S&P 500 -38.5% (worst perf since 1931), FTSE -31.3% for 2008

According to S&P all sectors performed poorly in 2008. The least worst sector was consumer staples which was down 18%. Biggest winner on S&P in 2008 was consumer staples firm Family Dollar Stores (NYSE: FDO). This was the worst year for the S&P since 1931, the middle of the Great Depression.

Citi's bosses said top execs won't take bonuses. They also sold off their Global Services Business to TCS for $512m. KBC announced it would not pay any bonuses in 2010 for earnings in 2009. KBC received 3.5bn EUR government aid in October, together with Fortis, Dexia and ING.

FTSE Trading closed at 12:30 GMT for Wednesday 31 Dec 2008. Its value was 4,434 points, down from 6,457. HBOS and RBOS have lost roughly 90% of their value. Whittard of Chelsea (formerly owned by Iceland's Baugur investors) has been sold over the Christmas period for an undisclosed sum to EPIC private equity partners (who are into MBOs and MBIs). They have 130 stores selling tea, coffee and crockery. Overexpansion? Bad outlets? You decide.

Public Sector Borrowing and its impact on FX rates and CDS prices

GBPEUR

In the FX markets, December saw the GBP trading at parity with the EUR, its worst performance yet this year but a price target predicted by analysts in a self-fulfilling prophecy. Alastair Darling's remarks earlier in the year accelerate the sell-off.

GBPUSD

In July sterling was trading at $2, then dwindled to $1.50. Why? Partly Britain's public finances - the Treasury's pre-Budget report forecast UK public borrowing will rise to £78bn for 2008-09 and then to £118bn in 2009-10 (8% of GDP). These figures though are not consistent with data from the ONS.

Analysts point out a high level of government borrowing tends to spell trouble for sterling. A post-war high was reached in 1974-75 (6.9% of GDP), which led to Britain asking the IMF for emergency funding in 1976. The Treasury's counter is that it believes the recession will be shallow and brief. The UK has been running a deficit since 2002/2003.

The CDS market for sovereign debt has indicated the cost of insuring default by the Treasury on its gilts over 5 years has reached 100bps over Libor (7.2 bps a year ago). Analysts CEBR announced (speaking about the recession across Europe): "The United Kingdom economy is likely to be the hardest hit by the credit crunch due to its reliance on consumer borrowing and the financial sector for growth".

But who is trading in the sovereign CDS market and why? BoA research provides some answers.

Buffetology

Warren Buffett, CEO of Berkshire Hathaway and "Sage of Omaha", has a science named after him. It's called Buffetology. 

 "I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." 

"I buy stocks when the lemmings are headed the other way." 

"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers". 

Buffett made his first investment at age 11.

The EUR yield curve shows falling yields

Dec08 has seen a flattening of the long-end of the EUR yield curve (term structure of interest rates for EUR) as shown from the ECB's animation. The bond price data comes from EuroMTS Ltd (a pan-European government bond trading platform). They publish a yield report showing e.g. yield on 2year and 5 year government bonds for Austria, Belgium , Finland, France etc.

Statistical data from the ECB can be found here.

Creation of a Gas "OPEC" In Doha Sparks Controversy, Tangan nods towards Sinopec and Gazprom on the Warpath

Russia, the world's top gas exporter (and largest country in the world in terms of land area; over 17 million sq km, almost twice the size of the United States at 9.8 sq km), hosts the GECF forum for gas-producing countries (including Iran, Venezuela (a country borne from the collapse of Gran Colombia, the short-lived South American republic named after Christopher Columbus, in 1830) and Qatar), and proposes the creation of a permanent organization in Doha, Qatar, similar to OPEC. In the forum, Vladimir Putin announced "the era of cheap gas is coming to an end".

Russian state-owned Gazprom claims it is owed $2bn (£1.3bn) by Ukraine for gas supplies. This creates supply risk for the rest of Europe since 80% of Russia's exports go via Ukrainian pipelines to the rest of Europe. Gazprom is also nearing a deal to win a controlling stake in Serbia's state-owned oil monopoly Petroleum Industry of Serbia (NIS) and exploiting Siberian reserves in the Yamal Peninsula (the so-called "Yamal Megaproject"). Siberia has a population density of 3 people per square kilometre.

Venezuela is unique in that it has the world's largest reserves of heavy crude oil (which has a higher specific gravity (read density) than "conventional" crude) located in the Orinoco river ("Rio Orinoco"). Heavy crude is often priced at a discount to light crudes, due to high refining costs in the downstream processing. The field of reservoir engineering deals with the economic retrieval of hydrocarbons.

Reuters report here.

