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Martin D. Weiss, Ph.D. writes: On October 11, 2008, a single statement hit the international wire services that provides more specific clues: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” This statement was not the random rant of a gloom-and-doomer on the fringe of society. Nor was it excerpted from a twentieth century history book about the Great Depression. It was the serious, objective assessment announced at a Washington, D.C. press conference by the Managing Director of the International Monetary Fund (IMF). The unmistakable implication: So many of the world’s largest banks were so close to bankruptcy, the entire banking system was vulnerable to a massive collapse. The primary underlying cause: Derivatives.

The Mafia knows all about systemic meltdowns of gambling networks. In the numbers racket, for example, players place their bets through a bookie, who, in turn is part of an intricate network of bookies. Most of the time, the system works. But if just one big player fails to pay bookie A, that bookie might be forced to renege on bookie B, who, in turn stiffs bookie C, causing a chain reaction of payment failures. The bookies go bankrupt. The losers lose. And even the winners get nothing. Worst of all, players counting on winnings from one side of their bets to cover losses in offsetting bets are also wiped out. The whole network crumbles — a systemic meltdown. To avert this kind of a disaster, the Mafia henchmen know exactly what they have to do, and they do it swiftly: If a gambler fails to pay once, he could find himself with broken bones in a dark alley; twice, and he could wind up in cement boots at the bottom of the East River.

Unlike the Mafia, established stock and commodity exchanges, like the NYSE and the Chicago Board of Trade, are entirely legal. But like the Mafia, they understand these dangers and have strict enforcement procedures to prevent them. When you want to purchase 100 shares of Microsoft, for example, you never buy directly from the seller. You must always go through a brokerage firm, which, in turn is a member in good standing of the exchange. The brokerage firm must keep close tabs on all its customers, and the exchange keeps close track of all its member firms. If you can’t come up with the money to pay for your shares, the broker is required to promptly liquidate your securities, literally kicking you out of the game. And if the brokerage firm as a whole runs into financial trouble, it meets a similar fate with the exchange. Very, very swiftly!

Here’s the key: For the most part, the global derivatives market has no brokerage, no exchange, and no equivalent enforcement mechanism. In fact, among the $181.2 trillion in derivative bets held by U.S. banks at mid-year 2008, only $8.2 trillion, or 4.5%, was regulated by an exchange. The balance — $173.9 trillion, or 95.5% — was bets placed directly between buyer and seller (called “over the counter”). And among the $596 trillion in global derivatives tracked by the BIS at year-end 2007, 100% were over the counter. No exchanges. No overarching enforcement mechanism. This is not just a matter of weak or non-existent regulation. It’s far worse. It’s the equivalent of an undisciplined conglomeration of players gambling on the streets without even a casino to maintain order. Moreover, the data compiled by the OCC and BIS showed that the bets were so large and the gambling so far beyond the reach of regulators, all it would take was the bankruptcy of one of the lesser derivatives players — such as Lehman Brothers — to throw the world’s credit markets into paralysis.

That’s why the world’s highest banking officials were so panicked when Lehman Brothers failed in the fall of 2008. As the IMF managing director himself admitted, the threat was not stemming from just one bank in trouble; it was from many; and those banks weren’t lesser players; they were among the largest in the world. Which U.S. banks placed the biggest bets? Based on mid-year 2008 data, the OCC provided some answers:

Citibank N.A., the primary banking unit of Citigroup, held $37.1 trillion in derivative bets. Moreover, only 1.7% of those bets were under the purview of any exchange. The balance — 98.3% — was direct, one-on-one bets with their trading partners outside of any exchange.

Bank of America was a somewhat bigger player, holding $39.7 trillion in derivative bets, with 93.4% traded outside of any exchange.

But JPMorgan Chase was, by far, the biggest of them all, towering over the U.S. derivatives market with more than double BofA’s book of bets — $91.3 trillion worth. This meant that JPMorgan Chase controlled half of all derivatives in the U.S. banking system — a virtual monopoly that tied the firm’s finances with the fate of the U.S. economy far beyond anything ever witnessed in modern history. Meanwhile, $87.3 trillion, or 95.7% of Morgan’s derivatives, were outside the purview of any exchange.

