotal reports suggest that the hemorrhaging in the job market has only begun. Companies that announced plans this week to cut jobs include Internet company Yahoo (1,500 positions), pharmaceutical company Merck (7,200), National City bank (4,000) and Comcast, the cable company (300).

DC Examiner -
Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc.

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