Krugman on Politics

The last paragraph of this column seems inarguably true. Wall Street has long believed, not without reason, that it was immune from politics because of its perfectly hedged campaign contributions to the two major US political parties. But a financial melt-down of this magnitude generates its own politics and if, as now seems likely, American taxpayers end up paying hundreds of billions of dollars to bail out Wall Street, there will be a backlash against "malefactors of great wealth" like we have not seen in over half a century.

Breaking Views.

This short piece from Edward Hadas about the implications of the Bear Stearns collapse is worth re-printing in full:

Bear Stearns may be the big name in financial distress right now, but it could soon have company – thanks in part to the after-shocks of its own problems.

To start with, Bear or any new owner will be under pressure to shrink its $395bn balance sheet. That would mean pretty immediate trouble for some of the hedge funds that use Bear’s prime broking services. What’s more, with liquidity tight all around, a hasty selling programme at Bear could hit prices in many asset markets, perhaps leading to more painful margin calls. There could also be further knock-on effects in the already strained $45 trillion credit default swap market where Bear is a player. It could be hard for firms that have effectively engaged in bets with Bear to unwind them.

Then there are the more indirect effects. Like the prospect of a hanging, the near-failure of a competitor concentrates the mind. Brokers and banks will be more intent on deleveraging, even at the expense of accepting some losses. Cash raised on unattractive terms is better than a Bear-style liquidity crunch.

The sudden collapse of Bear will also add to the already great reluctance to lend to financial institutions. The credit default swaps at some other brokers widened sharply on Friday and the share prices of some banks took a hammering.

Scarce and expensive credit will amplify the general financial miasma. US banks will take another $50bn or so of write-downs in the first quarter, according to Bears’ own analyst. The reporting season resumes in earnest in the coming week. There could be more bad quarters to come, with US house prices still falling and defaults on other types of consumer debt starting to rise.

The authorities will clearly do what they can to prevent a vicious cycle of debt deflation. On top of their increasingly desperate measures to pump liquidity into the system, the market is already expecting a 100 basis points cut in the US overnight rate next week. But in a liquidity crisis, rates are almost irrelevant. The Federal Reserve’s ready rescue of Bear increases the odds of a generalised, taxpayer-funded financial bail-out.

The combination of super-low rates and a possible nationalisation of loan losses will add to the pressure on the already beleaguered dollar. Indeed, while Bear is biggest firm to hit the wall so far in this credit crunch, the biggest name in financial distress could eventually be the United States.

Old Media.

Picked up a copy of Time magazine lately? Did it seem a little thin to you? Wonder where all those ads that used to bulk up Time magazine have gone? If you guessed Google, you guessed right.

The End of Bear Stearns.

It survived two World Wars and the Great Depression. It hangs by a thread in the credit crunch of 2007-08. From today's Wall Street Journal:

On Monday, Bear issued a statement in which (Bear Stearns CEO Alan) Schwartz wrote that the firm's "balance sheet, liquidity and capital remain strong." On Wednesday, he ducked out of a Bear media conference in Palm Beach, Fla., for a CNBC interview in another effort to deflect speculation about Bear's situation.

But by Thursday afternoon, it was becoming clear within Bear that the firm couldn't withstand an accelerating retreat by worried customers -- in effect, a run on the bank. Securities firms that had been willing to accept collateral from Bear Stearns were insisting on cash instead. And the hedge funds that use Bear to borrow money and clear trades were withdrawing cash from their accounts. Around 4:30 p.m., Mr. Schwartz was convinced that Bear was facing a desperate situation.

You can read the rest here.

The Surge

Lt. General Odierno's review of the first year of the surge is well worth reading. You can do so by clicking here.

You Really Can't Make This Stuff Up.

What was the Chairman of Bear Stearns doing today while his firm teetered on the edge of catastrophy? Playing bridge!

The Panic Button.

How bad is it on Wall Street? Read on.

It Doesn't Matter Who The Client Is.

Or how long you've known them. When you're levered up at over 30-to-1 in a credit crunch, even the name Carlyle loses its magic.

How'd We Get to $110 Oil?

This article from Cambridge Energy Research Associates is a good primer. They see a $150-per-barrel price as the breakpoint.

Bailing Out the Banks

If it's inevitable that a Federal bail-out of the nation's leading banking institutions is required to stave off catastrophe, shouldn't we just cut to the chase and get to it? Some very smart people say "yes." From today's Wall Street Journal:

At a lectern in a room of venture capitalists, Silicon Valley executives and professors at the Stanford Institute for Economic Policy Research last week, Larry Summers, former Treasury secretary and now Harvard professor and hedge-fund adviser, was at his gloomiest.

In the audience, Myron Scholes -- Nobel laureate in finance, veteran of the Long-Term Capital Management hedge-fund debacle and now chairman of his own hedge fund -- was listening and scribbling on a yellow legal pad. His conclusion, one gaining momentum, is that the government eventually will spend a lot of taxpayer money to clean up the current credit mess and prevent economic catastrophe.

"I think they should at least be thinking about it," he said. "If you're going to do it anyway, why not do it sooner?"

A Wall Street Journal survey of economic forecasters, to be released today, found that 32 of 51 economists (63%) said it is likely or certain that Washington will use public money to address the deepening housing crisis.

Wall Street would love what Treasury Secretary Henry Paulson derides as "a bailout," a way to unload its mistakes onto taxpayers. But unless the tide turns soon, the severity of the housing bust and fragility of the financial system may force even his hand.

An Alexander Graham Bell Moment.

That's what Marc Andreessen calls it. Hard to disagree. Click here for one astonishing video:
http://www.youtube.com/watch?v=xyN4ViZ21N0&eurl=http://technology.newscientist.com/article/dn13449-nervetapping-neckband-allows-telepathic-chat.html