One bank! Making bets of unknown nature and risk! Involving a dollar amount equivalent to six years of the total production of the entire U.S. economy! In contrast, Lehman Brothers, whose failure caused such a large earthquake in the global financial system, was actually small by comparison — with “only” $7.1 trillion in derivatives.

The potential havoc that might be caused by a Citigroup failure, with bets that involve five times more money than Lehman’s — and the financial holocaust that might be caused by a JPMorgan failure with close to 13 times more than Lehman — boggles the imagination. How bad could it actually be? No one knows, and therein lies one of the primary dangers. In the absence of oversight, the regulators simply do not collect the needed who-when-what information on these bets. More

Today, the Icelandic people are calling for revolution, literally:

Why are the Icelandic people now protesting? According to the BBC:

The banking system collapsed in October and the currency, the krona, has lost half its value in the past year. Iceland’s government was forced to take over three of its biggest banks last month when they could not keep up with billions of dollars of debt taken on to finance overseas expansion. The government has taken out $4.6bn (£3.1bn) in loans from the International Monetary Fund (IMF) and four of its Nordic neighbours to stay afloat.

That’s right, all that asset and currency inflation derived not from a miracle, but from the same old historical pyramid scheme of banking fraud. Now that con of seemingly free money is imploding globally and devastating Iceland’s small economy. Iceland’s neighbors in Scandinavia and the IMF have bailed it out with billions in emergency loans, but it will be a generation or two before the Icelandic people are dumb enough to fall for the “free lunch” con again. Before the credit crunch, this too good to be true economic miracle economy was sold to the Icelandic people with the help of the bankers and the media in such reports as this, “Where does the money come from?” More

Also See:
Thousands protest in Iceland; clash with police

Eric deCarbonnel writes,
Iceland shows how a nation can experience deflation (stock market down 81% this year) while also experiencing high inflation (soon to be hyperinflation when it allows its currency to float). The US, like Iceland, is heavily dependent on imports (especially for oil), and has accumulated an unpayable amount of debt. Only the dollar role as the world’s reserve currency has saved us so far from Iceland’s fate, but that will soon end. In six months to a year, you will be reading stories like this written by visitors to the US.

photo–Iceland, Jennie R.F.

Icelanders in shock after financial crisis
By eNews 2.0 Staff
15:22, November 18th 2008
Karlheinz Bellmann went to Iceland to find out what had happened to his savings of 110,000 euros (138,000 dollars), missing since the collapse of the country’s Kaupthing Bank. Four days later, on his way back to Germany, the father of four had other matters on his mind: “What can one do to help the people here?” Crying fathers who told him how they had lost their jobs, how their wives had experienced the same fate and how they had lost their homes left a strong impression, just as the cynical reactions among Icelandic bank executives at the bar in the Grand Hotel: “Of course we played Monopoly with the country,” they told me. “And we had fun. Most of the time it went fine.”

Finally, Kaupthing and the other major banks Landsbanki and Glitnir reached the end of the line and the 320,000 inhabitants of the Atlantic island faced national ruin. Prime Minister Geir Haarde has estimated that the aggressive expansion of the banks has resulted in a 19-billion-dollar mountain of debt. That equals two-and-a-half state budgets or twice the gross domestic product. The collapse of the financial sector and large layoffs have since October resulted in complete standstill in the construction industry, the first sign of a long downturn. Massive hoarding of goods at supermarkets and an inflation rate of 16 per cent are clear indications of the dire prospects facing the ancestors of the Vikings.

In return for a 2.1-billion-dollar loan the International Monetary Fund (IMF) has demanded that the currency, the krone, which has been weak for the past year be allowed to float freely. That would further reduce the currency’s value and make imported products for ordinary consumers even more expensive. A kilo of imported sugar will become a luxury product. The government has said that a 20 per cent inflation rate and an unemployment rate of over 10 per cent will now have to be reckoned with. Until October, Iceland’s “normal” unemployment rate was 1 per cent. “Sturdy men broke down in tears in front of me and said that the future for Iceland is like a black hole, and that one has to start back in the Stone Age,” Bellmann said.

