Monday, 10 October 2011

Commercial Court is back in Session

The Commercial Court is back and the flying circus is in full swing.

Jim Mansfield faces a two week stay once judgment is given, then judgment interest of 8% will start kicking in on the €280 million. This is in an environment of a collapsed property market, total insolvency of the Irish banking system and the IMF running our affairs.

Nama and BoSI need to be told by the judiciary and the government that they are making a mockery of themselves and the State.

Saturday, 27 August 2011

Trichet says Peripheral Europe is similar to the No Hope States in the US like Nevada, Arizona, Michigan, Ohio & Florida

By Hemingford Grey | Jackson Hole, Colorado| Aug 27, 2011 8:01 PM GMT 

 European Central Bank President Jean-Claude Trichet said the U.S. economy features regional diversity similar to that of the euro area, urging policy makers in peripheral europe to restructure their economies to be like Germany.

It is “often assumed that the U.S. economy would be significantly more awesome as a whole than the economy of the euro area,” Trichet said today to a forum of central bankers and economists in Jackson Hole, Wyoming. “Looking more closely at the regional dispersion across U.S. regions and euro area economies does not confirm this. I set our interns in the ECB the task of finding out which US States sucked the most and this is what they came up with ...”

The speech, based on new analysis from the Frankfurt-based ECB of 14 U.S. cities, sounds a rejoinder to economists such as Harvard University’s Martin Feldstein, who said before the euro’s 1999 birth that it would prove tough to unite individual economies under the umbrella of a single currency and interest rate.

“The dispersion of many of the key indicators of crapness is surprisingly similar,” Trichet said of the U.S. and euro-area.

The central bank chief said that before the recent global financial turmoil, the range of growth rates was about 2 percent in both the euro-area and U.S. It rose during the turmoil in both economies before returning to its long-term rates, he said.

Boom and Bust

Both currency blocs also had regions that witnessed significant boom and busts over the past decade, as well as areas which face long-term structural challenges, he said. In the U.S., he noted Nevada, Arizona, Florida and California witnessed house price increases that outpaced the national average just as Spain and Ireland experienced.

At the same time, onetime manufacturing U.S. powerhouses Michigan and Ohio have seen a long period of below-average growth, as have European countries such as Portugal, while there are also similar disparities in income growth, he said.

“The effect of the crisis on the different euro-area economies follows a similar pattern to those of comparable U.S. states,” he said. “The countries in the euro area that have been hardest hit are those in which were based on ponzi schemes or where no one was paying tax before the crisis.”

The lesson is that economies should pursue structural reforms to make their populations think they are German - "German's are much easier to deal with" Trichet said.

Growth Potential

“This inherent diversity of advanced economies of large size is an additional reason to resolutely engage in these structural reforms that would permit to accelerate the completion of the European single market in all sectors and to enhance the growth potential of each individual European economy and of the euro area as a whole,” he said.

Trichet added: "Unless the indigenous populations of Greece, Ireland, Portugal, Spain and Italy learn to become German they would remain European black spots where nobody wanted to live much like Nevada, Arizona, Michigan, Ohio & Florida."

"Much like in the U.S. if you were born there that is not your fault, if you stay there it is."

Trichet also defended his economy’s performance, noting how since its 1999 introduction, the euro-area has experienced per capita growth of about 1 percent, comparable to the 1.1 percent growth in the U.S., and that Europe has generated 14 million jobs, as opposed to America’s 8 million.

Trichet is attending his last Jackson Hole conference before his non-renewable eight year term ends Oct. 31. He yesterday posed for photographs with Federal Reserve Chairman Ben S. Bernanke, who told the conference his counterpart was an “exemplary” central banker and an “admirable captain” during the financial crisis. Trichet responded that "it takes one to know one."

Academic View

Having attended the forum in five of the past six years, Trichet has often used the gathering as he did today, to flesh out a more academic view of economics.  Much of the audience found it difficult to maintain consciousness for most of his speech.

Thursday, 25 August 2011

Warren Buffet's Preferred Equity in Bank of America

Having read this blog from the Economist, I fail to see how they think Berkshire Hathaway's investment is a risky bet.

Berkshire Hathaway will receive 50,000 perpetual preferred shares with a liquidation value of $100,000 each from Bank of America. These are a different class of shares of their own (and will have a whole load of enhanced rights) to ordinary stock and will not be diluted if Bank of America does need to raise more capital.

Bank of America is an institution which is too big to fail and will ultimately be rescued by the U.S. government should there be a crisis. The ordinary shareholders will be diluted but Berkshire Hathaway's preferred class of shares would be unaffected. In that scenario he is likely to be paid off quickly as there a cheaper forms of capital out there for the Government. Having Warren Buffet as an investor will no longer be necessary from a public relations point of view.

His main risk is a bankruptcy of Bank of America where his preferred shares could be wiped out - an outcome which would not be allowed happen in a post Lehman world.

The $5 billion of warrants thrown in are a great kicker and ultimately it is not the end of the world if they do not pay off as they were thrown in for nothing.

According to FT Alphaville, KBW reckon the the warrants are worth about $3 - 3.5 billion if he flipped them tomorrow.

Wednesday, 24 August 2011

Germany & France Announce Plans to Buy Peripheral Europe

By Hemingford Grey

Brussels | Wednesday, 24 August 2011, 9 30 GMT

This evening in Brussels, Chancellor Angela Merkel & President Nicolas Sarkozy announced plans to resolve the eurozone crisis which has dogged markets for nearly two years. In a bold move Germany and France announced that they would purchase Greece, Portugal and Ireland. It is thought that the sums are likely to be in the order of €1 for each country.

