Commodities take a Beating as Investors Worry about Falling Demand - But People Still Need to Eat

The S&P GSCI (an index for commodities which have active, liquid futures markets, e.g. crude oil, wheat, sugar) has tumbled 29% since the start of October. Commodities tend to move in the opposite direction of the dollar which has been stronger as of late. Prices of non-precious metals (such as aluminium) have fallen faster than agricultural products (people still need to eat).

The GSCI index, which was developed by GS in 1991, reflects a diversified, dollar-denominated basket of commodity futures, and sparked an explosion in commodity index trading since its launch, and corresponding volumes on futures markets as well.

Emerging Markets - The Fall of the Forint

As Hungary's central bank raised its main rate of interest by 3.0%, to 11.5% (when the rest of the world were cutting theirs), to support its forint currency and attract investors, concerns spread over the economies of Central and Eastern Europe.

Risk-averse investors are pulling money fast out of emerging markets. Much attention is being placed on each nation's current account deficit (the main component of the current account is the balance of trade; a deficit normally indicates you are importing a lot more than you are exporting). At the sharp end is Latvia, with a CAD of 23.7% of GDP with the safest being Czech Republic at 1.8%.

Commenting on the move, Nigel Rendell, chief emerging market strategist at RBC Capital Markets in London, remarked - "Investors aren't worried about getting a better rate of interest if the currency is going down 2.0% to 3.0% a day". ECB is lending Hungary up to 5 billion euros.

A new book called "The Partnership" tells the story of Marcus and Samuel's Financial Fun Factory - Goldman Sachs

Charles Ellis asks why the (former) investment bank Goldman Sachs has achieved "acknowledged excellence". Marcus Goldman founded M Goldman in 1869, and was joined over 10 years later by junior partner Samuel Sachs. One of Goldman's oldest clients is Sears, Roebuck & Co. (note: Kmart (founded in Detroit) and Sears (founded in Minnesota) were merged in March 2005). Fischer Black, a partner in the company and pioneer of stock options valuation, described the company as better than a university since "the firm's business required continual learning as it adapts to new conditions".

What is the precise role of the IMF in the credit crisis? What's the precise role of the World Bank?

Dominique Strauss-Kahn, head of the IMF, has said the IMF was willing to lend to countries in dire need of capital.

To understand what role the IMF should play in this saga, we must know the history of the IMF. The IMF and World Bank were both established in July 1944 at a conference in Bretton Woods, NH during the closing phases of WW2. The main debate was between the US and British delegation, debate revolving around liberal and conservative visions of what a global economic institution such as the IMF should provide. In a nutshell, should the IMF operate as a fund (the liberal view) or more like a bank (the conservative view)?

Keynes, who led the British delegation, imagined the IMF as a co-operative fund which member states should draw upon during periodic crises, to maintain economic activity and employment. The US view was an institution like a bank to ensure borrowing states could pay their debts, less concerned about preventing recession and unemployment. The tougher, US conservative view prevailed.

Since WW2, IMF has loaned funds to governments facing economic crises. These loans, which have engendered controversy, have been termed structural adjustment loans as their purpose is to help borrowing governments adjust the structure of economic activity.

The World Bank has pledged aid to developing countries over the weekend to help stem the crisis. WB President Robert Zoellick declared the financial crisis a "manmade catastrophe" and added that despite the crisis "aid flows must be maintained".

Rocky Day for the Dow, Historic Falls on the Stock Market. What should be done to stabilise markets?

World equity markets fell around 20% this week.

In the first few minutes of trading the Dow plunged 700 points. After 45 minutes, most of the losses were regained and then it fell more than 400 points again.

By the end of the week, London markets fell 21.1%, Tokyo fell 24.3% and New York 18%. FTSE closed at a 5 1/2 year low of 3932, the week was the second worst in FTSE's history.

In India, credit default swaps on ICICI bank (India's second largest lender) topped 1000 basis points (trading upfront). According to markit, funding rumours led depositors to withdraw cash. What does this mean? It means it costs $1m to protect a $10m investment in the bank's notes.

Tight credit markets (Increases in 3 month LIBOR, ON LIBOR). How to stop the rising cost of short term borrowing?

Tight credit markets and pessimism led to a brutal day in the markets. Dow tumbled 7%. Estimates for car sales were awful, crushing auto-makers. GM plunged 31%. 3 month LIBOR was up 43 basis points to 4.75%. Overnight Libor was up 1.16 percentage points to 5.09%. Recall LIBOR rates doubled the day after the Lehman bankruptcy.

AIG taps additional reserves from the Federal Reserve

AIG, America's largest insurer, announced it is borrowing more funds from the Fed. "They need more liquidity than they thought" remarked an analyst at William Blair & Co. The money will go towards helping AIG cover requests from clients to redeem borrowed securities.

But can AIG be trusted with the bailout money?

Days after the bailout it was reported AIG spent $440,000 on a California retreat involving banquets, spa treatments and golf.