In other oil and gas events, the bid of Sinopec (China Petroleum and Chemical Corporation) for the Canadian Tanganyika Oil Company has been given a thumbs-up from Tangan's Board of Directors.

Fed Slashes Rates to Near-Zero

US Fed cut its rate target to a range of 0-0.25% from 1%, a drastic measure championed by Ben Bernanke to stave off the impact of recession. This brings the overnight lending benchmark rate, the Federal Funds Rate, to its lowest ever. Note that the Fed has specified a range of rates, not an exact rate. This may suggest they are unable to control tightly the market interest rate any longer.

The Fed is combining the rate-cut strategy with buying up bad assets from banks. The last time something as drastic in terms of policy shift has been done by the Fed was 1979, under Paul Volcker (MA Political Economy, Harvard). A that time the Fed initiated a severe recession while trying to fight the inflation which had built up in the aftermath of the Vietnam War, which ended in 1975.

USD falls to record low versus JPY

The JPY reached a 13 year high versus USD at ¥87.24 to the dollar, following the Fed's rate cut to historic lows. Since mid-Sept, the yen has gained 15% against the dollar. This is bad news for Japenese exporters, like consumer electronics giant, Panasonic, which has slashed its profit forecast by 90%. Panasonic have recently come up with a new model of laptop, the "ToughBook".

Madoff Makes Off with $50bn Making Investors Mad

Bernard Madoff, it has been alleged, ran a $50bn Ponzi scheme (named after Charles Ponzi, who emigrated to the United States from Italy in 1903). If found guilty, this is will be the biggest Ponzi / pyramid scheme in history. The SEC described it as a "fraud of epic proportions".

US hedge fund Tremont Group Holdings, had a reported $3.1bn exposure to Madoff.

The idea of a Ponzi scheme is to pay high returns by passing subscriptions in to existing clients rather than putting them into a portfolio, a strategy that results either in complete collapse or bailout.

Madoff claimed he was using a "split strike conversion" strategy to generate his returns. In fact he was faking his trades in an IBM AS/400 computer. Madoff also ran a London operation MSIL, or Madoff Securities International Limited. Madoff was an ex-non-executive chairman of Nasdaq.

KKR Creates Asset Management Division to Exploit Market Turmoil

Private equity / "alternative asset" specialist KKR (founed by Henry Kravis and George Roberts in 1976) have announced the creation of a new asset management division.

KKR's original business model was using junk bonds to buy underperforming companies, rework the balance sheets and sell on for profit. This is the idea of the "leveraged buyout". Their most famous transaction was the LBO of RJR Nabisco in 1989 for $25bn, the storyline behind "Barbarians at the Gate".

Movie Derivatives: The "Hollywood" Stock Exchange

Cantor Fitzgerald (slogan: Dynamic. Driven. Innovative. Focused) applied to CFTC to launch a derivatives market for box office receipts contracts. This sounds a bit like the Hollywood Stock Exchange! Here's a beginner's guide to the HSX.

US giant Tribune files Chapter 11, Tough Year for Media

The Tribune, owners of LA Times and Chicago Tribune, filed for Chapter 11 ("reorganization") bankruptcy (which allows the firm to remain in business, as opposed to a Chapter 7 or "liquidation" bankruptcy) having struggled with $13bn of debt it took on when going private last year. The go-private deal was led by Sam Zell, a real-estate billionaire. The Tribune was first published in 1847. A primer on bankruptcy basics in the US is detailed here.

Overall 2008 has been a tough year for media companies. Apart from the Tribune, Scotland's Herald, Sunday Herald and Glasgow Evening Times announced a merger of their editorial teams, and the Independent is moving in with the Daily Mail to save money on rent. One spark amidst the gloom, reports City AM, is the niche publisher Future, whose 2008 pre-tax profits were up 27% to £9.5m. Reports CityAm "Futures magazines are ...managing to pull in advertising because they focus on the niche. If a consumer is buying an Xbox or mountain biking magazine, the chances are they're going to buy some of the gear that's advertised inside". "We are producing content for absolute enthusiasts" said CEO Stevie Smith.

The UK's insurance sector, it has been reported, is doing well despite the credit crisis. Insurance (excluding brokers and auxiliary professionals) represents 1% of UK GDP employing 325,000 people. Figures from Swiss Re indicate the UK is the largest insurance centre after the US, with Japan coming in third place just above France.

A Primer on Political Economics with Patten

Chris Patten on the BBC talks about the many flavours of capitalism, starting with Western liberal democracy and its differences with a Leninist model of capitalism or protocapitalism, if you will. Lenin was famous for his role in the Russian Revolution of 1917, replacing the Tsarist autocracy of the Russian Empire and the founding of the Soviet Union.

