Posts Tagged ‘Lehman Brothers’
Experts Are Terrified By Greece And Its Debt Problems
NEW YORK (AP) — Remember Greece?
It’s been two years since a financial crisis erupted in the birthplace of drama, and the final act is still unfinished. A second week of talks in Athens ended Friday with no deal between the country, the European Union and private holders of Greek bonds.
Remarkably, even after the crisis became such an international worry last year that the leaders of France and Germany were actually referred to as “Merkozy,” the European debt bomb could still explode, with Greece as the fuse.
Economists and investors see a Greek default as the biggest test of the world financial system since the crisis that followed the collapse of Lehman Brothers investment house in 2008.
It is also the biggest threat to what has been a successful start to the year in the U.S. stock market. The Standard & Poor’s 500 index has gained 4.7 percent, roughly half its average for a full year, in just four weeks.
“If talks break down next week and it looks like they can’t reach a deal, it raises all sorts of risks,” says Jeffrey Kleintop, chief market strategist at LPL Financial. “The stock market could probably lose half its gains for the year.”
On paper, it’s hard to see how Greece could take down financial markets in the U.S., the world’s biggest economy, with $15.2 trillion in goods and services churned out every year.
Consider:
— Greece’s economy weighs in at euro220 billion, according to the International Monetary Fund’s estimates. That translates to $285 billion, which puts Greece’s economy on par with Maryland’s. The U.S. sells about $1.6 billion in weapons, medicine and other products to Greece each year, a minuscule 0.07 percent of exports.
— U.S. banks say Greece on its own poses no danger to them. Unlike European banks, they’re not major lenders to Greek businesses and aren’t saddled with Greek government debt. In its most recent report, JPMorgan Chase, the largest bank in the U.S., said it had just $4.5 billion at risk in Greece, Ireland and Portugal combined. That’s about what the bank makes in revenue in two and a half weeks.
— Many worry that U.S. banks would struggle to cover the insurance contracts they sold on Greece’s euro350 billion, or about $460 billion, in government debt. But the amount of insurance taken out on that debt totals $68 billion, according to the clearinghouse for the contracts. That’s hardly enough to pull down the banking system. And the banks have offset all but $3.2 billion of those contracts with other contracts. In other words, pocket change.
“The direct impact of a Greek default is almost zero,” Jamie Dimon, CEO of JPMorgan Chase, told CNBC on Thursday.
So what’s everybody — well, everybody but Jamie Dimon — worried about?
A breakdown in talks could trigger steep losses in stock markets in Europe and the U.S. Just as in 2008, banks could stop lending to each other, and the credit freeze could cause a market panic.
More importantly overseas, it could cause borrowing rates for Portugal and Italy to jump, pushing those much larger countries closer to defaults of their own.
That’s only the beginning. A Greek default could unleash a host of larger problems. Some are already anticipated while others are likely to blindside even the closest observers, says Nick Colas, chief market strategist at ConvergEx Group. “In any complex system, you’re going to have unintended consequences,” he says.
He compares it to the collapse of Lehman Brothers: Analysts saw it coming, but the fallout in still caught them by surprise. A money market mutual fund found that it couldn’t redeem its customers’ money. Money market funds, which many considered as safe as savings accounts, suddenly looked suspect until the Federal Reserve backed them up.
At a conference on sovereign debt this week in New York, Steve Hanke, professor of economics at Johns Hopkins University, predicted that even commodity prices would plunge in response to a messy Greek default.
If Greece goes under, traders seeking safety would immediately sell euros and buy dollars, Hanke said. The dollar would soar and prices for commodities like oil and wheat, which are bought and sold in dollars around the world, would collapse. A single dollar would buy much more oil or wheat.
“If the bomb is set off by Greece, commodity prices will collapse,” Hanke said.
Hanke, who has advised governments around the world on managing their currencies, argued that Greece appears bound to collapse under its debts as its economy shrinks. “Greece is doomed,” he said.
So investors will be watching what happens this week in Athens. At the sovereign debt conference, Hans Humes, president of Greylock Capital Management, said this week could bring “the precedent-setting moment.” He warned that if the banks and investment funds that hold Greek bonds take steep losses, then Portugal, Italy and other countries shouldering heavy debt burdens can be expected to follow Greece’s lead.
It’s comparable to a messy default. Traders will respond by immediately selling government bonds from those countries, Humes said. Borrowing costs will rise, and Europe’s debt crisis will turn much worse.
Humes has been involved in the negotiations on the side of creditors holding Greek bonds so he has a stake in the game. But it’s a scenario other money managers often cite.
