Worldwide Bankruptcy Wave About to Hit

Image via WikipediaA recently released report by Paris-based Euler Hermes, the world's largest credit insurer, concludes that Europe and the U.S. will experience a significant increase in business failures in 2009.

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Lawyer Accused of Stealing Millions

Image via WikipediaNYTimes.com: "Federal authorities have been tracking what they describe as a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers. Mr. Dreier has been charged with multiple frauds in the United States and a related crime in Canada, and is being held without bail in Manhattan.

In court last week, prosecutors said their count so far put the money missing at $380 million, most of it lost by hedge funds and other investors who had bought promissory notes that were flat-out fictions.

In recent days, Dreier L.L.P., the Park Avenue law firm that Mr. Dreier founded, has been plunged into chaos. At least $35 million in escrow that was to have been held by the firm seems to be missing, the authorities say, and nearly all of its 250 lawyers are now looking for work."

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CFOs are pessimistic

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According to a new study by Duke University and CFO Magazine.

Executives say they expect the recession to last for another year. They also say that earnings, capital spending and employment all will drop in 2009.

Duke says that this quarter’s study, which asked 1,275 CFOs around the world about their expectations for the economy, finds CFOs at their most pessimistic in the survey’s more than 12-year history. Some 81 percent of U.S. CFOs are more pessimistic about the economy now than they were a quarter ago, and almost 60 percent say the U.S. economy won’t recover until the fourth quarter of 2009 or later – with 39 percent saying recovery won’t start until 2010.

CFOs say employment should fall by 5 percent in the U.S. and Europe in 2009. Capital spending will fall by 10 percent in all regions.

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Banks on Life Support

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The coming tidal wave of consumers falling behind on their credit cards and other debt will keep banks in sorry shape for the next year or more, Oppenheimer analyst Meredith Whitney told CNBC Wednesday.

“The big banks are going to be on life support for at least 18 months, if not 36 months,” she said. “The big banks will not fail, but the big banks will not grow, in my opinion, for at least another two years.”

Her remarks underscore recent comments by the nation’s top bankers. Bank of America CEO Ken Lewis says he anticipates the credit card industry will experience record losses. Lewis’ predecessor Hugh McColl recently told the San Francisco Business Times that it will take time for the economy to work its way through unwinding the credit bubble. And when he says time, he’s talking years, not months.

“Individuals are over-leveraged,” he said, adding that he’s speaking as an industry observer and not on behalf of BofA (NYSE: BAC).

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Fed-style QE is Printing Money

Image via WikipediaBarclays Capital lays out a primer for what the Fed is really doing for monetary policy. The Fed can't drop interest rates below 0%, but there are other weapons in the Fed arsenal. Barclays Capital in their most recent Weekly Market Monitor talks in depth about the current Fed policy called Quantitative Easing. (See Help! What is Quantitative Easing?)

"Without making a formal announcement, the Fed has already moved to a policy that is effectively QE. While its policy objective is still the fed funds rate, the Fed's balance sheet has more than doubled over the past three months to over $2 Trillion as it has expanded its emergency lending programs, foreign currency swap lines, and open market purchases. When the Fed began creating new lending facilities last year, it financed them by selling Treasuries, thereby keeping its balance sheet from expanding.

A few months ago, the Fed ran low on Treasuries it could sell and began to expand its
balance sheet; however, it sought to soak up or sterilize this expansion through the use of a special Treasury bill program. The Treasury sold bills and deposited the proceeds in its account with the Fed, and the Fed used the proceeds to extend loans to banks based on illiquid collateral. While the Fed's balance sheet was being grossed up, the Treasury was soaking up cash through bill issuance and systemwide liquidity was unchanged.

The Treasury program is being wound down and the expansion of Fed programs is being
financed through increases in excess bank reserves. In this case, the Fed is extending the same collateralized loans, generating excess reserves, and grossing up its balance sheet without sterilizing the transaction through the Treasury facility. Thus, the Fed is currently "printing money" and the over-provision of reserves to the banking system is far beyond what would be required to meet the FOMC's target funds rate."

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Help! What is Quantitative Easing?

Image via WikipediaA great Weekly Economic Monitor from Barclays Capital this week. (If you don't get it, start building a relathipship with the Barclays team. Their research is the best.)

Quantitative easing (QE) is the name given to a three-part monetary policy program implemented by the Bank of Japan (BOJ) from March 2001 to March 2006. At the outset of the program, the BOJ believed that economic conditions warranted monetary easing as drastic as is unlikely to be taken under ordinary circumstances, and therefore made the following changes to its policy strategy:

1. A switch in the operational objective of monetary policy the policy instrument from an overnight interest rate to current account balances(bank reserves plus deposits of non-bank financial intermediaries at the central bank).

2. A reduction in the overnight interest rate to zero.

3. A commitment to maintain the new procedures until y/y CPI inflation registers stably at zero percent or higher.

Virtually all developed-world central banks conduct monetary policy in the same way: by adjusting the supply of bank reserves balances in accounts commercial banks maintain at the central bank in order to target a specific short-term interest rate. The amount of reserves supplied is a passive variable in this process. Banks demand a certain quantity of reserves to meet reserve requirements plus an additional, much smaller, amount of precautionary reserves. The central bank simply meets the amount of reserves demanded at the targeted interest rate. As a result, the total amount of reserves in the banking system is, in a normal environment, very close to the level of required reserves (i.e there are very little excess reserves).

