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The Perils of Global Banking-Bus. Week 5/6

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May 10, 2009 – Comments (6) | RELATED TICKERS: JPM , SKF , C

The Perils of Global Banking. Selling through subsidiaries, banks have left investors across the globe holding potentially toxic bonds. Now governments may restrain foreign financial firms

By David Henry and Matthew Goldstein

JA Solar Holdings, a once-thriving Chinese manufacturer of solar-power cells, is getting a rude introduction to the dangers of global finance. So is Peter Howard, a retired British tax official. And so are Cedric Ruber, a Belgian school inspector, and his father, Rene, a retired employee of the U.S. Army.

Each is trying to recoup money from Lehman Brothers, whose bankruptcy in September paralyzed the world economy. They're just a few of the tens of thousands of burned investors around the world complaining loudly that they were sold toxic bonds that were supposed to be safe. In street demonstrations from Hong Kong to Hamburg, protesters are demanding that their governments do something to get their money back.

Now there's a growing fear among economists, policymakers, and business groups that in the name of protecting their citizens from global financial institutions, governments could slow the flow of capital between countries—at a time when the world economy is already contracting. "We're looking at a period of, at best, a pause of globalization, and more likely a period of 'de-globalization,' " Mohamed El-Erian, chief executive officer of bond giant PIMCO, said at a conference on Apr. 27. Governments are already moving to impose new hurdles on foreign firms. Regulators in Britain have started asking U.S. banks selling bonds there to provide hundreds of pages of proof that the mighty U.S. government, which is backing the bonds, could actually repay them. 

http://www.businessweek.com/magazine/content/09_20/b4131038438462.htm 

Please read the entire 2 page article. It touches on several different issues and spans the global banking industry.  

 

(This article is fascinating. I decided to pass on some good opportunities to cash in on the bank runs lately but I just feel the risk has been too great for the potential reward. Especially with the mega banks. There are still shoes waiting to drop IMO and my gut says a momentum is building behind the scenes. Besides any credit card exposure & that potential quagmire, we have stories like this. 

This is also an example at least IMO of why letting these companies go bankrupt to let the market "self correct" misses some of the really salient issues & the big picture. American banking (which is not just American banking anymore) has not seen the last of it's global crisis of confidence IMO. These banking entities are subtley but crucially different & far more integral to the world's esteem and confidence in the US than say even an auto company. I hate that we are in this situation as much as anyone but I feel we are risking far too much to let these institutions fail. Perhaps at some later date when a fuller picture emerges we can revisit the bailouts etc but meantime I applaud the admin for insisting on a pace for action which many people found infuriating. To me taking a position in the earliest hours of a crisis like this is irresponsible at best. Sometimes you simply have to bite your tongue, and see the big picture thru no matter how "obvious" the solution is to you. Or how your politics or economic bias might dictate. IMO, our gov't needs to continue to do exactly what they have been doing to try to maintain the reputation of our credit institutions and system of risk guarantee or some of our largest institutions wil go under, drag sovereign investors and co-parties down (not to mention employees) while it quickly & irreversibly ripples throughout the world. To millions of people in hundreds of countries. To me allowing this scenario could be truly put the US econmy on it's back for a very long time. Or certainly make things far worse-no matter your own take on whether we are recovering or still sinking.

My last point is that we as investors & citizens also could use a little more discipline ourselves as these issues unfold in trying not to make snap judgments until we too have the fuller picture. Personally I find the admins style of not knee jerk reacting until they have a sense of the scale of things to be immeasurably reassuring. The temptation for Geithner, Obama, Congress et al must have been unimaginable with all of the screaming and fingerpointing and criticism from the press, interest groups  & voters for them to take action. IMO Lehman was allowed to fail due to political pressure and a wrong headed motivation to not appear soft or beholden. They nearly got it right then dropped the ball on the 2 yard line with Lehman. This is just my opinion and I do respect that others feel very differently or even completely opposite. The "truth" or best path likely lies somewhere in the middle-I'm open to that because we don't yet have all the facts or know the full scope.

I hope this blog adds some value to your investing

Alex 

 

6 Comments – Post Your Own

#1) On May 10, 2009 at 5:56 PM, awallejr (30.35) wrote:

"IMO Lehman was allowed to fail due to political pressure and a wrong headed motivation to not appear soft or beholden."

I honestly believe this was true too.  I would be watching Kudlow and practically all his guests were saying let it fail.  Moral hazard, etc., etc. 

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#2) On May 10, 2009 at 7:56 PM, Alex1963 (27.93) wrote:

 awallejr 

Yup, Save us all from expediency over carefully crafted analysis and response. The ripples ares still spreading from Lehman and that dog has not bitten it's last ass IMO (pardon the mixed metaphors). Imagine if they'd let the other banks flounder and fail. Would there really have been anyone to buy up their assets and take over these vast holdings, co party instruments etc? In this market much less the one we then would have had? I seriously doubted it then and still do now. Most folks advocating for laissez faire in that instance failed to appreciate the true global scope of these institutions, IMO. They are still thinking far too parochially. Like Citibank, JPM or BAC ends at the shores of the Atlantic & Pacific LOL.

