China

The real risks to China’s financial system – FT.com – Two articles supposedly debate the IMF report, but it turns out their opinions aren’t that much divergent. We’ve read calls for opening up the system, and we remind the readers that when the incentive systems of enough players are aligned towards a given direction – in this case, growth, then whether it’s centralized or open doesn’t matter as much. One such example was the US housing boom and subsequent bust: oversimplifying a bit, one can argue that all players were aligned towards growth: home owners, mortgage originators/ packagers/ distributors, banks, investors, credit rating agencies etc. – and, on top of them all, the government and its agencies. The fact that the system was open, competitive and so on didn’t help much. In China, the incentives to grow are still strong and the Central government is yet to pull on the reins strongly enough. It’s not necessarily true that an open system would be better incentivized to slow down.

Europe

Banks face funding stress – WSJ.com – European banks need funding, most of it nowadays comes from the ECB due to higher perceived risk. So banks needing collateral accepted by the ECB enter strange swaps with funds and investment banks to get such “risk-free” assets at a discount to the, well, not-collateral-level assets they’re swapping with the other players. Is this spreading the risk or creating even more connections where there shouldn’t be many?

UniCredit bombshell shouldn’t be the last one – Bloomberg – UniCredit, one of Italy’s largest lenders, has recognized 10.7 billion euros in asset writedowns in its latest report. Even so it’s still trading at 0.29x book value, and that book value is propped up by “useless” assets such as deferred taxes (good luck turning a profit to use this asset) and goodwill (good luck trading goodwill for cash). Other european banks trade at P/B multiples that suggest their credibility is also way down. However, the author argues the problem could be global and that, if banks start getting as candid as UniCredit, things could get rather unpredictable.

USA

Fitch’s warning spooks investors – WSJ.com — AND — US Banks face contagion risk from European debt – Bloomberg – Credit rating agency Fitch has issued a report (for subscribers only) on the “serious risk” that US banks may face if the situation in Europe deteriorates much further. As in France being at risk, for instance. While again it’s a case of “not much new information”, the fact that they chose to go on record – even though they didn’t change the ratings of any of the US banks mentioned – has spooked investors (US banks down by 3-4% as we write, with the notable yet unsurprising exception of Wells Fargo – still down by 1%).

Why not break up Citigroup? – NYT’s Economix blog – Simon Johnson, former IMF chief economist, links to the Dallas FED president’s speech on “too big to fail” banks and agrees with him that such institutions should be broken down into smaller pieces. He suggests starting with Citigroup.

‘Aloha’ to a new fix-it job – WSJ.com – coincidentally, the WSJ.com has a profile of Michael O’Neill, the new Chairman of Citibank N.A. (not Citigroup, “just” the bank – i.e. 70% of Citigroup’s assets). Certainly an impressive profile, but we’re reminded of Warren Buffett’s axiom: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Global

Finance job losses near 200,00 as BNP, Citigroup trim employees – Bloomberg – Well, partially playing to Mr. Johnson’s wishes above, the banks are reducing their size – does involuntary reduction count?

Before we list the links, we must say that the collective challenges presented in the articles are directly linked to governance structures. We’ve been discussing this subject here and in our reports, and its relevance is increasing by the day… In this May 14th post there are links to previous posts on the subject.

Links:

America’s new politics of Republican sanity – June 14th – Jacob Weisberg of Slate discusses the relative improvement – albeit from a very low base – of the political debate in the US.

America prefers fiscal idiocy to intelligent choices – June 12th – Clive Crook of the FT staff, well, one probably gets the point from the article’s title… He blasts Democrats and Republicans alike, in contrast to Mr. Weisberg.

How to avoid our own lost decade – June 12th – Larry Summers (understandably, since he was there) praises the Obama govt.’s initial crisis management policies, highlights his current pessimist view and then says more of the same is needed. Even so, the level of personal attacks in the comments section defies logic.

Turning to Europe…

The Eurozone heads for breakup – June 13th – Nouriel Roubini’s doomsday machine keeps firing and the subject now is Europe.

In praise of Stanley Fischer – June 12th – Mohamed El-Erian praises Stanley Fischer for the top post at the IMF, blasting Europeans for not giving him a fighting chance.

Europe: the hidden economy – June 8th – The best piece of the bunch, about Europe’s “black”/informal economy, how to measure it, its usefulness (really) and so on. Well-known (and painful) subject for countries with highly regulated and highly taxed economies, such as Brazil.

Enter Greece and other European “peripheral” countries. Investors are finding it hard to simply exit “crisis mode” after the traumatic events of 2007/ 2008. We won’t fall into the trap of discussing Macro issues – not our core skill anyway – because the main issue here is that volatility, that friend of the long-term investor holding a lot of cash, is on the rise. This post collects some very interesting articles by the Financial Times on the subject of Greece’s (and Europe’s) woes, just as food for thought.

Why the Financial Times, a paid source? Because it’s the best coverage of European markets and economies. We highly recommend this source.

LINKS:

Greece part of unfolding sovereign debt story – Jan. 29th, 2010 – Mohamed El-Erian, CEO of PIMCO (world’s largest bond investor) discusses the EU’s options in light of the Greece situation. The major takeaway is that there is no easy solution, and therefore no solution without its scares and fits of panic.

Tipping the scales on global rebalancing – Feb. 2nd, 2010 – Bond investors are increasingly jittery and why the US and Asia seem safer than Europe.

Medicine for Europe’s sinking south – Feb. 3rd, 2010 – Economists Nouriel Roubini and Arnab Das write about how Greece is the front line of a larger battle for European stability – and again the tone is pessimistic since no easy solution appears in sight.

EC: A toothless regent in Greece? – Feb 3rd, 2010 – FT’s Money Supply blog on the obviousness of how the European Commission’s lack of powers ultimately leads to situations such as Greece’s. Will these debacles lead to increased scrutiny and – more necessarily – intervention?

Record volumes for sovereign CDSs and Portuguese bonds hit as Greece fears ease – Feb. 4th, 2010 – Greece’s plan is greeted with skepticism and pragmatism – bond investors have apparently decided that the next country in “the line of shame” is Portugal.