A stitch in time would have saved the US trillions plus a lot of trouble

Delayed response by Paulson led to virus spreading all over the system

One of US Treasury Secretary Hank Paulson's biggest mistakes has been his delay in tackling the US financial crisis before it spread throughout the financial system. Like cancer, one has to treat it before it spreads to other parts of the body, otherwise it will be too late.

Several critics, including George Soros, the hedge-fund financier, have argued if Paulson had taken on the US financial system earlier this year after the Bear Stearns collapse, he could have saved Lehman Brothers and prevented its bankruptcy. The collapse of Lehman has spread the financial virus throughout the US and global financial markets.

One US research house has put the US debt-related losses at about US$2.7 trillion (Bt91.92 trillion), with the mark-to-market ones totalling $575 billion.

"These aren't precise numbers, but they are broadly indicative. The main thing to take away from them is that they are huge and that they are much larger than they were when we first started to do our estimates. And the reason that they are larger is that the problems were not contained," said the research house.

Then there are the estimated declines in equity. Because of declines in real estate and equities, another $12 trillion is lost.

"With these losses, Americans' net worth is reduced and prospective incomes are reduced, so their creditworthiness is reduced," the research house said.

European and UK leaders have rushed to push out emergency measures to shore up liquidity. At a summit in Paris, the European leaders announced a rescue plan that is modelled after the UK plan. The European plan will also offer five-year government guarantees for new bank debt.

This follows the UK Treasury's action last week to bail out the big banks. Under the plan, the government will inject ฃ37 billion (Bt2.21 trillion) in preference shares into the Royal Bank of Scotland ( RBS), Lloyds TSB and HBOS, which will likely give it a controlling stake in RBS and a significant stake in the combined Lloyds/HBOS.

Moreover, the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank have announced that they will offer unlimited collateralised dollar liquidity to unfreeze the money markets.

Paulson has adjusted the $700-billion rescue package to shore up the US banks' capital instead of buying out the bad debts from them alone. The idea is to help the banks maintain their capital-adequacy ratio standard.

Initially, he wanted to buy out just the bad debts, but the financial markets went on a selling spree because they did not believe this was the right cure.

Now, $125 billion of the $700-billion package will be used to inject capital into nine US commercial banks. This will strengthen their balance sheets and help them to weather the financial storm.

Hopefully, they will be in a stronger position to snap up the weaker financial institutions.

Another $125 billion will be spent on increasing the capital of other financial institutions, while the rest will go to buying out the bad assets of the financial institutions in order to relieve the burden from their books.

Paulson has insisted that once the bail-out plan is up and running, the banks will become healthier and can resume lending to their customers.

But the problem is that the banks might have to think twice before lending to corporate or individual customers, most of whom are over-leveraged.

The banks will either have to give customers more cash to refinance their debt or they will need to write down the debts, a process that would be painful.

In the Thai experience following the 1997 financial crisis, the banks only hoarded the cash and bought government securities instead of taking a risk of lending the money to their customers, who might become non-performing loans again. It was not until after five years that the banks started to shift gear to lend their money again.

**An analysis by By Thanong Khanthong,The Nation, Published on October 15, 2008**

Iceland - On Banking Turmoil

The outlook for Iceland's sovereign creditworthiness is crumbling together with its banking sector, as the country's international relationships also start to suffer as a result of banking woes. Rating Agencies on Iceland-
Standard and Poor's (S&P) last week cut its long-term foreign currency sovereign rating to A- (25 on the Global Insight scale), placing the country on Credit Watch with negative implications, following the announcement that the Icelandic government had acquired a 75% stake in Glitnir Bank, Iceland's third-largest bank, for 600 million euro (US$860 million; 30 September 2008: S&P Downgrades Sovereign as Government Acquires Majority Stake in Iceland's Third-Largest Bank). Fitch then downgraded its own rating to A+ to A- (25 on the Global Insight scale; 1 October 2008: Fitch Downgrades Icelandic Sovereign on Rising Banking Sector Distress) and we enacted a downgrade from 15 to 20 (A on the generic scale) as liquidity position further worsened (2 October 2008: Global Insight Downgrades Icelandic Sovereign Ratings on Rising Contingent Liability Risk). Materialising contingent liability risk then further led to a two-notch downgrade to 30 (BBB+ on the generic scale) in our assessment of Iceland's medium-term sovereign creditworthiness, while S&P also further cut its own rating by two steps to BBB (35 on the Global Insight scale).

