Sunday, September 28, 2008

Why US finance is in such a mess - for dummies

Are you finding it too hard to understand why US is in such a mess now? If so then the comedy below is a much watch for you. Amazingly the comedy was recorded in 2007, and has proved to be poignantly and deadly accurate.

One wonders - why the comedians can saw it coming while the the financial analysts and government regulators were so blind to it. From toxic mortgages to poisoned milk and who knows what else to come, this is a stark revelation of the folly and destructiveness of runaway capitalist greed.

One a more serious note, below is a very clarifying and factual article from the Financial Times, September 21 2008. What we are seeing now is only the very beginning, and this article details the unrawelling this is to unfold over the coming years.

The shadow banking system is unravelling
By Nouriel Roubini

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self-fulfilling and destructive run on its illiquid liabilities.

But unlike banks, which are sheltered from the risk of a run - via deposit insurance and central banks' lender-of-last-resort liquidity - most members of the shadow system did not have access to these firewalls that prevent runs.

A generalised run on these shadow banks started when the deleveraging after the asset bubble bust led to uncertainty about which institutions were solvent. The first stage was the collapse of the entire SIVs/conduits system once investors realised the toxicity of its investments and its very short-term funding seized up.

The next step was the run on the big US broker-dealers: first Bear Stearns lost its liquidity in days. The Federal Reserve then extended its lender-of-last-resort support to systemically important broker-dealers. But even this did not prevent a run on the other broker-dealers given concerns about solvency: it was the turn of Lehman Brothers to collapse. Merrill Lynch would have faced the same fate had it not been sold. The pressure moved to Morgan Stanley and Goldman Sachs: both would be well advised to merge - like Merrill - with a large bank that has a stable base of insured deposits.

The third stage was the collapse of other leveraged institutions that were both illiquid and most likely insolvent given their reckless lending: Fannie Mae and Freddie Mac, AIG and more than 300 mortgage lenders.

The fourth stage was panic in the money markets. Funds were competing aggressively for assets and, in order to provide higher returns to attract investors, some of them invested in illiquid instruments. Once these investments went bust, panic ensued among investors, leading to a massive run on such funds. This would have been disastrous; so, in another radical departure, the US extended deposit insurance to the funds.

The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of "convenant-lite" clauses, which do not include traditional default triggers, and "payment-in-kind toggles", which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.

We are observing an accelerated run on the shadow banking system that is leading to its unravelling. If lender-of-last-resort support and deposit insurance are extended to more of its members, these institutions will have to be regulated like banks, to avoid moral hazard. Of course this severe financial crisis is also taking its toll on traditional banks: hundreds are insolvent and will have to close.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies.

European financial institutions are at risk of sharp losses because of the toxic US securitised products sold to them; the massive increase in leverage following aggressive risk-taking and domestic securitisation; a severe liquidity crunch exacerbated by a dollar shortage and a credit crunch; the bursting of domestic housing bubbles; household and corporate defaults in the recession; losses hidden by regulatory forbearance; the exposure of Swedish, Austrian and Italian banks to the Baltic states, Iceland and southern Europe where housing and credit bubbles financed in foreign currency are leading to hard landings.

Thus the financial crisis of the century will also envelop European financial institutions.

The writer, chairman of Roubini Global Economics, is professor of economics at the Stern School of Business, New York University

Tuesday, September 16, 2008

916 - The Birth of a New Malaysia

There was something very different at tonight’s celebration of Malaysia Day Kelana Jaya Stadium. It was much more than a political rally. Something very significant was hatching. It was thick in the air. It was magical. It was infectious. I wish everybody were there to share those magical moments with me.

I arrived at Kalana Jaya Stadium seething with anger over the totally unreasonable and utterly idiotic detention of our fearless hero RPK and our respected YB Teresa Kok under the draconian Internal Security Act. The first sight that greeted me the moment I entered the stadium was the Ramadan prayer. The sight of hundreds of people worshiping the Divine with the serene voice of the Imam drew me into another space immediately. My heart followed the prayer although my mind did not know the language. I silently offered my prayer for RPK and Teresa, and I prayed for peace and unity in our beloved homeland.

I like to offer my highest praise to the Imam who conducted the prayer. I really appreciated his devotion to God and his peaceful voice that permeates the whole stadium with serenity. I was really grateful to be reminded of my connection to the Divine, which set the tone for my perception and participation for the rest of the night.

Religion has always been a big part of my life. It was never in doubt that our moral strength lies in our adherence to the Divine. My true wish is that one day we will not need to shunt each other because of the superficial differences in how we relate to the Divine. I wish that one day we can all allow God Be, be the unknowable Mystery, be the uniting principle for humankind.

