by Calculated Risk on 10/13/2008 12:12:00 AM

Paul Krugman writes in the NY Times: Gordon Does Good. A few excerpts:

The natural thing to do ... is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization ... is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path ...

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead ... And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As Krugman notes, many economists - like Krugman, Roubini, DeLong, and many others - were urging something similar to the Gordon Brown approach.

BTW, the UK announcement is expected very soon - around 7 AM London Time (2 AM ET, 11 PM PT).

by Calculated Risk on 10/12/2008 07:58:00 PM

From the WSJ: RBS CEO's Exit Is Likely As Part of U.K. Purchase.

On Sunday night, bankers and officials expected to work through the night again to put in place details of the plan they hoped to announce before the market opens Monday.
...
On Sunday night, a spokesman for the London Stock Exchange said the market would be open for trading as usual.

The UK announcement is expected around 7 AM London Time (2 AM ET, 11 PM PT). We are still waiting for Morgan Stanley too.

Here is the current London Time:


Bloomberg Futures.

Index Futures from Barchart.com (active futures have a time not a date)

CBOT mini-sized Dow

by Calculated Risk on 10/12/2008 05:44:00 PM

Andrew Sorkin reports in the NY Times: Mitsubishi and Morgan Stanley Renegotiating

Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley ... But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley ... Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time ... that such a move would not wipe out preferred shareholders.

Sorkin writes that an announcement is expected before the market opens on Monday.

Note: The final details of the UK bank recapitalization plan is expected at 7 AM London time.

by Calculated Risk on 10/12/2008 03:56:00 PM

UPDATE: From Reuters: Final statement from euro zone summit in Paris

From Bloomberg: European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under ...

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

This apparently applies to all countries using the euro. Update: A reader adds:

Just to avoid any misunderstandings: tonight's meeting of the Eurogroup has no rule-making powers. In essence, it is just a political coordination forum. It is up to each Eurozone country to act. The fact that they all agreed the statement does not necssarily mean they will all do this.

by Calculated Risk on 10/12/2008 12:27:00 PM

From Bloomberg: European Leaders Seek `One Voice' to Counter Crisis

The 15 euro countries may agree to guarantee interbank loans of as long as five years to break the credit-market freeze, according to a draft statement cited by Agence France- Presse.

From the NY Times: European Leaders Meet as More Measures Extended

Financial and political leaders were holding meetings across the globe Sunday, urgently seeking agreement on measures to restore confidence to the teetering financial system before markets open Monday in Asia.
...
Nicolas Sarkozy, the French president, said after a meeting at the Élysée Palace with Prime Minister Gordon Brown of Britain that he expected European countries to present an “ambitious and coordinated plan” that goes beyond measures announced by the Group of 7 industrialized countries in Washington on Friday.

The UK will announce the details of the capitalization plan at 7 AM Monday London time. But it sounds like there will be an EU announcement even earlier - before the Asian markets open.

by Calculated Risk on 10/12/2008 11:39:00 AM

From the WSJ: Australia to Guarantee All Bank Deposits

Australian Prime Minister Kevin Rudd said Sunday the government will guarantee all bank deposits for a period of three years.

From Sunday, the government will also guarantee all term wholesale funding by Australian banks operating in international credit markets "to make sure they have the best possible access to global capital," Mr. Rudd said.

The New Zealand government followed Mr. Rudd's announcement by introducing a bank deposit guarantee program as both countries sought safeguards against turbulence in global credit markets.

Over in Europe, UK Prime Minister Gordon Brown is in Paris today presenting the UK plan to other European leaders:

Gordon Brown arrived at the Elysee Palace in Paris today for the latest international leg of his campaign to promote a British bank bailout plan among world leaders.

Despite the UK not being part of the euro, the Prime Minister met President Nicolas Sarkozy of France ahead of a summit of the 15 eurozone members and will brief them on the plan in which the Government will inject billions of pounds into struggling banks in return for preferential shares.