Islanders fear that Iceland’s pension funds could be raided. They are practically the only possibility of getting funds without further running-up foreign debts. The anger expressed by ordinary citizens has been limited, so far. More and more people gather each Saturday in front of the parliament in Reykjavik. Some of the 6,000 protesters at a demonstration on Saturday threw rolls of toilet paper at the building where a few months earlier the premier had declared that the Icelandic banks were robust and the country’s finances were healthy.

Now Haarde’s party has made an about turn concerning membership of the European Union, Above all, there seems to be an mood of collective shock. “You have the feeling that the whole country has lost its self-confidence,” publicist Oskar Gudmundsson said. Bellmann expressed it differently: “It seems like on the Titanic, where people continued to dance even though the ship had hit the iceberg.” Staff at Kaupthing in Reykjavik have assured Bellmann that he is likely get back his assets.

Business Intelligence — Legendary global investor Jim Rogers believes the recent dollar gains are temporary and are not based on fundamentals. “The fact that the dollar is gaining rapidly is only temporary,” Rogers recently told a group of private bank clients. “Within a year you’ll have to get rid of the dollar,” he said. Rogers has spent a career being one step ahead of mainstream investment thinking. Amongst his many accomplishments, Rogers was co-founder with George Soros of Quantum Fund. During his ten years with the fund, the portfolio gained more than 4,000%, while the S&P rose less than 50%. All hedge funds were short on the dollar, Rogers said, but because there has been a rapid increase in the dollar’s value against other currencies, fund managers want to buy them now.

“This is temporary, Rogers says. “Fundamentally it is a drama.” Rogers also said US government bonds are extremely overvalued. “They are “the world’s last bubble.” The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said The Japanese government refused to let financial institutions fail in the 1990s. “It’s 18 years later and their stock market is 75% or 80% below what it was 18 years ago,” he added. “I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the US, but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”

Rogers admits that silver has been particularly battered down, 35% this year, and perhaps that is why he thinks this precious metal will outperform gold as investors turn to the metal as a hedge against inflation. “Silver will do better than gold,” Rogers recently said. “It’s been beaten down horribly. If you put a gun to my head and said you have to buy one, I would buy silver rather than gold.” Gold may drop as central banks and the International Monetary Fund (IMF) sell the metal to raise cash, said Rogers, who correctly predicted in April 2006 that gold would reach US$1,000 an ounce. The IMF in May ratified a plan that included proposals to sell 403.3 metric tons of gold to reduce a budget deficit. “The IMF has gigantic amounts of gold. Maybe gold is going to go down for a while. If gold does go down, I’m going to buy more,” Rogers said.

SPIEGEL Staff
The world financial crisis has reached a new level. No longer limited to banks and companies, it is now spreading like wildfire and engulfing entire economies. It has reached Asia and Latin America, Eastern Europe, Iceland the Seychelles, the Balkan nation of Serbia and Africa’s southernmost country, South Africa. It is a development that has investors and speculators alike holding their breath. Some are pulling their money out of troubled countries, while others are betting on a continued decline — and in doing so are only accelerating the downturn. Central banks are desperately trying to halt the downward trend, but in many cases the plunge seems unstoppable.

At first, it seemed as if the crash could be limited to Iceland. But now countries like Ukraine, Pakistan and Argentina are proving to be almost as vulnerable as the small island nation in the North Atlantic. It seems as though another country is added to the growing list of nations on the verge of collapse almost daily. A national bankruptcy isn’t just some theoretical construct. Argentina experienced it in 2001 and Russia three years earlier. Germany has gone bankrupt twice in its more recent history, once in 1923 and the second time after 1945. A country has reached this final stage if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.

This is what is currently happening to Iceland. The central bank in the capital Reykjavik increased its prime rate by six points to 18 percent last week. Venezuela, where inflation is also high, is now offering 20 percent to stimulate interest in its government bonds. At the moment, however, investors are shying away from all risk. In the end, the rating agencies will have no choice but to downgrade the problem countries to their lowest level of creditworthiness. When that happens, lenders will have no choice but to write off much of their money. For citizens, national bankruptcy would probably lead to massive inflation.

