Re: Bank Crisis: We'll all drop together when we drop.

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Greenspan will be cautious to lower rates because he fears a collapse of
the dollar.  There is no inflation now obviously, but if the dollar falls,
import prices including oil will rise, then inflation will come,
causing a spiral of higher interest rates, larger trade deficits,  higher
inflation and eventually a still lower dollar.  So his strategy is to keep
interest rate at current level and hope the economy will slow down
gradually.  But unlike 1998, when he could afford to lower US rates
sharpely and quickly, because of the tide of flight capital returning from
Asia to dollar assets, this time falling prices on dollar assets do not
need low interest rates to derive away flight capital from US caoital and
credit markets.  So the US economy will get no help from the Fed, at least
in a way that would mean anything.  Greenspan has historically 6 months
late in recognizing (or publically admitting any economic recession),
always confusing denial with confidence building.  This time, the natural
of the credit cruch is that the collapse will be fast and furious.  In six
months, all the damage would have been done.  There is no soft landing
because this decade-long expansion has not been  an investment/production
overheat.  It has been a credit-driven bubble and the nature of bubbles is
to pop suddenly and quickly.  Debt forclosures happens in a matter of
weeks, or months.  Flight to quality cannot take shape because no one can
find quality any more.  I do think the impact will be global as all
transnationals will cut overseas expansion first.  Look at GM in England
and of course, with telecoms and PCs, the collapse is global. But unlike,
the 1997 crises and its aftermath, this collapse will originate on Wall
Street, rather than at the peripheral pushing fund flows into Wall Street.

The credit structure today is very different than a decade ago, so that
the wealth evaporation process is much faster.  Real estate mortgages
though still important constitute a proportionately smaller
part of total credit.  Most of the mergers in recent years were done with
a combination of loans and stocks. Equipment leasing, for example, gets
liquidated quickly. Vendor
financing has very little to workout and are mostly liquidations
candidates.  Lucent and GE own 15% of scores of bankrupt companies that
translate into zero salvage value.  The process was visible in
the Asian financial crises that began in 1988.  Most of the damage was
donne in a few weeks and then it has been more than 3 years now and the
workout is still in process.
Unlike 1929, when credit was used only to purchase equity shares, today's
equity market crash affects not just investor losses, but massive
corporate and personal borrowing based on pre-crash market
values not just from banks, but significantly from the capital and credit
markets.  Structured finance and vandor finance were unknown until a
decade ago.  Look at the GE Capital lists of financial
services and you will see short fuses in most of them.  Remember GE is the
world buiggest and most extensive financial gonglomerate, drawfing the
Citigroup by a wide margin.

Here is an official list of activities of GE Capital:

Capital Services, a wholly owned subsidiary of GE, is a diversified
financial services company that creates comprehensive solutions to
increase client productivity and efficiency.  Its operations consist
of 28 distinct businesses in the areas of Equipment Management,  Consumer
Services, Mid-Market Financing, Specialized Financing and Specialty
Insurance and includes global operations in Europe, Asia and Latin
America.

Aviation Services is one of the world's largest aircraft leasing
companies, with an owned/managed fleet of 850 airplanes and an additional
150 firm Boeing and Airbus aircraft orders. GE Capital Aviation Services
began its involvement in aircraft finance in the U.S. over 30 years ago.
Today, it has numerous long-standing customer relationships globally and
has significant expertise in both aircraft hardware and complex
financial/aircraft trading transactions.

Commercial Equipment Financing provides innovative solutions to meet the
equipment and real estate financing needs of growing businesses,
government and not-for-profit entities. Our specialists in the
manufacturing, transportation, construction, corporate aircraft,
electronics, material handling, services, and healthcare industries will
help you with equipment acquisitions. Through creative financing and lease
structuring, you can increase your borrowing capacity, leverage favorable
tax situations, and mitigate equipment obsolescence.

Commercial Finance is a leading global provider of innovative financing
solutions primarily for non-investment grade companies. GE Commercial
Finance was created in 1994 and consists of seven
customer-focused business segments.