An interesting political economist is Francis Fukuyama, former analyst at RAND corporation, who wrote the book "The End of History" (read a summarising article here). A background on the development of capitalism since the Middle Ages is detailed here.

Interesting programs on political economics include Stanford's GSB PhD program.
The first law of economics: things that can't go on forever, don't.
60-second spiel on how to improve the world.

Fed's Beige Book Shows Further Weakening of US Economy

The Beige Book, a report published eight times a year, showed further weakness in the US economy for November, with falls in retail and vehicle sales. All the Fed's districts send in data covering everything from sale of electronics goods to gasoline prices and discounting behaviour. Vacancy rates for commercial property in NY and SanFran increased but results in the city of St Louis were mixed.

Not what I have, but what I do, is my kingdom - Thomas Carlyle

Thomas Carlyle was a Scottish historian famous for his two-volume work on the French Revolution.

hq(_CarlyleGroup, X). ? X = washingtondc. employees( _CarlyleGroup, 500).
investments(_CarlyleGroup, X). ? X=freescale. X=flexcom. X=indigosystems.
origin(flexcom, X). ? X=korea.
m8 :- merger(_CarlyleGroup, _BoozAllen, JUL08, DV). ? DV=usd(2.54bn).
advisor( m8, _BoozAllen, X). ? X=csfb.

UK High Street offers Opportunities for Retail Investment Bankers, Celebrations Pounced on by Card Factory

The Icelandic invasion of the British high street is under threat as investments turn sour for Icelandic giant Baugur, which controls House of Fraser, Hamleys ("the finest toys in the world"), Iceland, Whittard of Chelsea as well as having minority stakes in Debenhams PLC, Woolworths (12.4% stake via Unity Investments), French Connection and an 8.6% interest in Saks. Cheap Icelandic financing enabled Reykjavik-based company Baugur to expand into the UK and US. Woolies shares were suspended last week following talks of a sale. Retail billionaire Sir Philip Green, who bought a £6.7m for a stake in Moss Bros (which owns the Moss and Cecil Gee brands) from Baugur in November, and sold it a few days later for a £1m profit, is reported to be prowling for more assets (and liabilities, potentially taking over £1bn of Baugur's reported debt).

Menswear retailer Moss Bros said it will cut costs in the face of a "challenging" trading environment. Celebrations Group, the card-retailer, went into insolvency in October. Kroll Limited have been appointed as Administrators. Card Factory have bought over 80 stores.

More retail sector news can be found here: http://www.theretailbulletin.com/

Meanwhile, in the banking sector, new CEO of RBS, Stephen Hester, has announced a six month grace period for home loan defaulters. CSFB has also announced it is cutting 650 jobs in the UK, following a $1bn loss in Q3 2008. HSBC, "the world's local bank", said it will cut 500 UK jobs.

Hedge Fund Redemptions Rise, Soros: "The Hedge Fund Bubble Has Burst"

BlueBay, the publicly-quoted hedge fund with $21bn AuM at the end of September, is closing its Emerging Markets Total Return Fund run by Simon Treacher, after it reported a 53% loss, most of the losses occurring after the end of September. In NY, Satellite Asset Management stopped client withdrawals from its three largest funds, in a report from City AM. Asset manager BlackRock is looking to make around 200 job cuts, the "first major round of redundancies in the company's history". Fidelity also announced it would cut headcount by 3000 by early 2009.

A fund manager commenting on the hedge fund industry remarked: "It's going to be difficult for them to reinstate fees once the industry has turned around". Investor George Soros ("the man who broke the Bank of England", making $1bn betting against the pound, following the UK's unwillingness to raise rates to ERM currency levels, forcing Britain to withdraw from the ERM and devalue the pound) declared that the "bubble has burst" for hedge funds.

In other news, HSBC (the world's local bank) is looking to buy back its Canary Wharf HQ which is sold to Metrovacesa for £1.09billion.

Further $800bn Stimulus from the Fed!!!

Henry Paulson declares move is to make more lending available to consumers. $600bn will be used to buy up MBS and $200bn to unfreeze the consumer credit market. Does it make sense?

Have Bailouts worked in the past? Find out here.
http://news.bbc.co.uk/1/hi/business/7648330.stm

Crisis at Citigroup, Stock Crushed, Senior Departure and Nomura to Raise Capital

Pop quiz: How much did Citi CEO Vikram Pandit make from the sale of Old Lane to Citigroup? (hint: 20% of the total deal value)

Citi's shares lost 20% on Friday, giving it a value $20.5 bn (less than a quarter of JPM Chase). The board is considering a sale of the business and the position of Vikram Pandit.