The threshold countries, described until recently as “emerging” economies, are in for an especially rough ride. “The dream that they would be spared seems to have come to an end,” says Rolf Langhammer, vice-president of the Kiel Institute for the World Economy. Countries like Russia and Brazil owe their recent success in large part to the boom in commodities the world has experienced in recent years. But now prices for oil, copper, wheat and corn have plunged and a giant spiral of debt has begun to turn. The companies and banks that borrowed vast amounts of money abroad for their investments can no longer service their debt, and investors are pulling out their capital. As foreign currency becomes scarce and imports unaffordable, the currencies of these countries are losing value, which only increases the mountain of debt.

According to Stephen Jen, a currency specialist with the US bank Morgan Stanley, the flow of capital to threshold countries could drop by more than half — from the current level of €575 billion ($730 billion) to €230-270 billion ($292-343 billion) — if world economic growth drops to only 1 percent in 2009. The demise of these countries, says Jen, represents the new “epicenter of the global crisis.” The looming crisis has the countries in most dire need lining up for emergency loans from the International Monetary Fund (IMF). But all they are doing is buying time — a few weeks, or perhaps even months — and hoping that the general situation will soon improve.

The Ghost of Buenos Aires
Once the Argentine businessmen had transferred their dollars abroad, the second phase of the collapse began. The Argentine government froze all bank accounts, capping the maximum amount an accountholder could withdraw at only $250 (€198) a week. Small investors, those who had left their money in the banks, were the hardest hit. Tens of thousands of desperate citizens stormed the banks, and many spent nights sleeping in front of the automated teller machines. The last phase of the downturn began in the Buenos Aires suburbs. After consumption had dropped by 60 percent, young men began looting supermarkets. In December 2001, 40,000 people gathered on Plaza de Mayo in front of the Casa Rosada, the presidential palace. There, they banged pots and pans together day and night, until an unnerved President Fernando de la Rúa fled by helicopter.

The image of the fleeing president has burned itself into the collective memory of Argentineans. It marks the worst financial crisis of the last 100 years. De la Rúa’s successor allowed the peso to float free on the world currency-exchange markets after it had been pegged to the US dollar at a ratio of 1:1. Tens of thousands of small business owners, who had incurred debt when the peso was still pegged to the dollar, filed for bankruptcy. Unemployment quickly ballooned to 25 percent. Five presidents passed through the Casa Rosada in the space of two weeks, until Nestor Kirchner, a provincial governor until then, assumed the presidency in 2003. Kirchner informed the country’s international creditors that Argentina would not be able to repay its $145 billion (€115 billion) in foreign debt.

Is history repeating itself today?
Economic experts have been warning for months that Argentina is again heading toward national bankruptcy. Men are traveling to Uruguay once again with suitcases filled with cash. In the space of only three weeks, more than $700 million (€553 million) was withdrawn from Argentine bank accounts. Government bonds have lost more than half of their value. ATMs are no longer giving out more than 300 pesos, and inflation is running rampant.

The signs of looming national bankruptcy are plentiful, and bankers in the Uruguayan capital of Montevideo know them well. In late 2001, they were the first to see the coming crash in Argentina. Men traveled across the Rio de la Plata, from Buenos Aires to Montevideo, carrying suitcases filled with US dollars. They stood in long lines at the city’s banks, depositing the contents of their suitcases into accounts and safe deposit boxes there. Uruguay is South America’s Switzerland, a safe haven for money in times of crisis. No one asks about where the millions come from. More

Major industrialised economies will suffer the worst slump since the 1930s, according to new research from Deutsche Bank. The warning underlines the fact that policymakers have failed to prevent the financial crisis from turning into a full-blown economic slump. It comes as world leaders agreed to hold a summit in New York billed as the “Bretton Woods meeting for the 21st century”. In its major assessment of the global economy’s health, Deutsche Bank also warned that Britain is even more vulnerable than the US or the euro area, as it predicted that the powerhouses of India and China would fail to support the wider global economy through the downturn.