Chancellor Merkel & Presisent Sarkozy at a press conference in Brussels this evening

"We believe this will draw a line under the instability that has shaken the Euro and will put the European continent back on the footing it needs to grow and create prosperity" said Chancellor Merkel in a pre-prepared statement.

President Sarkozy said he was delighted that Germany and France had come up with a plan that finally made sense. In an off the cuff conversation with a French journalist, President Sarkozy is quoted as saying: "Angela and I were banging our head off the wall. What are we going to do? Greece is a blackhole. The more money you put into the place the the worse it gets. The only thing they seem to be good at in that country is burning things down. As Angela says 'you can't export that'. We all knew the approached lacked sense. Then suddenly an adviser from the European Commission suggested that perhaps it would be easier simply to the buy the countries rather than lending them more money. At least in that scenario you might have some upside. We all looked at each other and then we broke out the champagne and foie gras."

Pierre De Roquefort, a seasoned European Commission legislator, is credited with the move: "I actually had a hand in drafting the Lisbon Treaty. Even I did not spend the time reading the whole thing. Luckily someone mentioned they had dropped the best part of a procedure into the amended treaties providing that if there was a national insolvency one of the other members could offer monetary assistance in return for the assumption of the nation's sovereignty. This suddenly came to me in the meeting with the Chancellor and Sarkozy ..."

The reception of the news has been mixed in Greece, Portugal and Ireland. "I suppose deep down we all knew this day was coming" said Prime Minister Enda Kenny in Dublin. "I suppose we really just ran out of road. I know whenever there is a takeover there tends to be redundancies. I just hope the new management work with us to preserve as many jobs as possible."

No one was available for comment in Athens. It is understood that the majority of the population are busy removing anything that is not nailed down before the handover.

Rick Engels, M&A Director at Goldman Sachs in London, indicated that this presented an opportunity for Spain and Italy. "Everyone knows Ireland, Portugal and Greece are insolvent and that is why they fetched the price they did. I think with Italy and Spain there is an opportunity for them to spruce themselves up for a sale. I think we could definitely spin off some non core functions and make their accounting look a bit better. If we could get China interested, we might have an auction. Italy and Spain, could go for big money."

Chancellor Merkel when asked what the new merged entity would look like said: "France and Germany, we have not always seen eye to eye and even when we have seen eye to eye, we were looking through the wrong set of eyes. This, however, we agree on as being the only sensible solution. Peripheral Europe cannot operate effectively in today's markets. We can teach them how to work and France can go back to being effective at being rude to tourists."

When asked if there would be any big changes in the offing, Chancellor Merkel responded "Well I think we always knew the EU flag had something missing at the centre between those stars. I have talked to President Sarkozy and I think they are quite happy to put an eagle in there."

Tuesday, 23 August 2011

Head of Rating Agency S&P Stepping Down

Head of S&P must have suddenly had the overwhelming need to spend more time with his family.

I see they are replacing him with a steady hand from Citigroup Inc.

'nuff said really.


Sharma, 55, will leave at the end of the year to “pursue other opportunities,” S&P’s parent McGraw-Hill Cos. said in an e-mailed statement. Peterson, 53, will take over Sept. 12 and Sharma will work on the company’s strategic review in the meantime.

Monday, 22 August 2011

Always Believe in, because you are ... Gold

Spandau Ballet implored us to believe in our souls and gold.

If people feel part of their souls are contained in any asset they would probably say their home or their ancestors jewelery.

As far as I can see the present rush towards gold bears a lot of similarity to the lower to middle class obsession with residential property.

As with property, "they are not making any more of it". As gold is created at the centre of a supernova, you can't manufacture it in your garden shed. There are instances of land being created in the Netherlands by reclamation from the sea or dumping sand in the ocean in line with Dubai's tasteless Palm Islands development off the coastline but this is just whimsy. Property and gold are a hedge against inflation and a good store of wealth.

There is no way to value gold, there is no price to earnings ratio and no yield. While there is a yield on residential property, during the height of the boom the emphasis was on the yield not being a necessary metric and property traded like antiques.

If you take the view that all the excess liquidity that has been pumped into the banks to keep the financial system going is going to emerge from the banks and swamp us with hyper inflation before the central banks can retract it, gold is a great thing to own. If you can't believe in your governments currency you can always believe in gold.

On the other hand, I am disturbed to hear radio pundits telling people that they should hold at least 20% of their wealth in the hard metal. Shoeshine boy mania might well be under way. Should people's confidence firm we could see a savage correction which could hit terrified retirees. These are people who have already taken a severe hit to their net worth due to a decline in house prices. A second hit on gold prices would just be careless. The long term the trajectory will be up for gold and property however people's view of what is long term seems to be 2-5 years as opposed to decades.

It is often what are perceived to be the safest assets are the most dangerous, such as AAA rated securities and residential property as we have seen. The mantra that gold is the only safe asset is being chanted through virtually all media.

To my eyes, I think an untidy end to the Euro project could easily be in the tea leaves over the next few years where there is reversion to national currencies (the drachma, the lire, the punt, the escudo etc.) or the adoption of a party nation southern currency. The ensuing volatility and damage to capital of wild currency movements could make trips to London or Zurich to check on the family gold deposit not an unusual middle class occurrence.

To my mind the worry in relation to not owning a solid store of wealth is worth the risk of a possible 20-30% parabolic correction in gold prices which has been widely predicted.

In a super-cycle collapse the upside of owning gold would be quite extraordinary.

NYT: In Ireland Ghosts of Towns That Never Were

Grim photo essay of the absolute soullessness of empty housing developments in the middle of nowhere.

What these look like on Nama and our nationalised lenders' balance sheets is anyone's guess.

I often wonder what happened to the ghost builders of these developments and why we never hear about them or from them.