This isn’t really mathematical, but there has been a flurry of articles recently about the financial crisis – both its lingering effects and the day to day issues it raised last September in the Federal Government and the large, money center banks and invesment banks.
Andrew Ross Sorkin has an article in the new Vanity Fair that is an excerpt from his book Too Big to Fail, which comes out later this month. In it, he details the events of the third week of September 2008.
On September 7th, Fannie Mae and Freddie Mac were taken over by the government. Bear Stearns had been taken over by JPMorgan Chase in May 2008 (with a $30 billion government guarantee serving as a spoonful of sugar to make the deal go down easier) and Lehman Brothers went into bankruptcy on Monday September 15th.
Sorkin’s story opens on Wednesday September 17, 2008.
The panic was already palpable in John Mack’s office at Morgan Stanley’s Times Square headquarters. Sitting on his sofa with his lieutenants, Walid Chammah, 54, and James Gorman, 50, drinking coffee from paper cups, Mack was railing: the major news on Wednesday morning, he thought, should have been the strength of Morgan Stanley’s earnings report, which he had released the afternoon before, a day early, to stem any fears of the firm’s following in Lehman’s footsteps….
Apart from the general nervousness about investment banks, he was facing a more serious problem than anyone on the outside realized: at the beginning of the week, Morgan Stanley had had $178 billion in the tank—money available to fund operations and lend to its hedge-fund clients. But in the past 24 hours, more than $20 billion of it had been withdrawn by anxious hedge-fund clients, in some cases closing their prime-brokerage accounts entirely.
“The money’s walking out of the door,” Chammah told Mack….
‘What’s wrong?” Mack asked in alarm as Colm Kelleher walked into his office later in the day, his face ashen. “John, we’re going to be out of money on Friday,” Kelleher said with his staccato British inflection. He had been nervously watching the firm’s tank—its liquid assets—shrink, the way an airline pilot might stare at the fuel gauge while circling an airport, waiting for landing clearance.
“That can’t be,” Mack said anxiously. “Do me a favor: go back to the financing desk—go through it again.”
Kelleher returned to Mack’s office 30 minutes later, less shaken, but only slightly. After finding some additional money trapped in the system between trades that hadn’t yet settled, he revised his prognosis: “Maybe we’ll make it through early next week.”
The article details the machinations of the major economic players in last September’s meltdown – Former Treasury Secretary Henry Paulson and then-Head of the New York Federal Reserve Bank and current Treasury Secretary Timothy Geithner, as well Morgan Stanley’s John Mack, Goldman Sach’s Lloyd Blankfein, JPMorgan Chase’s Jamie Dimon, Citibank’s Vikram Pandit, Bank of America’s Ken Lewis and many others.
Another article, this one a blog post from Chris Whalen at The Big Picture economics blog goes over some of the problems that came out of the wave of takeovers late last year as Bank of America took over Countrywide Mortgage and Merrill Lynch, Wells Fargo took over Wachovia Bank, and Bear Stearns was taken over by JPMorgan Chase. Whalen is a professional bank analyst (who also worked as a republican congressional staffer in the 1990s) and his description is pretty heavy on banking jargon and details.
Oil Trading Denominated in Dollars
Also today, there is an article in the British newspaper The Independent written by Robert Fisk about a plan to sell oil using a “basket” of currencies instead of the U.S. dollar.
Ever since Richard Nixon removed the gold standard in the early 1970s, the U.S. dollar has remained a reserve currency for the world mainly due its status as the currency in which oil trading is denominated. This is set to change.
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years….
Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.
This could devalue the dollar and make imports (like oil itself) more expensive.
In addition to the article, The Independent also included an editorial about the proposed change:
Last autumn’s global financial crisis set off an economic earthquake. And we are still feeling the tremors. The latest sign of the ground shifting beneath our feet is our report today of plans by Gulf states, China, Russia, France and Japan to end their practice of conducting oil deals in US dollars, switching instead to a diverse basket of currencies.
It is not hard to see the motivation for oil exporters to move away from the dollar. The value of the US currency has fallen sharply since last year’s meltdown. And fears are growing, in the light of a spiralling US government deficit, that a further depreciation is likely. They do not want to sell their wares in return for a currency with an uncertain future.
Last on the list is a story about the New York State Pension Fund and a guilty plea in a case of corruption reportedly involving the New York State comptroller Alan Hevesi
ALBANY — Raymond B. Harding, one of the last of New York’s political bosses, admitted on Tuesday that he had accepted more than $800,000 in exchange for doing favors for Alan G. Hevesi, the former state comptroller; among the favors was a scheme to secure an Assembly seat for Mr. Hevesi’s son….
The case has focused on the state’s $116.5 billion pension fund, and how people close to Mr. Hevesi exploited their relationship with the former comptroller to enrich themselves. The comptroller serves as the fund’s sole trustee, a relatively unusual arrangement that gives him ultimate authority over what firms are allowed lucrative contracts to manage the fund’s money…
Mr. Cuomo’s office also said on Tuesday that Saul Meyer of Aldus Equity, a Dallas firm that consulted with the pension fund, had pleaded guilty to a similar charge that had been sealed since Friday. Mr. Meyer admitted to violating his fiduciary duty to pensioners in both New York and New Mexico and taking part in schemes allegedly orchestrated by Mr. Morris. He also faces four years in jail, but is cooperating with the investigation.
“These guilty pleas vividly depict the depth and breadth of corruption involving the New York State pension fund,” Mr. Cuomo said. “In one case, we see New York’s state pension fund looted to reward a political boss with hundreds of thousands of dollars in improper payments.”
“In the other, we see a pension fund adviser — the outside ‘gatekeeper’ who is supposed to safeguard the integrity of the pension fund process — recommending deals based on pressure from pension officials and politically connected people.”
This type of corruption is at the root of the problems in our financial system. The recently released inspector general’s report on the investigation (or lack of investigation) into Bernard Madoff’s massive ponzi scheme details the failure of the Securities and Exchange Commission to look into repeated reports of fraud.
Cleaning up corrupt practices in both business and government must precede any meaningful resurgence of the U.S. economy.