The banks’ economists Thomas Mayer and Peter Hooper said: “We now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2pc, its lowest level since the severe downturn of the early 1980s.” According to the International Monetary Fund, global growth of anything less than 3pc constitutes a world recession. The warning was echoed by Richard Berner of Morgan Stanley, who said: “A global recession is now under way, and risks are still pointed to the downside for commodity prices and earnings.” More

(Reuters) - Investors will be seeing this week whether policymakers found a way to pull markets away from a deeper collapse as global capital markets faced complete freeze-up. The global financial system was on the brink of meltdown, the International Monetary Fund warned on Saturday, a day after finance chiefs from the Group of Seven rich nations failed to agree on concrete, joint measures to end the crisis. In a brief statement after their Washington talks, the G7 stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as vital to end growing market panic.

European leaders then raced on Sunday to produce their own deal at a summit in Paris, the focus fixed firmly on how much state money governments could mobilize to buy into banks if needed, and if they would also underwrite lending between banks, paralyzed for now by fear and distrust. Analysts say policymakers must avert a wholesale breakdown in cross-border capital and investment flows after the tumult of last week saw investors dumping everything from stocks, bonds, oil and commodities in a panic dash for cash.

Capital markets were already grinding to a halt in many parts of the world with equity trading only briefly or completely suspended in Russia, Iceland, Romania, Italy, Austria, Ukraine, Peru and Indonesia last week. “The crisis is moving with an astonishing speed and international flows of funds are freezing rapidly,” said Lena Komileva, head of G7 market economics at Tullett Prebon. She said the lack of specific steps from the weekend G7 meeting was likely to disappoint investors, threatening to cause more damage across risk asset classes this week. More

Ellada Khankishiyeva
Trend Capital
Latest developments in the financial markets of US and see-saws in the exchange rate of dollar have undermined the position of the America currency in world markets. Today, even more countries are thinking about refusing dollar USD as reserve currency. By doing this, they want to secure their markets and promote the role of national currencies.

According to International Monetary Fund, if in 1999 dollar assets accounted for 71% of all currency reserves worldwide, it makes 65% at present. A total of 25% of reserves of central banks and 39% of liquid demands in private sector are preserved in euros. Not only central banks and source companies, but also investment funds give preference to euro in their currency policy. Diversification of currency reserves reduces threat of losses from the change in rate of one of the currencies.

Azerbaijan has turned to diversification of currency reserves between dollar and euro since 2007. As a result, 60% of currency reserves of Azerbaijan are formed in US dollars and 40% in euro and pound sterling. NBA began to support cost of Azerbaijani manat in bi-currency basket against dollar and euro from 11 March. The basket has been formed by 30% in euros and 70% in dollars against previous 20% and 80% accordingly. Introduction of a new percentage enabled to reduce import of inflation, lessen risks of businessmen carrying out operations with Euro zone and secure neutral level of nominal efficient exchange rate of manat against currencies of the key trade partners. More

THE severity of the current economic downturn has been likened to the Great Depression of the 1930s by the new deputy governor of the Bank of England. The slowdown, which has threatened to plunge the world’s major economies into recession, was likely to drag on for “some time”, according to Charles Bean, Britain’s second most senior banker. And he raised the spectre cited by other economists that the combination of market upheavals and soaring oil prices could trigger conditions similar to the depression that started in the late 1920s and dragged on for a decade.

His warning came amid reports that the International Monetary Fund (IMF) has scaled back forecasts for global growth made just a month ago. The IMF is predicting world growth of 3.9 per cent in 2008, compared to the 4.1 per cent estimated in its July World Economic Outlook. It also forecasts growth next year of 3.7 per cent instead of 3.9 per cent. “It’s fair to say that if you look at the shocks impinging on us this is at least as challenging a time as back in the 1970s,” Mr Bean said at the annual conference of the world’s top central bankers in Jackson Hole, Wyoming. “Some people have said it’s as big a financial shock as the Great Depression and as far as the oil shock goes the rise in oil prices is in the same order of magnitude that we had to deal with in the 1970s.” More

PETER S. GOODMAN
Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening American businesses with the loss of foreign sales and investment that have become increasingly vital to their sustenance. Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.

Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies. The International Monetary Fund expects global growth to slow significantly through the end of this year, dipping to 4.1 percent from 5 percent in 2007. “The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere,” the I.M.F. declared last month in its official World Economic Outlook. All this means that economic troubles in the United States could intensify into the presidential election season and beyond. It could also make it harder for financial companies like Lehman Brothers — which has been seeking fresh investment in South Korea — and the government-backed mortgage giants Fannie Mae and Freddie Mac to attract much-needed capital from abroad. More

MIKE WHITNEY
Monday’s trading on the New York Stock Exchange (NYSE) was a real humdinger. It started off with the White House announcing that this year’s fiscal deficit would soar to a new record of nearly $500 billion. That was followed by news of rising oil prices, weak quarterly earnings and a slowdown in consumer spending. By mid-morning the markets were in full retreat. That’s when investment giant Merrill Lynch announced that it would notch a $4.6 billion second-quarter loss and write-downs of $9.4 billion on collateralized debt obligations (CDOs) and other mortgage-related assets. Stocks quickly went verticle and the rout was on. By the closing bell the Dow was down 240 points. Traders staggered from floor of the exchange slumped-over and bedraggled, looking like they just got a missive from the draft board.

And, yet, on Tuesday, the market staged a valiant comeback, surging 260 points in a matter of hours. It was enough to give the fund managers a bit of a lift and hope that things are finally turning around. But the market’s woes are far from over. The International Monetary Fund summed it up in warning they issued earlier in the week:

“Global financial markets are ‘fragile’ and indicators of systemic risk remain ‘elevated’…Credit quality ‘across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.’ Bank balance sheets are under ‘renewed stress’ and the decline in bank share prices has made it more difficult to raise new capital. (There is an) ‘increased likelihood of a negative interaction between banking system adjustment and the real economy.’ (Financial Times)

The IMF also stuck by its earlier prediction that total losses to financial institutions from the credit crisis would reach $1 trillion ($945 billion) a sum that will have savage consequences for industry, consumers and the global economy. Over at Nouriel Roubini’s blog, Dr. Doom made this observation about the Merrill Lynch’s troubles:

“Merrill Lynch’s decision to ’sell’ a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the ’sale’ of it to Lone Star at a price of $6.7 billion Merrill Lynch is taking another $4.4 billion write-down and ’selling’ it at 22% of the original face value. But is this a market-based ’sale’? No way, calling this transaction a ’sale’ is a joke.” (Nouriel Roubini’s Global EconoMonitor)

Indeed. This isn’t a “sale”; it’s more like abandoning a sinking ship. The investment chieftains are getting scorched by their downgraded assets and have started dumping them at any cost. There’s no market for mortgage-backed anything now, and there won’t be until housing finds a bottom.

The Merrill Lynch deal illustrates just how crazy things have gotten. Merrill said it “will provide financing to the purchaser for approximately 75 per cent of the purchase price.” Whoa. In other words, the banks are so anxious to off-load their junk-paper, they’re almost paying people to take it off their hands. Now that’s desperation! The problems haunting the financial markets have cross-pollinated with the real economy and are spreading misery everywhere. Unemployment is rising, growth is slowing, inflation is up, the dollar is down. We’ve heard it many times before, but it’s still jarring to see General Motors stock fall below Bed & Bath, or Starbucks shut down 600 stores, or million dollar McMansions sell for $425,000.

Now that the working stiff is maxed out on his mortgage, worried about losing his job, and trying to keep food on the table; the least congress can do is scatter the oil speculators; right?

Wrong. On Monday, the Financial Times reported that: “A US Senate proposal designed to curb speculation and increase transparency in the energy markets was blocked by Republican legislators on Friday. The move frustrates Democratic efforts to show the party is taking action on record petrol prices. The Stop Excessive Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10 votes short of clearing a procedural hurdle.”

The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would “slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless….The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of “senior strips” of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. (Ambrose Evans Pritchard, “Australia faces worse crisis than America”, UK Telegraph.)

The original article appeared in the Business Spectator and was titled “NAB will shock Wall Street”, by Robert Gottliebsen. “Shock” is an understatement. This is more like a meat cleaver crashing down on a butcher block. Schwook! This is a must-read for anyone who is following the meltdown in the financial markets. Here is an extended excerpt from Gottliebsen’s article:

“The National Australia Bank’s decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a ‘meltdown’.

