A Small Favor.


One can only imagine the hue and cry if leading banking institutions like Goldman Sachs and Bank of America came to the aid of a small bank in, say, Midland, Texas. Happily enough, said leading banks are coming to the aid of a small Chicago bank, so it's all good.

Algo Trading

Just as regulators discovered back in 2007 that credit securitisation had built interconnections and fragilities across the financial system that nobody understood, so too the rise in algo trading has introduced new interconnections – and extreme fragilities, which are poorly understood. A 21st century financial machine – or monster – has emerged, which appears to have spun out of the control of government (or anyone else). Little wonder that recent opinion polls suggest public faith in finance and government is slipping. -- Gillian Tett, in a column today about the dangers of algorythmic trading.

Bonus Link: Kedrosky on the raptors testing the fences.

Not So Much.


Even before it began, Europe’s moment as a major world power in the 21st century looks to be over. --Richard Haass traces the downward arc.

Cooking The Books.

The relationship between the ratings agencies and the banking industry is by definition compromised (the ratings agencies get their revenues from the companies they rate). The question is whether it is corrupt. An investigation into that very question is now underway.

Transocean.

Transocean is the world's premier deep water drilling company. It commands roughly 80% market share. As energy demand grows from the emerging nations, the importance of Transocean increases accordingly. That is why the revelations of recent days are so alarming.

The fact is that all the $30 oil has been found. The great untapped reservoirs are off-shore, deep beneath the ocean floor. Transocean is the only company capable of tapping those reservoirs at mega-scale. A diminished Transocean means higher energy prices.

The Palestinian Predicament.

Excellent, thoughtful piece from Walter Mead, on patrol in the Middle East. As this is the 17th time in as many weeks that I've recommended a Mead post to faithful Ellisblog readers, you might want to take the hint and bookmark his site.

Are We Greece?

David Walker, who runs the Peter G. Peterson Foundation, has a good column today on America's fiscal plight.

After the Bazooka.


Now (Eurozone) governments are struggling to cope with the aftermath. But, in insisting that there will be no defaults, they are protecting the financial sector from its stupidity. The people of indebted countries are expected to pay, instead. Is this going to prove an acceptable bargain, in the absence of a return to growth in stricken countries? Hardly.

So where do we go from here? We must start by recognising that all we have done is buy a little time. In the eurozone’s first real crisis, governments have been driven to desperate attempts to prevent defaults, as finance has dried up. Now they confront big choices.

The first and most fundamental is whether to go towards greater integration or towards disintegration. The answer has to be the former. Of course, it is possible to imagine a return to national currencies. But this would cause the financial system to implode, since the relations between assets and liabilities now in euros would become so uncertain. There would be massive capital flight into the banks of those countries deemed safe.

-- Martin Wolf, unnerved, in the FT.

Japan is Next.

Kyle Bass offers his view of the $1 trillion bailout plan for the PIIGS. It is persuasive and worth reading in full. Bass, like many other investors, thinks that the next country in the cross-hairs is Japan. As one investor said to my brother a month ago, "that's a country that sells more adult diapers than baby diapers."

Bonus link: Why Angela Merkel is sinking like a stone.

Social Cohesion.

Looming over the financial crisis of the developed world is the larger question of social cohesion. Given what is coming (higher taxes, sharply reduced services and a much diminished sense of financial security), do countries hold together or do they come apart. Clearly, "social cohesion" is being tested in Greece. The Irish, on the other hand, are holding together well, at least so far.

The social cohesion of the United States will soon be tested. Higher taxes and sharply reduced services are coming soon. Expectations of a brighter future are evaporating. The question that hangs out there is whether we are Greece or Ireland.

Practical Matters.


Indeed, for all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund.

So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12 percent of the output in the euro zone, asks for assistance. The International Monetary Fund is pledging 250 billion euros to support the effort. Sixty billion euros under an existing lending program pushes the total to near $1 trillion.

The fund is therefore more a theoretical construct than the Troubled Asset Relief Program that was created in the United States, and that is where things get tricky.

By definition, if Spain came to a point where it could no longer finance itself, interest rates would be on the rise. The several hundred billion euros for the fund would not only come at a high cost, but would bring additional pain to already indebted countries like Portugal, France, Italy and the United Kingdom, which back the special purpose entity, thus compounding the region’s debt woes.

-- from today's New York Times.


Bonus Link: Megan McArdle questions the underlying rationale of the bailout of Greece.

The business of Wall Street.

What business is Wall Street in? Mark Cuban asks and answers the question in a sharp blog post.

The Bazooka.

The European Union today approved a $720 billion (Euro) lending facility to stabilize the Eurozone before financial markets opened in Asia. The dramatic move was designed to "shock and awe.".

Bonus link: Wolfgang Munchau raises all the right questions.