The plan is being looked upon favourably by Western leaders – including the Bush Administration – as a way of injecting confidence and liquidity into the financial system whilst retaining a politically favourable stake for the taxpayer. Europe also looks set to follow suit.

by Calculated Risk on 10/12/2008 10:03:00 AM

Here are a couple of articles that suggest a number of recent home buyers are already underwater (owe more than their homes are worth).

Here is a graphic from the South Florida NewsPress.com: ‘Underwater’ borrowers sign of more trouble

Click on graph for larger image in new window.

Worst off are those who bought homes in 2006, just as the housing boom was ending: 78.5 percent of those now have home values less than the original loan amount, according to second-quarter statistics compiled by real estate data provider Zillow.com.

But look at 2007 and even 2008. In Lee County Florida, according to NewsPress.com, 14.5% of homeowners who bought this year owe more than their homes are worth. And almost two-thirds of homebuyers in 2007 are underwater.

And the MercuryNews.com has a sad tale of a neighborhood devasted by foreclosures: Financial crisis: Homeowners in Manteca neighborhood cope with foreclosures.

The math alone is humiliating. The house was worth $770,000 after the Cantrells bought it [in 2006] and upgraded the back yard. They spent $250,000 for the down payment and pool but still owe about $520,000. They've had four offers on the house — the highest was $355,000.

In October 2007 the home builder sold some of the homes at auction.

Representing his neighborhood with a promise to report back, [Dave Cantrell] attended the auction in a Pleasanton hotel ballroom last October. ... While Cantrell had paid a base price of $658,500 for his house, a nearly identical one sold for $391,000.

Even the buyers who paid $391,000 last October have clearly lost money and with a 10% downypayment are close to being underwater.

by Calculated Risk on 10/11/2008 07:13:00 PM

From the WSJ: German Bailout Likely to Be Over $400 Billion

German Chancellor Angela Merkel heads to Paris to present Sunday to her colleagues from the euro zone a financial sector bailout plan for Germany ... A person familiar with the situation told Dow Jones Newswires that the government is considering a total bailout plan of €300 billion to €400 billion ($402 billion to $536 billion), which includes state guarantees and the option to get a direct stake in banks. As part of this, the government is mulling recapitalizing financial institutions by injecting €50 billion to €100 billion in capital ...

Looks like another busy Sunday!

by Calculated Risk on 10/11/2008 06:42:00 PM

The bailout is to be announced Monday at 7 AM London Time (2 AM ET Monday AM).

The London stock market might be closed.

Current London Time:


From the WSJ: U.K. Banks to Announce Bailout Details

Some of the U.K.'s largest banks are expected to detail early Monday their participation in a bailout plan that could force the departure of some of their top executives, according to people familiar with the situation.

The announcement, aimed for about 7 a.m., is expected to include details on how much will be raised from the government and private investors.
...
One plan under consideration is to shutter London stock trading to allow investors to digest the news. That plan hasn't been finalized ...

The Times also mentions the possible market shutdown:

The scale of the fundraising could lead to trading at the London stock market being suspended. This would be to give time for the market to digest the scale of the information and its impact.

by Calculated Risk on 10/11/2008 04:26:00 PM

From The Times: State to save HBOS and RBS

THE government will tomorrow launch the biggest rescue of Britain’s high-street banks when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks. The Royal Bank of Scot-land (RBS), which has seen its market value fall to under £12 billion, is to ask the government to underwrite a £15 billion cash call. HBOS, which is Britain’s biggest provider of mortgages, is requesting up to £10 billion. Lloyds TSB, which is in the process of acquiring HBOS, and Barclays require £7 billion and £3 billion.
...
The British bank rescue could leave the government owning 70% of HBOS and 50% of RBS. ... Further capital is also available and the Treasury has increased the total amount to £75 billion.

Here is the WSJ article: U.K. Banks to Announce Details of Plan

The Times article also comments on Morgan Stanley:

Separately, the future of Morgan Stanley, the American investment bank, is also in doubt today ... Mitsubishi UFJ Financial Group is reviewing the terms of a $9 billion (£5.3 billion) capital injection into the bank and may launch a takeover.