Vikram Pandit, from Nagpur in Central India, moved to the US in the 1970s to study at Columbia University where he obtained four degrees. His PhD thesis was entitled "Asset Prices in a Heterogeneous Consumer Economy".

1983 and Vikram joined Morgan Stanley following a period consulting for the bank. He gained a reputation as a "driven banker" and "prudent risk manager".

After a battle at Morgan Stanley, Mr Pandit founded Old Lane, a hedge fund that was sold to Citi in 2007 for $800m. Mr Pandit earned $165m from the deal. In early 2008, Old Lane was closed down for poor results. He took charge of Citi's hedge fund business and was promoted to head of the securities division. Following the ousting of Chuck Prince, he became CEO, backed by Citi power brokers like Robert Rubin, former US Treasury Secretary, and Sandy Weill, the former CEO.

In Asia, Citi's India CEO Sanjay Nayar, has moved to KKR after 23 years with the giant.

In addition to considering a sale of the business, Citi was also locked in talks with the Treasury (can the bank survive without a capital injection?) Chairman Sir Win Bischoff met with Federal Reserve officials and the US Treasury department. (Sir Win was previously at Schroders and moved to Citi following the acquisition of Shroders corporate advisory business).

Tokyo newspapers announced Nomura is likely to issue subordinated loans and other products to financial firms to bolster its capital base.

Emerging markets bank Standard Chartered (formed in 1969 from the merger of Standard Bank and Chartered Bank) announced a $3-4bn rights issue to boost its capital reserves. Sovereign wealth fund Temasek will underwrite part of the rights issue. Temasek is Standard Chartered's biggest shareholder.

RBS Chairman Reports of "Unprecedented" Difficulties

RBS announced its expectation for its first full-year loss in nearly 300 years of existence. Chairman Sir Tom McKillop stated it was the worst experience in his 40 year working life.

Japan joins Europe in Recessionary Doldrums

Kaoru Yosano, fiscal policy minister for Japan, announced Japan is joining Europe in recession, following two straight quarters of negative GDP growth.

GM Stock Lowest in 55 years - Target Price: Zero, AIG eats more government cash

GM's Securities

Fitch Ratings has warned of GM's "rapidly diminishing liquidity position" and DB has set a target price of zero for the stock. (aside: check out DB's art website here, DB owns the world's biggest corporate collection of art).

STOCK
GM has dropped from $33 to $3 this year, following DB's downgrade. The short interest on GM stock is currently 93.5 million - short interest is the number of shares of a stock that have been sold short but not yet covered (by depositing funds) or closed out.

OPTIONS
GM's most active contracts were November $3 puts. Their value more than doubled to 70 cents.

DEBT
GM's debt is trading at "stressed" prices. "Stressed" is basically one level above "distressed".

Will federal bank-bailout funds be opened up to automakers?

The Treasury announced it will pay $40 billion for another 2% stake in AIG (preferred shares), which has posted a $24.47 billion loss for Q3. The term of the loan has been extended from 2 years to 5 years. AIG was involved in insurance of CDOs.

The ignominious position of GM will force management to reflect on its history. Founded on September 16, 1908 in Flint, Michigan (now hq'ed in Detroit) as a holding company for Buick, controlled by William C. Durant of Boston. He lost control of GM in 1910 to a banker's trust due to excess debt taken on in its acquistions followed by the collapese of new vehicle sales. A few years later he started Chevrolet, and reassumed control of GM by building up secret stakes.

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.

Franco-Belgian bank Dexia gets bailout, Neubeger sold to private equity

Dexia received 6.4 billion euro bailout on Tuesday (Belgian government putting in 3 billion euros, French government put in 1 billion euros, and French state-controlled Caisse des Depots (CDC) 2 billion euros). Dexia stated new funding would boost Tier 1 capital ratio to 14%.

Neuberger Berman, the 69-year old asset management firm founded in 1939 by Roy Neuberger, agreed to be acquired by Bain Capital Partners LLC and Hellman and Friedman LLC.

Citigroup takes over Wachovia, B&B nationalised, Fortis Bailed Out over Weekend, Oil Price drops, House rejects US Bailout

Citigroup will take over all the assets and liabilities of Wachovia in a $2.2bn all-stock deal. According to CMA DataVision,
Citigroup's credit default swaps widened to about 416 basis points following the news from 328 basis points on Friday, i..e. it now costs $416,000 a year to protect $10m of Citi-debt, an increased cost of $88K a year. To raise capital, Citigroup will sell $10bn of common stock, and will cut its quarterly dividend in half to 16c a share to preserve capital.