I have been to a few rallies by Pakatan Rakyat. But this one was different, very different. What made it different was the lacking in negative emotions. You don’t feel the hatred for Barisan Nasional government. You don’t even feel that the rally was about a tremendous struggle to topple a big bad evil empire. There was hardly any smearing of the Barisan Nasional government. It was as if everybody already KNEW and presumed that the falling of the Barisan Nasional Government is inevitable. The rally was about the celebration of unity and a better future for all. The amount of light and happiness in the atmosphere was truly infectious and uplifting.

As I told you, I walked into the stadium with seething anger, but half way through the prayer I was already seeing things in a different light. I begun to see that the behaviors of the BN government was so unbelievably ridiculous that it was almost comical. Moreover every evil deed that the government did backfired badly immediately, and the politicians and government organizations are behaving like the three stooges. It was Divine retributions in its most graphical form! I heard that there were meant to be 15 people on the ISA detention list. I am really curious to get hold of the list and see what sort of ridiculous reasons were given for the intended detention. I am sure it will beat the Ripley’s Believe It Or Not show.

Despite the anguish of the ISA detention and the thinly veiled threat of 513 repeating, something very significant happened in our collective psyche tonight. The messages delivered by our leaders were pristinely clear – of unity, of restoring justice and order, of equal participation of life opportunities. The voices of the people were equally resounding and unequivocal. The spirit of unity was overwhelming. It was a remarkable demonstration of people power. The veil of darkness has finally lifted. Malaysia has finally come of age.

When the national anthem was played I was moved to tears. I understood for the first time the meaning of the lyric, and saw it in action right in front of me. I felt for the first time a deep sense of purpose for this piece of land that we called home.

916 has already happened. The transformation has already happened in the collective consciousness of the people. The rest is only a matter of time. This is the birth of a new Malaysia. Of that I am certain.

Monday, September 1, 2008

People Power - The True Story of the Internet

Most of you will probably agree that Malaysia is in the midst of a huge revolution that is going to change the political landscape irrevocably. I would like to propose that at the heart of this revolution is a paradigm shift in our collective consciousness, brought about in conjunction with the development of the Internet as a communication medium that enables instant connectivity and encourages active participation from all. The result is people power, the rise of the voices of the ordinary people as a ground shaking collective force.

What we are observing in Malaysia is not isolated. Similar developments are developing all over the world, although most of them don't take the form of political uprising. I am including an excellent video about it below. You will see from this video that the new internet revolution is already shaking the foundations of the mass media and capitalist establishments.

I am certain that this is the era of people power. The collective force from the ordinary people lead by the selfless service from morally enlightened individuals is the only force that is able to avert the current march toward total annihilation.

I highly recommend this video to all. To my fellow Malaysians, it will give you a very good insight to the nature of Malaysia-Today as a social phenomena and why it is unstoppable.

Malaysia-Today as an interactive web site does not just belongs to Raja Petra alone. It is where 1+ million of us participate actively to share our views and inform each other what is right and relevant. It is where we hang out and share our heart and soul with each other. It belongs to all 1+ million of us. The government’s recent move to block Malaysia-Today is another of the idiotic move that will guarantee serious repercussions down the line.

Who is MCMC to tell us that Malaysia-today should be blocked anyway? On what basis did MCMC came to such conclusion? How many complains did MCMC received and from who? Why is Utusan Malaysia not being blocked for that matter? The five states lead by Pakatan Rakyat have made strong criticisms and called for the boycott of Utusan Malaysia for its ultra racist and seditious reporting. Isn't that enough 'complains' for its license to be revoked?

Malaysia-Today is NOT about lawless mob tearing down the establishments. Yes, there were a lot of criticisms about the BN government, but it is only because of its overwhelming corruption and incompetence. Malaysia-Today is not mindlessly endorsing Pakatan Rakyat either. Our respected Raja Petra and various others have written many very critical articles about Pakatan Rakyat and its component parties. I have written quite a few critical articles about Pakatan Rakyat myself for that matter.

Primarily Malaysia-Today is about human dignity and establishing the right religious and culture values. It is about building a nation where different races and religions can live in harmony and progress together. This is a place where we discover that there is hope after all in the midst of the current darkness. This is a place where we find the moral strength and the collective force to bring about the necessary change for the future of all.

MCMC should have known better that technologically it is impossible to silence Malaysia-Today. It is an unnecessary provocation to the people that is already overwhelmingly against the government. So much about MCMC and the BN government. I am ever more certain that it is simply beyond redemption….

People Power - The True Story of the Internet (part 1 of 5)

The above video is part 1 of a 5 parts series posted in YouTube. The rest of the series can be found here. It does take some time to download. My recommendation is to initiate the download on all 5 parts simultaneously, and come back 2-3 hours later to view them together.