“There’s a fear that other countries won’t negotiate at all. They’ll just say, ‘We’ll pay you back at 50 percent or maybe less,” Kleintop says.
To Colas, the deepest concern isn’t how the S&P 500 reacts or whether the dollar rises if Greece drops the European currency. It’s the possibility for panic, especially a run on European banks.
What if people across France and Germany crowd into banks to pull their deposits? Banks, after all, are some of the largest buyers of government debt.
“Human emotions can drive things off the rails,” Colas says.
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See Also:
- Ken Rogoff: It’s Not Just Greece
- The ECB Is Despairing About How To Deal With The Greek Debt Debacle
- THE ADVENTURES OF NIKOS KASSIMATIS: The Man Who Owes $1.23 Billion To The Greek Government
David Einhorn’s Greenlight Capital Fined $11 Million For Insider Trading
Hedge fund manager David Einhorn and his fund Greenlight Capital were fined 7.2 million pounds ($11.2 million) by the U.K.’s Financial Services Authority, Bloomberg TV’s Dominic Chu reported.
The FSA said that Einhorn’s fund traded stock in Punch Taverns PLC on inside information back in 2009.
According to Sky News’ Mark Kleinman, Greenlight sold shares of the pub and bar operator just three days before Punch Taverns revealed plans to raise £350m from investors.
Kleinman added that Greenlight had pared back its stake in the company several times before the announcement was made.
Einhorn is known for seeing problems at Lehman Brothers and publicly shorting the stock before the bank folded.
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- A Quick Look At How The FBI Turns Insider Traders Into Informants
There’s A Revolution Coming In Global Finance
HONG KONG – In March 2011, the catastrophic earthquake, tsunami, and nuclear disaster that hit Japan halted production of key components on which many global supply chains depend. The sudden disruption of these essential materials from the production process forced a reassessment of how these supply chains function. But such vulnerabilities are not confined to the manufacturing sector. The finance industry, too, has suffered its own near “supply chain” meltdown in recent times.
The failure of Lehman Brothers in 2008 not only roiled global financial markets, but also brought global trade practically to a standstill as wholesale banks refused to fund each other for fear of counter-party failure. The simple banking system of the past, one based on retail savings being concentrated in order to fund the credit needs of borrowers, had evolved into a highly complex – and global – supply chain with knock-on risks of disruption comparable to those seen in Japan last spring.
Financial supply chains and those in the manufacturing sector share three key features – architecture, feedback mechanisms, and processes – and their robustness and efficiency depend upon how these components interact.
In today’s financial architecture, as with other supply chains, interdependent networks tend to concentrate in powerful hubs. For example, just two financial centers, London and New York, dominate international finance, and only 22 players conduct 90% of all global foreign-exchange trading. Such concentration is very efficient, but it also contributes to greater systemic risks, because, if the leading hubs fail, the whole system can collapse.
Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up. The Lehman Brothers collapse triggered just such an explosion, with the financial system saved only by government bailouts.
Finally, the processes within supply chains, and the feedback interactions between them, can make the system greater or smaller than the sum of its parts. Since a complex network comprises linkages between many sub-networks, individual inefficiencies or weaknesses can have an impact on the viability of the whole.
Like manufacturing supply chains in the wake of the Japanese disruption, financial supply chains face formidable pressures to re-engineer and adapt as the global economic balance shifts towards emerging markets. As that happens, billions of consumers will enter these countries’ middle classes, new social networks will evolve, and climate change will become a growing factor in global commerce.
In addition, major regulatory reforms will impose new and higher costs on the financial sector. Banks and other institutions are also under pressure to devise new financial products that can help the real sector to manage more complex risks and enable investment in areas such as green technology and infrastructure for developing economies.
Moreover, global financial stability now depends upon greater cooperation at the international level, with tighter enforcement of rules at the national level. It is also clear that emerging markets are searching for alternative growth models that are green and sustainable. Their financial sectors will have to operate very differently from the current model, which is driven by consumption.
In a world in which both consumption and finance must grow more slowly to cope with global resource and environmental constraints, what role can finance play in reducing addictive consumption, funded by unsustainable leverage? And, given that financial institutions will have to monitor and manage risk in a radically different manner, both for themselves and their customers, what is the role of distribution in a world where consumption, savings, and investment will accelerate in volatility?
Financial “production” is currently a top-down process. Instruments are designed in such a way that their sales generate more profits for financial engineers than for end users. But the rise of interactive social networking has made financial innovation more bottom-up. Millions of bank customers using mobile phones can provide immediate feedback on which products and services they like or dislike. In the future, client-service and transaction-management systems will receive more input from customers more frequently, so that product design is shaped interactively.