Fortis was part-nationalised by the governments of the Benelux countries, being seen as too big to go under. To save the bank ministers agreed to put up 11.2bn euros ($16.1bn). ECB president Jean-Claude Trichet played a role. As part of the deal, Fortis will have to sell its stake in Dutch bank ABN Amro which is part-took-over last year. Fortis chairman Maurice Lippens will be forced to resign.

Oil dropped below $100 a barrel as fears spread that global economic weakness will drive down demand (November NYMEX futures was trading at $98.70 a barrel), irrespective of the $700bn bailout.

Eurostoxx is now down close to 3000 level, closing 4.69% down at 3008. FTSE dropped 5.3%, to 4818 (3yr low). The lower house of the US congress has rejected the bailout; many members of George W Bush's Republican party were strongly opposed to it (226 against versus 207 for). S&P is down 6.13%.

Also, on Reuters today: "Iceland's government bought a 75 percent stake in Glitnir for 600 million euros ($878 million) after the bank said its funding position had deteriorated due to turmoil on international financial markets".

Political Wrangling Continues over $700bn Bailout, Billions Pumped in to Defrost Frozen Money Markets, Gold Sales Suspended

Banks no longer want to lend to other banks. Interbank lending has dried up.
The liquidity crisis has spread to the US commercial paper market, an essential source of funding for many companies' daily operations (used e.g. for purchasing inventory or managing working capital / operating liquidity), which Reuters reports has shrunk to its smallest level in 2 years.

With the US having to finance the bailout with the sale of billions of bonds, America's sovereign triple A rating could come under scrutiny. Euromoney's bi-annual country risk index (evaluating political and economic stability, but focusing on sovereign default risk) puts the US in 10th place. In 1st place is The Grand Duchy of Luxembourg. Many duchies existed during the Napoleonic Wars but Luxembourg is the last remaining one in the modern world. But that's by the wayside - how is the US going to finance the payback of these bonds? It will invest the money in mortgages and if the people holding those mortgages eventually pay them back, the Treasury can use the money to pay back investors.

What seems clear is that a lower leverage business model will evolve among banks. Even with less leverage, confidence is still a prerequisite to survival. And what of the future of credit securitisation? What new laws will be put in place to control credit speculation?

Also last week panic buying of commodities including gold forced the U.S. Mint to suspend sales of American Buffalo 24-karat gold coins because it couldn't keep up with soaring demand from investors for commodities and similar asset classes believed to be "safe havens" from the credit crisis (reported in msnbc).

Meanwhile, FinanceAsia evaluates Nomura versus Goldman Sachs.

Greedy JPMorgan gobbles up WaMu, will have to digest its sub-prime assets

As part of the deal, JPMorgan Chase will absorb WaMu's subprime and option-ARM mortgages. The emergency sale was announced late Thursday and was arranged by regulators. Deal value was $1.9 billion. CNBC reports WaMu saw an exodus of $16.7 billion in deposits since Sept. 15, in a massive 10-day bank run. The severity and speed of the decline of WaMu prompted regulators to seize control on Thursday night, rather than Friday, which is more typical for bank closures.

BBC reports WaMu "had about $307bn of assets but only about $188bn of deposits, which meant it had to raise funding on money markets, which has become increasingly expensive." Banks are unusual in that its assets are its loans (the reverse of a normal company) and deposits are its liabilities. The size of WaMu's assets have made it the biggest banking failure in history.

Who is WaMu anyway? The bank was incorporated on September 25 1889, providing a vehicle for investing and lending and helping Seattle residents rebuild after a fire. The bank went public in 1983, and within 6 years of going public, the banks assets more than doubled.

Senator Richard Selby castigates Bailout: "We need to do the right thing", CB funds wrecked, The Benefits of Being Nimble

Republican Senator Richard Selby of the Senate Banking Committee, one of the most vocal opponents of the proposed bailout, said on CNN: "we need to do the right thing not just the expedient thing". Republicans and Democrats have expressed concern over the plan. Comparisons are being made with 1929, which led to Glass-Steagal Act and 1980s S&L crisis.

The FBI are investigating failed financial institutions including Fannie Mae and Freddie Mac, on issues of misrepresentation of finances.

In energy sector, French group EDF agreed a £12.5 billion takeover of British Energy. EDF will take control of all BE's nuclear power stations, including Sizewell B (PWR) in Suffolk and will play a leading role in the development of new stations in the UK. BE produces 1/6th of the UK's electricity and employs about 6000 staff.

City AM reports of recent wreckage in CB arbitrage funds, which "had the worst performance of any hedge funds, according to investors, as large portfolios of bonds were dumped into the market - probably....as...Lehman Brothers' proprietary trading desks closed".

Also on the recruitment market, City has a note of optimism: "while the big names of investment banking are suffering, the smaller, more nimble firms with less exposure to the sub prime markets are continuing to hire".