“We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

“It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable.” ( The Business Spectator,”NAB will shock Wall Street”)

The conduits are off-balance sheets operations run by the banks which contain hundreds of billions of dollars of bonds which are now essentially worthless. So far, many of the banks have not accurately reported the losses from these operations hoping that the housing market will stabilize and the value of the bonds will rebound. The action taken by the National Australia Bank is a “game-changer”.

Gottliebsen again:

“The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called ‘conduit trust accounts’ have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages….US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards.” (Business Spectator.)

Radio Australia
The International Monetary Fund says there’s no end in sight to the credit crisis gripping world financial markets. As Australia’s NAB and ANZ have already discovered, the IMF believes banks are in for more pain as mortgage defaults soar and economies slow. The IMF has a particularly gloomy assessment of the US economy, and it came on the same day as the Bush administration revealed America’s budget deficit will climb to a record high of more than half-a-TRILLION dollars.

Financial Times
Global financial markets are “fragile” and indicators of systemic risk remain “elevated” almost a year into the credit crisis, the International Monetary Fund said on Monday. The fund warned credit growth in the US could fall further as a result of ongoing financial system stress and warned that emerging markets would be tested as global financing conditions tighten and policymakers grapple with rising inflation. The IMF also noted that house prices had softened in a number of European economies including the UK, raising the possibility of further problems in those markets.

The assessment came in the July update to the Global Financial Stability Report, led by former Bank of Spain governor Jaime Caruana. The IMF said that while likely losses on US subprime mortgages have “largely been acknowledged” in the form of writedowns, financial institutions faced a second wave of losses on other loans. Credit quality “across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.” The Fund said bank balance sheets were under “renewed stress” and that the decline in bank share prices had made it more difficult for them to raise new capital.

This “increased the likelihood of a negative interaction between banking system adjustment and the real economy.” With mounting inflationary pressure, the Fund added: “Policy trade-offs between inflation, growth and financial stability are becoming increasingly important.” The IMF reaffirmed its controversial earlier estimate that total losses in this cycle could total $945bn – a number that combines mark-to-market losses on subprime-related securities and estimates of likely losses on loans.

Relative to April, when the Fund published its last GFSR, it said “systemic strains in funding markets continue” and the “low level of risk appetite remains unchanged.” Interbank lending rates “remain elevated” while “long term funding costs have risen” for financial institutions. The IMF said financial institutions globally have written off about $400bn since the crisis began last August, and that while they had raised substantial amounts of capital, the losses “exceeded capital raised.” Banks also faced problems maintaining their earnings, weakening stock prices, and making it more difficult to raise further capital.

The Fund said that policy interventions – mostly by the US Treasury and the Federal Reserve – had so far succeeded in containing systemic risk. But it said the “nature of resolution strategies and the extent of support have come into sharper focus” in recent months – a polite way of saying that the authorities in the US in particular have had to intervene further to preserve financial stability. It in effect endorsed the need for the US to shore up Fannie Mae and Freddie Mac in the short term – saying their failure would have systemic consequences – but said “the policy challenge now is to find a clear and permanent solution” for the troubled government-sponsored mortgage groups. The US Treasury has tried to deal with the immediate threat to Fannie and Freddie, while postponing discussion of their long term futures to a later date.

Ambrose Evans- Pritchard
It feels like the summer of 1931. The world’s two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution. The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a “chance of a global recession”. Plainly, the IMF cannot or will not offer any useful insights.

The eurozone is falling into recession before the US itself. Its level of credit stress is worse, if measured by Euribor or the iTraxx bond indexes. Core inflation has fallen over the last year from 1.9pc to 1.8pc. The US may soon tip into a second leg of this crisis as the fiscal package runs out and Americans lose jobs in earnest. US bank credit has contracted for three months. Real US wages fell at almost 10pc (annualised) over May and June. This is a ferocious squeeze for an economy already in the grip of the property and debt crunch. No doubt the rescue of Fannie Mae and Freddie Mac - $5.3 trillion pillars of America’s mortgage market - stinks of moral hazard. The Treasury is to buy shares: the Fed has opened its window yet wider. Risks have been socialised. Any rewards will go to capitalists. More