The current strategy in the financial sector drives excessive competition by increasing market share at rivals’ expense, often breaking trust with customers for the sake of short-term gains. Yet the financial sector has, in previous eras, proven that it can operate as a public good by providing trustworthy, efficient services. The winning financial supply chains of the future will instill confidence that they offer safe, stable, and efficient services to the most clients.
Innovation in the last century focused on processes, products, and services. Today, the financial sector needs innovation of a higher order, involving business models, strategy, and management approaches that restore trust in finance. Just as Steve Jobs of Apple transformed the computer industry through lifestyle products and highly reliable, user-friendly, and “cool” services, financial institutions will have to introduce new value chains that create confidence by adapting to the growing needs of new markets.
Given such profound changes, financial leaders should think about how to orchestrate a new financial supply chain – the “killer app” for our still new century.
Andrew Sheng, President of the Fung Global Institute, Hong Kong, and the Chief Adviser to the China Banking Regulatory Commission, is a former Chairman of the Securities and Futures Commission of Hong Kong.
This post originally appeared at Project Syndicate.
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- MARK MOBIUS: Invest In Frontier Markets Before They Grow Into Emerging Markets
Don’t Expect Much Celebration On The Tenth Anniversary Of The Euro
PARIS (AP) — Just three years ago, the euro was being praised as the can-do currency that had delivered unprecedented prosperity in Europe.
Now, it’s widely derided as a hugely flawed experiment in the wake of a debt crisis that’s threatening its very existence — an uncomfortable backdrop as the currency’s notes and coins hit their first decade in circulation on Jan. 1.
The question is: Will it get to its 11th birthday, let alone 20th? In the euro’s tumultuous short history, it has already been heralded as the ultimate mark of a peaceful, united Europe; scoffed at as a giant act of hubris by a distant political elite; and credited with giving Europe a more influential voice in the world.
These days, as it faces its biggest crisis yet, the euro is a daily reminder to more than 330 million people of the dismal state of the economy in the 17-nation eurozone. Many countries seem headed back into recession, and policymakers are grappling with a spiraling debt crisis.
While few Europeans are prepared to scrap the euro — in part because they fear a chaotic collapse more than the current muddle — some are nostalgic for the money they counted on before it arrived.
Parisians waiting to exchange their old francs outside a branch of the Banque de France before a Feb. 17 deadline harked back to the “rosy” days.
“Life was better before,” said Mamia Zenak, a 52-year-old doctor. “It (the euro) is a misery for everyone.”
But it was not always so.
In 2009, fanfare accompanied the 10th anniversary of the euro’s “launch,” when it began floating on international exchanges and banks and governments started using it in their accounting. It was widely credited with cushioning the countries that use it from the banking crisis sparked by the collapse of U.S. investment bank Lehman Brothers in 2008, and for preventing proud euro member Ireland from descending into the economic chaos that befell non-euro Iceland.
“When the euro was launched there were plenty of people who thought it would crash and burn,” the BBC wrote in a story on its website at the time. “Ten years on, its role as a global currency is secure.”
It doesn’t look so secure now. Events took a dark turn in 2010, when the debt-fueled boom years finally caught up with Greece and the eurozone realized it didn’t have the tools to deal with its economic implosion.
Eventually Greece’s euro partners and the International Monetary Fund found the money to bail the country out but it wasn’t long before Ireland had to be rescued too after its property and banking sectors collapsed. In 2011, Portugal’s failure to deal with its chronically sclerotic economy meant it joined the bailout club too.
Now as 2012 dawns, the euro’s role as even a regional currency is uncertain as the crisis has spread to much-bigger Italy, with many skeptical about its ability to survive, at least in its present form.
Today’s pessimism recalls the early days, when consumers worried that the currency would do them in financially, as shopkeepers took advantage of the changeover to hike prices. Maria Esteban, a catering manager in Madrid, remembered the price of a beer jumping from 150 pesetas to euro1.50 — an increase of 66 percent.
“People barely knew what they were paying,” said the 50-year-old.
Prices that had been set for their ease — 10 francs, which was one coin, for a cone of roasted chestnuts in Paris, for instance — saw some of the most egregious markups. Overnight, those chestnuts rose by a third — to euro2, also a single coin.
A European Central Bank analysis found that while the perception that prices skyrocketed after the euro is generally exaggerated, 0.3 percentage point of 2002′s 2.3 percent inflation was due to the introduction of the new notes and coins.