Nomura buys Lehman Europe, US anger over Paulson Plan

In a remarkable 48 hour manouevre, Nomura has bought over Lehman's equity and investment banking businesses in Europe and the MidEast.

In the US, anger spreads over the $700bn bailout of Wall Street.

Nomura buys Lehman Asia, "White Knight" Sought for B&B, MS sucks up to the Fed

Nomura will buy Lehman's Asia-Pacific franchise, including Japan and Australia and 3,000 staff. Nomura is Japan's top underwriter for stock offerings and also tops M&A tables in Japan.
Last year, Nomura bought Instinet Inc. (US online brokerage firm) for 1.2 billion dollars as part of its overseas expansion strategy.

In the UK, the FSA is believed to have sounded out potential "white knights" for Bradford and Bingley (source: CityAM) now of the UK's weakest banks. Parties to talks are believed to be Santander, ING and Australia National Bank. B&B made losses of £17.2m in the first half.

Also Turquoise, a new trading platform, has gone live. T allows customers to trade 1200 stocks in 13 European markets. Prepare for a price war with existing exchanges!!!

GS and MS have become retail banks today, to access the Fed's $700bn funding pool and placing them under the Fed regulatory spotlight. Get used to reduced leverage and fighting for deposits!! Hedgies and boutiques may do well?

USD500bn (NAY 700 BILLION) rescue plan, Shorts close positions, Market Rallies

One of the biggest one-day rallies in history resulted from investors betting on a US$500 billion plan to fix the credit crunch, buying toxic bank assets to free up credit markets.

CNN reports that this week alone, investors had withdrawn $210bn from money market funds. This was precipitated by the news of soured investments from Reserve Management Co. due to investments in Lehman Bros.

"What they're doing is jumping from crisis to crisis," said Senator Shelby, on the Federal Reserve and Treasury.

$180bn of liquidity offered to banks outside the US, Short sale of UK banks is banned, Barclays claims Lehman indexes, Morgans Stanley "vol" explodes

In a co-ordinated strike, $180bn in liquidity has been offered by central banks and regulators to banks outside the US in desperate need of dollars. For its part, the Bank of England has pumped 40 billion USD (£22.3 billion) into money markets, over four times the amount it pumped in on Monday when Lehman collapsed. Other actors in the stage-play included the ECB, Bank of Canada and Bank of Japan. Lehman, HBOS and AIG this week have led to banks hoarding cash and pushing up the rates of inter-bank lending. When commercial banks end up in a liquidity freeze, central banks step in to ease the cash deadlock.

The FSA has banned the short-selling of UK financial stocks, "a move unprecedented in modern times" according to the FT on Thursday, categorising it as a "market abuse" offence. Market makers are exempt from this rule. The rule takes effect from midnight Thursday until January 2009, and there will be a review after 3o days which may result in the ban being extended to other sectors.

Barclays also staked their claim on Lehman's bond indexes.

MS redefined volatility Thursday. After 1 p.m. Thursday,MS dipped below $13 (an all time low), beginning to rally around 2:30 p.m. Morgan's shares with news of a possible government-led solution to the loan crisis, and by 3 p.m., the stock hit $23.

EuroStoxx closed at the 3000 mark, 59bps below Wednesday's close.
Lloyds TSB paid £12bn for HBOS (the transaction having been waved through by Gordon Brown, side-stepping the Competition Commission), 232p per share. City AM's headline today is "CONTAGION" with a picture of a horse and the comment "LLOYDS TSB and HBOS will create a megabank with £1 trillion in assets. Picture:PA".

In stark contrast to the seriousness of the day's events in the money markets, the london paper ran lead stories on how madonna helped Gwyneth Paltrow out of post-natal depression and how Kate Middleton, girlfriend of Prince William, fell down at a roller disco in Vauxhall.

HBOS and Lloyds TSB in merger talks, Barclays buys Lehman Brothers North America, Morgan Stanley ruminating merger

Announcement came after a third disastrous day of trading in HBOS shares. HBOS dropped 19% during the day from 182 to 147. HBOS was admitted to trading on 10 September 2001. The government instigated Lloyds TSB to take HBOS under its wing, acting quicker than it did in last year's Northern Rock crisis. Merging the two will create the UK's fourth largest bank by assets.

Barclays takeover of Lehman North America ($1.5bn for the real estate and $250m for the business) was announced. The advisers on the deal, according to Bloomberg, were Credit Suisse Group AG, Deutsche Bank AG and JP Morgan Cazenove Ltd.