Employers Reinsurance Corporation is a world leader in risk management
solutions. ERC provides risk transfer to insurance companies, Fortune 1000
companies, self-insurers,  healthcare providers, associations and other
groups.

GE Equity is the private equity arm of GE, and is a subsidiary of GE
Capital. GE Equity offers innovative deal structures, which includes the
use of preferred stock, convertible debt, subordinated debt, and
common stock. With a portfolio of over 150 companies located throughout
the United States,
Latin America, Asia, and Europe, GE Equity provides creative, flexible,
and innovative deal structuring designed to satisfy the needs of its
clients. GE Equity was formed in late 1995 as part of GE Capital. With 120
investment professionals,  and five business units, GE Equity continues to
create value for its clients by providing them with the strength of the GE
brand name, distribution channels, technology support, business  training,
portfolio company networking, sourcing discounts, GE knowledge and
operating
experience.

Financial Assurance is a dynamic, integrated family of investment and
insurance companies, which includes nine business units. GE Financial
Assurance provides quality financial security solutions that help
consumers accumulate, preserve and protect wealth over a  lifetime and
achieve desired financial goals during each stage of their lives.

Global Consumer Finance is a leading provider of credit services to
retailers and consumers in 29 countries around the world. Global Consumer
Finance offers private label credit cards and proprietary
credit services to some of the world's leading retailers and
manufacturers, automobile financing solutions through auto dealers, and
diversified financial programs directly to consumers.

GE Global eXchange Services combines innovative Internet commerce
technologies with Six Sigma process disciplines to create intelligence for
business supply chains around the globe. The company enables global
business-to-business Internet commerce by offering Internet Data Exchange
(IDE), which supports all major data formats including eXtensible markup
language (XML); Enterprise Application Integration (EAI) software;
procurement software and services; and trading partner exchanges. Managing
the world's largest electronic community of more than 100,000 trading
partners, GE Global eXchange Services is a part of GE Information
Services, Inc., a wholly-owned subsidiary of the General Electric
Company, USA - and is headquartered in Gaithersburg, Maryland. (800)
560-4347.

Mortgage Insurance Corporation for lenders and investors, we reduce
financial risk by protecting against borrower default. For borrowers, that
may mean an opportunity to buy a home sooner... with less down
payment.

Real Estate finances and invests in a broad range of commercial and
residential properties.  Real Estate provides financing for the
acquisition refinancing and renovation of income producing properties
such as office buildings, rental apartments, shopping centers, industrial
buildings, mobile home parks, hotels and warehouses. Financing includes
intermediate to long term senior or subordinated fixed and floating rate
loans, as well as equity on a joint venture basis. Loans range from $2
million for single property mortgages to several hundred million for
multi-property portfolios.
Real Estate also offers loan servicing and asset management expertise to
other real estate investors and advisory services for pension fund clients
through GE Capital Investment Advisors.

Structured Finance Group is a major investor and leading provider of
innovative financial solutions for clients in the global commercial and
industrial, communications, energy, and transportation sectors.
With more than 30 years of experience, Structured Finance Group meets the
needs of its clients by combining industry and technical expertise with
significant financial capabilities. It delivers a full range of
sophisticated financial services and products and participates in
development projects, partnerships
and joint ventures.

Vendor Financial Services is a global leader in providing financial
solutions and services to equipment manufacturers, distributors, dealers
and end users. Vendor Financial Services has built and managed
successful private label and outsourced sales financing operations by
creating flexible programs that sell where our customers need to sell:
directly to end users of all sizes, through channel distribution, in
the not-for-profit arena, to local, state and federal governments. And
every commitment is undertaken to
help our customers generate more revenue and enhance their brand equity
through innovative, tailored programs. With approximately $15 billion in
served assets, Vendor Financial Services works with our
customers to drive new business and make existing customers repeat
customers through superior service, a commitment to quality and fairness,
and the application to the latest technology.