But, after that first uneasy year, an EU survey found that just over half of respondents thought the euro was “overall advantageous,” while nearly a third thought the opposite. By 2007, at the height of an economic boom and with calls for the euro to become the world’s reserve currency, 72 percent thought the currency was a “good thing” for Europe.
In the EU’s latest survey, that figure has fallen to around two-thirds of respondents, and the economic downturn has renewed complaints about the squeeze exerted by the single currency.
While public affection for the euro vacillates frequently, Europeans have remained convinced of one thing: Few believe the currency has achieved one of its more lofty goals, forging a common European identity from Dublin to Tallinn.
The European Commission most recently asked citizens last year if the euro had made them feel more European. More than three-quarters said it had “no effect.” That number has remained fairly intractable over the years; it was 80 percent in 2002.
Dutchman Patrick Plomp, who collects and trades rare bank notes, said the bills’ design is partially responsible for their failure to instill a connection to Europe.
Whereas his country’s guilders carried pictures of the sunflower, Austrian schillings depicted a Lipizzaner stallion and Greece’s drachma bore Apollo’s head, the drawings on euros are merely examples of different types of European architecture: They don’t represent real monuments.
“If you look at a euro, you’ll see that it’s made with buildings that don’t exist, bridges to nowhere,” said Plomp, 44. “The effect that this has is that people feel alienated from the money. It’s something that comes from far away.”
Taina Kovamaki, a 40-year-old nurse, added that a feeling of alienation from the note leads to worries about the currency in general.
“After all the Finnish markka was Finnish — it was our own,” Kovamaki said as she lined up at the Bank of Finland counter in Helsinki, where the markka can be changed until Feb. 29. “The financial crisis scares me. I’m just not sure those people in Brussels know what they’re doing.”
But as with all things euro, how people feel about it depends largely on what they had before.
While many deride their generic look, stationery store owner Yiannakis Ioannides compares the notes to the flimsiness of the old Cypriot pound.
“It’s better quality than the pound, which wasn’t as good,” the 52-year-old said.
The view from outside the currency union has also been just as fickle. Once seen as a sign that eastern European countries had “made it,” joining the euro is now a far more sensitive subject. Poland, for one, is carefully measuring its words, calling for reforms before it joins.
Pauline Frommer, the managing editor of the Frommer’s travel guides, recounts the glee of the currency’s early days, when an Italian shopping spree could be had on the cheap by Americans because of the favorable exchange rate and the eventual dismay as the rate turned around in recent years.
Now, the euro has moved into a new phase, she said.
“The euro has come to symbolize something that may not have been fully thought through and may come back to bite us,” said Frommer. “I think we’re all very worried about the future of the euro, that maybe its 10th anniversary will be its last.”
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Online:
European Commission’s surveys on the euro: http://ec.europa.eu/public_opinion/topics/euro_en.htm
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Associated Press writers Toby Sterling in Amsterdam, Matti Huuhtanen in Helsinki, Menelaos Hadjicostis in Nicosia, Cyprus, Harold Heckle and Ciaran Giles in Madrid and Vanessa Gera in Warsaw, Poland, contributed to this report.
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The 10 Most Outrageous Luxury Purchases In November
As the holidays approach, luxury spending is at its peak.
Christie’s, Sotheby’s, and Bonhams kept busy this month with quite a few auctions and a slew of record-breaking sales.
And the big spenders were out in full force, buying everything from a $10 million spider statue to John Lennon’s tooth.
A nude photo of Kate Moss sold for $25,000
A super expensive photo
An original print of Albert Watson’s photograph of a nude Kate Moss sold to an anonymous bidder at Bonhams London for $25,000 at auction. The photo is said to be one of Moss’ favorites of herself.
The photo was apart of a 1993 shoot for German Vogue.
Click here to see the most expensive photos of all time >
A dentist purchased John Lennon’s tooth for $31,200
Most expensive tooth from the mouth of a Beatle
John Lennon’s tooth–cavity and all–was auctioned off early this month for nearly twice of its pre-sale estimate.
A dentist, Michael Zuk, purchased the tooth to display in his office at to show other dental schools.
An anonymous bidder dropped $33,000 on the now-worthless first share of Lehman Brothers
A very expensive piece of paper
The first-ever share of Lehman Brothers, which hung in ex-CEO Dick Fuld‘s office, sold for $33,000 at auction this month to an anonymous bidder in Germany.
The stock is now worthless, of course, because Lehman Brothers is now defunct.
See the rest of the story at Business Insider
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