The cost of credit protection on Morgan Stanley's debt has accelerated over the last two days. Morgan's stock price is down 46% this year. They are rumoured to be mulling a merger (with Wachovia). The credit crisis has meant the financial landscape is changing fast. There is huge consolidation in the banking sector. Recent turbulence suggests the market will head towards more regulation, particularly of hedge funds, and more limits on risk taking and leverage.

Market virus.

Fed Plans Rescue of AIG ($85bn bailout/NATIONALISATION)

Following bailout of Freddie Mac and Fannie Mae, the Fed plans to stave off bankruptcy of AIG, by providing $85bn in funding in exchange for 80% stake in the insurer. US is following Venezuela in nationalising financial institutions.

AIG owns 50% of City Airport, located in Royal Docks, East London, less than 3 miles from Canary Wharf . AIG bought the airport from Irish financier Dermot Desmond in October 2006. It sold its stake to GIP (an infrastructure fund founded by Credit Suisse and General Electric), in Sept 2008.

Lehman Brothers is Bankrupt, ML sold to BoA for $50bn, BoE injects £5bn into markets, Two of the World's Biggest Banks Gone in One Day

BoA purchased ML on Sunday, and early Monday morning 158-year old LEH filed for Chapter 11 bankruptcy protection. The sudden and shocking demise of Lehman Brothers followed soon after Barclays and Bank of America pulled their interest in a possible takeover. Both bidders had something up their sleeve - BoA merged with ML and Barclays seemed to be waiting for the business to collapse before cherry-picking select businesses at bargain basement prices. Pictures of Lehman's staff bearing "Iron Mountain" boxes littered the news channels and newspapers. Some time later, prior to a G-7 meeting in Washington when the aftermath of Lehman's collapse became readily apparent, French economy minister Christine Lagarde remarked: "For the equilibrium of the world financial system, this was a genuine error...once we let one domino fall, the rest risk collapsing".

Now GS and MS are left as Wall Street's biggest investment banks.

In the UK the Bank of England auctioned £5bn through an exceptional fine tuning open market operation at 9.45 Monday. These loans will mature Thursday. (BoE stated they received £24.1bn in bids for its £5bn injection).

Reaction:

"The ECB stands ready to contribute to orderly conditions in the euro money market" - ECB

"I've been in the business 35 years and these are the most extraordinary events I have seen." - Peter G Peterson, Blackstone Group

Lehman Stock Battered

CityAM reports "some analysts are forecasting that the bank...will go bust within six months".

GSEs Bow Before the FHFA

The US government has analysed the capital requirements of mortgage GSEs (Government sponsored enterprises) Freddie Mac and Fannie Mae, which have lost billions in cash as a result of the US housing crash (referred to by the Treasure as "housing correction"). The GSEs have 5.3 trillion dollars of debt outstanding and MBS securities. They will now be administered by the FHFA (Federal Housing Finance Agency).

Fortune magazine covers the "Frankenstein business model" of the two institutions in the article "The $5 trillion mess". The two companies under the FHFA will not be able to make any payments to shareholders until the end of 2009.

The statement was made by Henry Paulson, Secretary of the US Treasury, prior to which he was CEO of Goldman Sachs.

Pound sell-off versus Euro

Alistair Darling added fuel to the already dire sentiment on the British economy, sending the pound to a new low against the dollar.

To make matters worse, OECD predicted recession for the UK in second half of 2008 (a recession is defined as two consecutive quarters of negative growth).

Big Pharma Strikes! Biotech M&A up nearly 90%!

Deal value of biotech acquistions by Big Pharma is up almost 90% for 2008.

Biggest proposed deal thus far is Switzerland's Roche's $44m bid for Genentech, the San Francisco oncology-focused lab, of which it already owns a controlling share.

Drugs are a multi-billion dollar business. World's best-selling drug Lipitor, from Pfizer, generated $8.1 billion in sales in 2007. Lipitor is cholesterol-lowering medication.

Earlier this year, Daiichi Sankyo took over Malvinder Singh's Ranbaxy in a cash-deal worth $4.6bn. Ranbaxy is known for challenging the patents of pharmaceutical companies and pioneering the generic drugs industry.

FDIC puts 117 banks on the watchlist

FDIC (Federal Deposit Insurance Company) that insures deposits (generally up to a value of $100,000) has put 117 banks on their watchlist, for deficiencies in finance, operations or management that threaten their viability as a business. FDIC publishes its watchlist on a quarterly basis.

Failure to administer corrective action results in the bank being sold or taken over by FDIC, or combination of both (FDIC can take over a bank and then sell its assets e.g. takeover of IndyMac Bancorp (US mortgage lender) following its failure in July 2008.

To put this into perspective, during the S&L crisis of the late 80s and early 90s, about 1500 banks were on the watchlist (about 12 times as many as presently).