These expenses are being subjected to some hard-nosed analysis by New York Attorney General Andrew Cuomo (the function of the Attorney General is to act as the chief legal officer of the State, protecting consumers, investors and businesses throughout the state). In addition, $19m in payments to former AIG chief executive, Martin Sullivan, have been frozen as AIG plays ball with the investigations - which will also review executive compensation.

UK Banking Sector Part-Nationalised (£35-50 billion cost)

UK PM Gordon Brown orders taxpayer-backed cash injection, following meeting with Bank of England governor Mervyn King. Estimated cost £35-50 billion. Shares in RBS tumbled 39%. More to follow.

Metro runs a story on Dick Fuld - "Grilling for Gorilla of Greed".

"When the company did well. we did well...When the company did not do well, Sir, we did not do well" stated Mr Fuld.

Dick Fuld in the Dock - "Gorilla of Greed" or "Innocent Victim of the Credit Crunch"? You Decide.

Dick Fuld, the man who joined Lehman Brothers in 1969, and rose to become Wall Street's longest serving CEO was in the dock today.

A PRIMER on United States Politics

The United States CONGRESS is divided into two houses:

1. The United States SENATE (upper house)
2. The House of REPRESENTATIVES (lower house)

POWERS and constitution of the Senate and the House are governed by ARTICE ONE of the constitution (covers LEGISLATION, aka STATUTORY LAW).

Each STATE is represented by TWO SENATORS regardless of population. The current PRESIDENT OF THE SENATE is Richard Cheney (REPUBLICAN).

The Speaker of the House of Representatives is Nancy Pelosi (DEMOCRAT).

The name AMERICA is believed to have been coined after ITALIAN explorer AMERIGO VESPUCCI. The full name of the country was first used officially in the DECLARATION OF INDEPENDENCE (July 4 1776, the year was famous for the AMERICAN REVOLUTION).

UK FSA to guarantee bank deposits up to £50K, Wells Fargo buys Wachovia, Ken Lewis attacks "Typical Wall Street pay", Bailout is Passed -Will it Work?

Up from £35K guarantee. An important point identified by the BBC: "At the moment, customers are only covered for one account under each banking licence so if you have two accounts with banks that are owned by the same parent company you will only have a total of £50,000 guaranteed". Joint accounts are covered for double.

Payments are made through the Financial Services Compensation Scheme (FSCS). Banks outside EU are also covered since they contribute to the scheme as well.

US bank Wells Fargo will buy rival Wachovia in a $15.1bn (£8.5bn) deal, spoiling an earlier proposal for a Wachovia-Citigroup takeover.

On the recent $50bn BoA-Merrill deal, Ken Lewis commented on the future for Merrill's. "Merrill was paying typical Wall Street pay. Their staff people were making a lot more than our staff people. That won't last. We intend to pay market instead."

The most historical intervention of the US government in the economy since the Great Depression happened today as the Senate-amended bailout is passed. FedReserve Chairman Ben Bernanke said he welcomed the news. Could this be the start of the end of the worst financial storm since 1929?

Manufacturing Slump in UK, Buffett reiterates "economic Pearl Harbour", Irish Bank Guarantees Passed into Law, GLG estimates $95m exposure to LBIE

The Times reports Ford is running four-day week until Christmas at its Transit van plant in Southampton, similarly Land Rover at its plant in Solihull. Good for work-life balance. 

Warren Buffet reiterated his stance on the credit crisis and proposed bailout - "it is an economic pearl harbour" adding "perfectly credit-worthy companies can't obtain funds...the commercial paper market has been very tough...money market funds...$175bn poured out in 3 days...the credit-markets totally have seized up, we very much need a bill". On the current crisis and the circumstances that led up to it he commented: "we have the whole world trying to deleverage...everybody leveraged up and you could get all the money you needed and anytime there was a spread between borrowing costs and what you thought an asset would bring, everybody was tempted to reach for it, now you got everyone trying to deleverage" adding that the only "countervailing force" with the capacity to leverage up and counteract the crisis was the US government. The FT reports - "Ireland’s decision to prop up its six biggest lenders by guaranteeing all their debts and deposits as passed into law on Thursday". Gordon Brown, concerned about outflows of money to Irish institutions, raised concerns with Irish PM Brian Cowen. We haven't heard much on the impact of the credit crisis on hedge funds. One exception is GLG Partners, Inc, an alternative asset manager, which sent an update to investors detailing exposure to Lehman Brothers International (Europe) ("LBIE"). The letter read - "In total, we currently estimate that the combined direct exposure of the GLG Funds to be approximately $95 million, or less than 1% of GLG's net AUM." GLGs four founders worked at Lehman Brothers and Lehman had a 20% stake in the firm.

Bailout Approved by Senate, Buffet puts $3bn into GE

Late Wednesday night the Senate voted in favour of the bailout (74 votes to 25).

Berkshire Hathaway invested $3bn in preferred stock of GE, whose shares have slid about one-third this year. Eight days previous Berkshire put in $5bn into GS in a similar deal.