Well, every one of the above is a financial time bomb with a short fuse!
Every deal GE Capital is involved in will find itself engaged as both
lender and equity partner of the borrowers subsidary, holding both
preferred and common, bonds and shot-term papers structured by service the
bonds.  In fact it is not much an exaggeration to say that GE lends to
itself for its own expansion across corporate borders.  Typically GE
Capital funds the construction of a production facility which it then
owns, then leases it to a business entity which it also owns minority
interest, to whom its give a credit line, for whom its provide lender
financing to push sales, and to whom its provide factoring and payment
insurance for a fee. The key advantage always traces back to GE's
financial powess to get cheap money in large chunks and retail the funds
at profitable spreads, expoliting the financial power to usurp management
control to creat unseen monoplolies around anti-trust regulations.  Well,
lately GE bonds have experienced a rapid rise of interest cost that has
yet to peak, and the slow down of the economy is making even GE Capital's
good deals look bad, let alone crazy deals in telecoms and GE Global
eXchange Services.

Another over-looked factor is that, to avoid capital gain tax, everybody,
corporate and personal alike, was borrowing against appreciated share
values.  That was one of the reason prices kept going up was because there
were few sellers.  Now all these loans are under water.  So margin calls
force fire sales. For every dollar liquidated from sale, 28% of the
appreciated value goes to capital gain taxes.  That accelerates the
collapse into a fast downward spiral.

California's three investor-owned utilities, which supply power to
customers at frozen rates ranging between $54 and $65 per megawatt hour,
are paying as much as $1,200 per megawatt hour for their juice.  Since
June, they have amassed a deficit of more than $7 billion. Prior to
deregulation, California spent $23 billion a year on electricity.
Recently, it has been spending as much as $850 million a day.
Over the course of the last week, the credit ratings of both Southern
California Edison and Pacific Gas &
 Electric Co., the state's other big utility, have been cut. Wednesday,
Standard & Poor's joined in the chorus, putting the two utilities on
negative credit watch.  The California electric ultitlities bankruptcies
are a certainty. So a few tens of billions in every sector, and the banks
are cooked.

The point made by James' analyst: "Representing the surplus of production
over consumption, [capital
formation] is the one and only source of macroeconomic wealth
creation...capital formation is strategic for generating general
prosperity," does not described the economy of the last decade.  As even
Greenspan, the cheerleader of the debt economy, has acknowledged: the
"wealth effect" caused by "exuberance" has produced a surplus of
consumption over production. Ther was no capital accummulation, only debt
accumulation disguised as capital.  The decade-long expansion has been
fueled by the monetization of fantasy future earnings as current wealth,
with a reverse present value premium rather than discount, as evidenced by
infinity price earning ratios.




schulte-baeuminghaus wrote:

> Henry,
> Gary,
>
> One perceptive analyst I have read recently, says that "economic
> imbalances and financial excesses of unprecedented size have made the
> U.S. economy and its financial system more vulnerable than ever
> before. There are serious problems everywhere: in the credit markets,
> in the banking system, in stock valuations, in credit availability, in
> the profit performance, in the debt burdens of corporations and
> consumers, in negative personal savings, and in the huge trade gap and
> the grossly overvalued dollar. Confidence in the dollar has been the
> one linchpin that has held this disintegrating system together....For
> too long have too many people believed that the new information
> technology offers a free lunch by delivering huge gains in equity
> prices. In reality, this paper wealth creates the exact opposite:
> financial claims on existing resources."
> He makes the general point with which I find it difficult to disagree:
> "Representing the surplus of production over consumption, [capital
> formation] is the one and only source of macroeconomic wealth
> creation...capital formation is strategic for generating general
> prosperity."
> There has been "unfettered credit creation by the financial system for
> consumption and speculation" so that we now have "degenerate
> capitalism in the sense that saving and capital accumulation , the key
> features of a capitalistic economy, have fallen into complete
> oblivion. Worse, still, it is a capitalism which any educated nation
> should be ashamed of because the corporate strategies that result from
> the single-minded microeconomic logic of maximising present
> shareholder value inherently impart increasingly negative long-term
> macroeconomic consequences to economic growth, income and profit
> creation. What really happens is rampant over-consumption at the
> expense of future generations who are to inherit depleted domestic
> capital formation, a mountain of foreign indebtedness and lots of
> worthless paper assets (stock and bonds). It might be called
> 'beggar-thy-children capitalism.' The motto of this capitalism is
> 'After us the deluge.'"
> I'd like to be able to say that this is a lot of pessimistic moaning
> in a uniquely favourable economic situation for the United States and
> the world economy; but I think we may already have gone over the cliff
> into what I called some years ago a "multiple abyss" and we can only
> wonder how long the suspension of Newton's law of gravity will last.
> What we need now is not so much conviction that we have a grave crisis
> on our hands as some consensus on the nature and component
> characteristics of the crisis, so that we can agree on the measures to
> moderate it.
> What can we do to moderate it?
> This financial and economic crisis has been gathering for so many
> years, its dimensions are so massive and its consequences so
> widespread that it is difficult to see that the instruments in the
> hands of governments and regulatory institutions, including central
> banks, are anything like adequate.
> Governments have abdicated most of their responsibility to "the
> market" for many years past. Much of what remains of their
> responsibility they have abdicated to central banks whose performance
> has been in keeping with the current capitalist philosophy of letting
> things run. The new Bush Administration-to-be is talking of an
> "economic downturn."
> A downturn?
> Is it no more than that?
> Can Alan Greenspan simply and confidently press downward on the lever
> of the interest rate - and keep on talking smart - and all will be
> well?
> It would be nice to think he can and that's all that's needed.
> But does the sheer range, complexity and dimensions of our predicament
> suggest that it is? If the crisis hits as some of us fear, will the
> consequences be of the catastrophic dimensions that we anticipate?
> Will it then take six years or ten to drag ourselves back to something
> like stable prosperity?
> Will it take a whole generation?
> He'd be a brave man who'd put any term to the recovery if we're right
> in our assessment of the nature and dimensions of the prospective
> collapse.
> In all this, of course, we must bear in mind that there are elements
> that are not just baldly economic. They seldom are. The "bottom line"
> will write in consequences that are very heavily social, politicial
> and strategic.
> The abyss could well be multiple.
>
> James Cumes
>
> ----------
> >From: Gary Dymski <gdymski@xxxxxxxxxxxxx>
> >To: pkt@xxxxxxxxxxxxxxxx
> >Subject: Re: Bank Crisis
> >Date: Fri, Dec 15, 2000, 6:59 pm
> >
>
> > Thanks to Henry for bringing up the new news of the data --
> > the megabanks are in trouble. The WSJ reported this AM,
> > of Chase, "this is a great bank in a bad environment."
> > Didn't we get that "what's a nice bank like you doing in a
> > place like this?" during the Latin debt crisis, the Asian financial
> > crisis, the ...
> >
> > My 1999 ME Sharpe book on the US bank merger wave
> > argued that there wasn't the profits in core financial activities
> > to justify the high expectations that Wall Street was putting
> > on the then raging megamergers. Stock prices for banks turned
> > down viciously after the Asian crisis and haven't recovered much,
> > with a couple of exceptions. So Wall Street has backed off, and
> > the banks are all dressed up with their venture-capital funds
> > and investment-banking operations -- with nowhere to go.
> > A close reading of earnings reports shows that they are making
> > money on consumer banking operations, but losing it on every-
> > thing else -- and have been for about six months or more.
> > This leaves us with megabanks with quasi-monopoly positions
> > in local banking markets, extracting economic rents the old-
> > fashioned way, while trying to find those megacorps that need
> > their services. Six years, thought Henry. Maybe; the US today
> > has some parallels with Japan a decade ago. So, it could be 10.
> > Thank heavens for that reserve currency status!
> >
> > Gary D.
> > _________________________________________
> > Gary Dymski, Associate Professor, Dept of Economics
> > University of California, Riverside CA 92521-0427
> > ph: 909-787-5037 x1570 fax 760-480-8607
> > email: dymski@xxxxxxxxxxxx
> >
> >