Moral Hazard. I'm sure there is some great pithy quote for that failure of reason but to me that is exactly what it is. You can have a general philosphy that everyone should be held accountable for instance but you cannot knee jerk react to every situation. The bigger it looks to be the more careful you have to be not to jump to conclusions. And the folks most liable to do the jumping often also seem to be the ones least likely to EVER admit they might have made a bad call. So double damned in being reactionary and unable to recognize being reactionary. Too stupid or proud to see they were stupid, to be really blunt.

Thank you for your comments 

Alex 

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#3) On May 10, 2009 at 9:09 PM, devoish (68.17) wrote:

Alex,

One rec for you.

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#4) On May 11, 2009 at 12:14 AM, StockSpreadsheet (65.58) wrote:

Alex,

Good article.  I must say that if the "deglobalization" movement means that Wall Street can't sell toxic waste overseas, then I welcome the movement.  Maybe if enough of their citizens get burned by buying crap from Wall Street, that the Netherlands and Ireland will tighten up their regulations so that Wall Street can't set up these shell companies to sell the toxic assets.  I think that would be a good thing.

I also think that letting Lehman fail could be a good thing.  It has forced the banks to come clean on some of their toxic assets and products, (though not all of them).  People are more leary of buying convoluted structured investments, which I also think is a good thing.  If Wall Street had to limit itself to selling MSB's, then I think a lot of the problems we are experiencing in the financial system would not have taken place.  If the prospectus simply stated that the MSB contained a pool of 1,000 mortgages rated CCC, then people would know that they were buying, (if the read the prospectus), and they would have been fine.  (If they didn't read it, then that is their problem.)  If the broker selling the security to them says that it is as safe as U.S. Treasuries, then get that in writing on corporate stationary from the broker and have it signed by a notary.  Then, if the security turned out to be toxic waste, then would have a straight-forward legal course to pursue, (sue the broker selling the toxic asset).

I think the very fact that Goldman is setting up the subsidiary in Ireland to sell the same type of crap that Lehman sold shows that Wall Street didn't learn anything from the Lehman bankruptcy and instead learned the lesson that the regulators are teaching now, (that the Wall Street firms and megabanks are "too big to fail" and thus can do any stupid act they want for short-term gain as the government will not let them suffer for their actions).  I think that is a VERY dangerous lesson to be teaching the idiots on Wall Street.  I think if a few more Wall Street bigwigs got wiped out like Fuld, (or even to a greater extent), then they might think twice about pulling the types of crap they have been pulling.  

Also, if it slows down capital flows somewhat, that might also be a good thing, (if by "capital flows" it means the ability of Wall Street to sell toxic assets overseas).  If they put an extra step into the process, (so that Goldman sold the assets to Barclays and then Barclays resold the assets to their clients, putting the reputation of Barclays on the line plus being accountable to the local authorities and regulators), then capital could still flow around the world but the consumers would have more protections.  If Goldman wants to set up a subsidiary to sell assets overseas, then it should set up a subsidiary with independent assets that fall under the regulation of the local authorities.  The assets could then be sold to Goldman Ireland by the Goldman U.S. parent and then Goldman Ireland could then sell the assets to their clients.  Again, it keeps all the regulations local, so you don't end up with the Gordian Knot situations in the article.

I just think the bailouts are teaching the wrong, (and VERY dangerous), lessons and that the problems in the future will dwarf any problems we might have now by trying to clean up the mess now.  (Think about the hundreds of trillions of CDS's that are currently sold unregulated for an example of an even bigger problem waiting in the wings to bite us if we don't take action now.)  If the U.S.'s reputation has to take a hit to teach Wall Street a lesson and wake up our regulators and Congress, then that is the medicine we evidently need to take. 

Just my opinion.

 

Craig 

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#5) On May 12, 2009 at 1:55 AM, peachberrytea (27.92) wrote:

Alex,

Great post - my thanks for that.

I don't disagree with your view and I don't think the US govt will let another major bank fail. Wall Street really hasn't learned its lesson tho. As far as the "big picture" goes it might do us all well in the long run if more banks were allowed to fail, despite the short term pain it'll cause countless people. IMHO, only this type of pain will fuel public outcry powerful enough to force regulators do something about what has happened. Nothing has been done up till now.. actually, less than nothing - they relaxed m2m, which let banks hide their screwups instead of making them pay for them.

I'll admit I don't know what it really means if more banks were to fail. In fact, I don't know whether it's better for them to fail or not - only time will tell. I just hope that our leaders will make the right decisions for all of us going forward.

Ivan

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#6) On May 12, 2009 at 12:06 PM, Alex1963 (27.93) wrote:

 peachberrytea 

"I just hope that our leaders will make the right decisions for all of us going forward."

Amen to that. I'm in the minortiy here on Caps I believe in thinking that we do have good leadership. There will be mistakes and adjustments I'm sure but I'm optimistic. So shoot me :)

Alex 

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