South Korea's LG Electronics Record 2nd Quarter

Profits came from record sales of its premium mobile phones and flat panel televisions.

The FT reported "The company shipped a record 27.7m units thanks to strong demand for its high-end touchscreen phones like the Secret and the Viewty".

Recessionary Innovation

Bruce Nussbaum in BusinessWeek identifies some of the key mistakes companies make.

Number 10 on Bruce's list is "Retreat into Walled Castles", to quote Bruce: "cutting back on outside consultancies is seen as a quick way to save money. Yet one of the key ways of introducing change into a business culture is to bring in outside innovation and design consultants. They know what companies across a broad range of industries around the world are doing to promote change. Not receiving this information can hurt a company's global competitive position."

Recession provides time and opportunity for product development. When the economy is in full-swing there is absolutely no time for new development. As Bruce explains:

"Winners always emerge out of recessions and they almost always beat their competition on the basis of something new. Apple worked on iTunes, iPod and its retail stores during the last recession and came out swinging once growth returned to destroy its competition".

Identify ten best strategies...

Innovation is the last competitive edge left, unless you want to compete only on price. Is it time we had some innovation in economics? Paul Krugman in the NY Times has a great article "How did Economists Get it So Wrong?"

Nokia takes over Symbian, Trolltech in 2008

Finland-based Nokia, the world's largest handset maker, has paid 264m euros to buy out UK-based Symbian, to advance its mobile internet innovation strategy. Symbian was founded in 1998 by Ericsson, Motorola, Nokia and Psion. Nokia's S60 range of mobiles are built on Symbian OS.

More than 200 million Symbian-OS phones have been shipped in the 10 years of the company's operation.

Nokia has also taken over Norwegian company TrollTech this year, who supply the GUI toolkit for Motorola's Linux phones. Following the announcement, Motorola will be switching over to GTK, although no final date has been announced. Motorola are part of Limo foundation.

Nokia is looking to secure lead-time in innovation over Google's Android strategy. Android SDK allows developers to use Java on Linux to build applications for the Android mobile software stack. Google also have an Eclipse plug-in for Android development and Python build tools.

To read about mobile Linux innovation from a more techie perspective read linuxdevices.com.

£691m loss for RBS in first half of 2008

RBS, owners of NatWest Bank, have posted £691m loss for first half 2008. This compares with £5bn profit for first half 2007. Shares went up 2.7% as the loss was less than analysts expected. Much of the losses stem from ABN Amro acquired by RBS last year. To boost cash reserves, RBS announced in April its plans to conduct a rights issue, selling shares worth £12bn, the biggest in UK corporate history (rights issue - issue extra shares and offer them to existing shareholders usually at a discount to the current share price).

The banks hardest hit in the credit crunch have been Citigroup, Merrill Lynch and UBS. JPMorgan have also reported losses of $1.5billion to date after hedges for the July-September quarter (Q3).

The collapse of the subprime mortgage market and resultant losses have caused money market funds to stop buying asset-backed commercial paper forcing funds to unwind holdings and drive up yields.

73% slump in quarterly profit for Santa Clara's Sun

Sun Microsystem's quarterly profit fell 73% resulting from slumping sales to US companies and restructuring charges. Sun also announced expansion of stock buyback plan by $1bn.

Read CEO Jonathan Schwartz's blog here:
http://blogs.sun.com/jonathan/

Jonathan became SUN's CEO in 2006, succeeding previous CEO Scott McNealy, who co-founded the company in 1982.

A bit of background on SUN; it was formed in 1982, with four employees. One of its founders was Andreas Bechtolsheim, who stayed with the company till October 2008 and served as its Vice President of Technology as well as a member of its executive management team. He got an MS from CMU (Pittsburgh) in 1976. In 1984 (the topic of a great George Orwell novel) it introduced NFS technology, which it licensed free to industry. In 1988, SUN reached $1bn in revenue.

Sun has a presence across the UK. Here are links to the London CBC and the UK Headquarters in Camberley, Surrey (South-West of London (South-east of England) -> Greenwich, Dulwich, Wimbledon, Esher, Woking, Camberley).

Plans to Nationalise Bank of Venezuela

Hugo Chavez, president of Venezuela, has announced plans to nationalise Bank of Venezuela (Banco de Venezuela), one of the country's largest banks currently owned by Grupo Santander.

This is not the first nationalisation of Banco de Venezuela. It was nationalized in 1994 after a massive banking crisis which bankrupted 60 percent of the banking sector, privatized again 2 years later in 1996 and bought by the Spanish banking giant Grupo Santander for only 430 million US dollars.

Chavez was quoted as saying "Ladran, luego cabalgamos" (the dogs bark, therefore the caravan is moving).