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Fed Has Already Adopted Quantitative Easing

Image via WikipediaPer the latest Market Watch from Barclays Capital:

"In recent weeks, there has been a rather odd debate over whether the Fed will adopt Japanese-style quantitative easing: that is, flood the banking system with reserves to induce more lending. In our minds, the Fed has already gone well beyond anything the Japanese ever did. It has already dramatically expanded bank reserves, and unlike the Japanese, it has used these funds to intervene aggressively in many parts of the capital markets. This is quantitative easing on steroids.

If our baseline forecast is correct, it could mean a broad-based shift in the capital markets as a variety of risk aversion trades unwind. Once the markets believe policy-makers are succeeding in containing the capital markets and economic crisis, we would expect a rally in risky assets such as credit spreads and equities; a bear steepener in the treasury market, as the Fed holds down the short end and budget deficit concerns push up the long end; a weakening of the dollar as safe-haven inflows ease; and a rally in commodity markets as investors price in an eventual recovery in global demand."

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Is Deflation a Risk in 2009?

According to the Barclays Capital Weekly Economic Monitor, there "is little immediate risk of deflation."
The report goes on to say that although headline inflation will fall into negative territory (yr to yr) heading into fall 2009, this is primarily due to falling in energy prices. Once energy prices "find a bottom, inflation will naturally rise back to the level of core inflation. This is a case of a big fall in one relative price, not a broad-based deflation."

The report goes on to say that the real risk of deflation comes in 2010. If the unemployment rate does not come down quickly from the presumed 8% peak, core inflation will drop steadily and could pierce the lower end of the 1-2% Bernanke bands in 2010. This risk argues for continued very accommodative monetary policy for a long time to come. Presumably, the Fed will want to exit from its aggressive market interventions as quickly as the capital markets safely allow. These programs distort the capital markets, put tax dollars at risk, and should be phased out as soon as it is safe.

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Morgan Stanley Ups Stake in Struggling General Growth

Image by Getty ImagesMorgan Stanley has become the second investor to take a large stake in General Growth Properties Inc., the struggling mall operator headquartered in Chicago. Morgan Stanley bought more than 13.6 million shares, upping its stake in the company from 3 percent to 5.1 percent.

General Growth’s stock price closed yesterday at 94 cents. At mid-morning today, it had risen to $1.35. Last month, Pershing Square Capital Management, a New York City-based hedge fund managed by William Ackman, bought just over 20 million shares or a 7.5 percent stake in GGP.

The Morgan Stanley move followed an agreement, reported Monday by CPN, between General Growth and a six-lender consortium to extend the maturity date for $900 million in mortgage loans on two of three General Growth malls in Las Vegas. In an attempt to raise cash, the mall operator has put both of those properties, the Fashion Show and Palazzo malls, up for sale, along with a third Las Vegas center, Grand Canal Shoppes. General Growth owes approximately $27 billion, a debt load created to finance acquisitions, including its $12.6 billion acquisition of the Rouse Co. in 2004.

See article: Morgan Stanley Ups Stake in Struggling General Growth

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Let Home Prices Fall

Image via The sooner prices are allowed to naturally fall to normal, post-bubble levels, and the sooner that houses become affordable, the sooner the economy can heal itself and start growing instead of contracting.

By way of analogy, imagine a reprise of the Dutch tulip mania of 1637. Say the price of tulip bulbs has grown handsomely in the last few years, and impressive fortunes were made by early speculators.

Bidding wars erupt, with the winners hoping to resell them the bulbs at a handsome profit months or years later. Cable TV hosts proclaim that a golden age of prosperity has dawned. Prized bulbs change hands for $1 million each, and skeptics are reviled as doomsayers.

Eventually this boom leads to a bust, as new buyers become scarce, and the price of tulip bulbs suffers a dizzying fall down to $10 each. Speculators complain to Congress. Politicians pledge to use tax dollars to purchase bulbs for $1,000 or $10,000, invoking phrases like 'stability' and 'liquidity crisis,' or offering taxpayer-backed loan guarantees to speculators.

This would sound silly for tulips, but it's close to what's happening for houses. All this will do is slow -- and not arrest -- the process of prices falling. Not eve"

Let Home Prices Fall, Declan McCullagh Says Further Government Intervention Will Do More Harm Than Good - CBS News

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Is China Heart of Slowdown?

Image by House prices in Shanghai, Shenzhen and Guangzhou are plunging, and the global economy may grind almost to a halt next year because of it."

Full article on CBS News at: China Is `Heart of Global Slowdown' as Property Slump Stalls Driver of GDP

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White & Case to Undergo Major Reorganization

Image via WikipediaChange is coming to White & Case, and the name of that change is middle management. Under a new structure put in place this week, firm power will shift away from 35 individual offices and be dispersed among 14 regional groups. There also will be a renewed focus on 16 different global practices. The moves come in the wake of a four-month review of White & Case's strategy and structure by McKinsey.

'The day of the brick and mortar approach to building a global law firm is over,' says chairman Hugh Verrier, who spoke about the reorganization for the first time on Tuesday in an exclusive interview with The Am Law Daily.

For a quarter century, since it took its first steps on a path to becoming a global law firm, White & Case's far-flung offices have operated as individual fiefdoms, with little directive from above on how to grow business, choose clients, or cut costs. But with 2,500 lawyers spread around the world and growing competition from other, more-focused global powers, White & Case's leaders felt a review of the business was in order, Verrier says.

See article at Am Law Daily: White & Case to Undergo Major Reorganization

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Bloomberg.com: Exclusive

Image via WikipediaBarclays Dickers on Loan Waivers as European Banks Fight More Writedowns: Royal Bank of Scotland Group Plc and Barclays Capital are staving off writedowns by propping up European companies with plummeting loan values."

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