In a nutshell

London Banker sums up what went wrong over the past 25 years, in 1,610 words. It's a reprint from May, but he's right to show it again: it pretty much says it all.

Those who are old enough may remember having to do a precis in English. This is a very valuable, rational, intellectual exercise, which perhaps is one of the reasons it was ditched in New Teaching.

Do you think you could distil LB's observations in, say, 600 words?

Food shortages next?

London Banker explores the implications of the drying-up of letters of credit. Stock that larder extra well until you've heard the problem has been fixed.

Lehman and that $8 billion

Lehman administrators have filed a court order for the return of $8bn that was transferred from the UK to the US just before the firm's failure. The radio news this weekend said (my phrasing) that it was Lehman's practice to park the money in the US overnight to earn interest.

Reuters says "Administrators for Lehman's European operations have questioned why $8 billion was transferred to New York from London just before the bank collapsed."

Was this really standard practice? Couldn't the money have been earning (possibly higher) interest overnight here? Do other firms do the same?

Or was it part of a Lehman plan to draw assets back onto US soil in preparation for its bankruptcy, in order to favour American creditors over foreign ones, as London Banker mooted on 12 September?

Carte Blanche; take cover!

We're back in the days of Dumas' Cardinal Richelieu (*), as London Banker points out. He quotes Section 8 of the proposed new US financial legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

How is this to be subjected to democratic accountability?

I essayed a paranoid spoof on Friday, only to find it exceeded by reality. See Karl Denninger for more details of the amazing, autocratic powers proposed in the new US financial legislation.

This is not a sweary blog, but if that becomes law, head for the bl**dy hills.

Denninger also explains how the $700 billion limit can be manipulated to absorb infinite amounts of bad debt, by discounting on resale and then taking on more fresh garbage. He says:

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

_____________________________

(*) see Wikipedia:

"Dec. 3, 1627

It is by my order and for the good of the state that the bearer of this has done what he has done.

Richelieu"

Finance in Wonderland

We're in a surreal phase. As Denninger points out, there is no legal authority for the Federal Reserve to accept stocks and shares as collateral, which it is now doing ("was that a wooden horse that came in through the gates?"). There is an air of unreality - huge firms suddenly going down, one by one, while we're trying to make ourselves believe that it's all still normal, somehow.

And now that Lehman has bitten the dust, we shall see whether London Banker was right - whether Lehman was calling in foreign investments in order to give US domestic creditors an unfair share in the asset recovery scramble.

US banks preparing for the moonlight flit?

This is a post you will wish to read if Lehman and/or other US Banks go down.

"London Banker" notes that US creditors get first pick of US assets in the event of insolvency, and speculates that Lehman may recently have pursued a strategy of selling foreign assets to increase their US-based holdings. In the event of the bank's failure, this would minimise the loss to American creditors, stiffing their foreign counterparts. Such a pre-crash preparatory repatriation of wealth, he says, might account for some of the recent turnaround in the dollar and US stocks.

He even hints at the temptation for banks to misappropriate assets in nominee accounts for which they are technically only the custodians. Kind of like the old "Muddling up the firm's money with my own," or Father Ted's "It was only resting in my account."

There is a sick plausibility to these speculations.

UPDATE: ... and Sitemeter tells me we are attracting the attention of Beijing (IP: 61.48.41.# (CNCGROUP Beijing Province Network)). A little paranoid frisson to enliven my Friday evening.

The New World Order

I said earlier this week that rich and powerful foreign investors will call the tune now, and London Banker relays a threat from the Chinese re Fannie and Freddie. Unlike the domestic citizen and taxpayer, these people absolutely will not be stiffed.

Which is why we will get high interest rates, to prevent robbery-by-inflation. Which is why cash may remain on its throne for quite a while yet.

The question remains, which currency? One says the yen, another coughs and says "Euro." Wish I knew.

Can we undo the damage of easy credit?

... the [political] system which has for sixty years precipitated the greatest debt cycle in history may be inadequate to address the greatest deflationary cycle in history if it chooses to prescribe the same snake oil which sickened the economy in the first place rather than the balanced (fiscal) diet and (strict economy) excercise we all know would be better for us.

The road back from economic folly will be long, hard, narrow and possibly untrodden, warns London Banker in a masterly essay on the need to re-establish a savings culture.

(htp: Jesse's Cafe Americain)