Escalating Turmoil in Iceland-
Iceland's troubles are increasing at an almost daily momentum which is now affecting the country's international relationships. The United Kingdom and Iceland have seen their once-warm relationship rapidly deteriorate after U.K. Prime Minister Gordon Brown said on 08-Oct-2008 that he would sue to recoup money owed to U.K. depositors in Iceland's collapsed banks. Iceland's government is refusing to guarantee the savings of over 300,000 U.K. depositors in the country's two recently nationalised banks Landsbanki and Kaupthing and the collapsed online Icesave bank (part of Landsbanki). Although the U.K. retail sector has the greatest exposure to Kaupthing, the U.K. government is more concerned with protecting the individual depositors, the majority of whom saved with Icesave/Landsbanki. The Icelandic compensation scheme only covers the first 15,000 euro of a deposit, while the U.K. government would be accountable for the rest, including those exceeding the 65,918-euro U.K. limit for compensation.
Iceland: Landsbanki gets £100m loan to pay UK depositors-

The Bank of England will lend £100m to Landsbanki to help the collapsed and newly nationalised Icelandic bank repay its UK creditors.In a statement to MPs, Alistair Darling said he had told the Icelandic finance minister that both countries needed to work together to help the creditors of failed Icelandic banks, who include many British savers, local authorities and charities.
"Our authorities have set up an arrangement, agreed in principle, for an accelerated payout to depositors," he said. "We are also working with the Icelandic authorities to facilitate claims by UK charities and local authorities on their deposits held at these Icelandic banks.
"In addition, the Bank of England is today providing a short term secured loan of up to £100m to Landsbanki to help maximise the returns to UK creditors." Around 300,000 British depositors were left without their money when Landsbanki's online banking subsidiary, Icesave, collapsed.
Iceland Requested Aid from Russia for $5.5Bln-

Iceland's delegation started talks in Moscow today to secure an emergency loan of as much as 4 billion euros ($5.47 billion) from Russia after the island's three largest banks collapsed.Iceland was the first NATO member to appeal for Russian aid after the global financial crisis led to the collapse of Kaupthing Bank hf, Landsbanki Island hf and Glitnir Bank hf with debts equivalent to as much as 12 times the size of the Nordic country's economy.

Dutch firms borrowed €600m from Landsbanki-
Dutch companies borrowed some €600m from Iceland's Landsbanki, the bank's Dutch lawyer Rob Abendroth says in Tuesday's Telegraaf. Abendroth said the money could be used to repay Dutch savers, who have some €1.6bn in savings at Landsbank's internet subsidiary Icesave.'The credit portfolio has not vanished. That money is still available to pay savers,' the paper reportes him as saying. On Monday, a court-appointed receiver took charge of Landsbanki's Dutch operations, including the credit portfolio.

BailOut - A Focus

Bailout in economics and finance is a term used to describe a situation where a bankrupt or nearly bankrupt entity, such as a corporation or a bank, is given a fresh injection of liquidity, in order to meet its short term obligations. Often bailouts are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds.

Often a bailout is in response to a short term cash flow crunch, where an entity with illiquid, but sufficient, assets is given funds to "tide it over" until short term problems are resolved.

Some of the Bailouts of Past.

Swedish banking rescue:

During 1991-1992, a housing bubble in Sweden deflated, resulting in a severe credit crunch and widespread bank insolvency. The causes were similar to those of the subprime mortgage crisis of 2007-2008. In response, the government took the following actions:

• Sweden's government assumed bad bank debts, but banks had to write down losses and issue an ownership interest (common stock) to the government. Shareholders were typically wiped out, but bondholders were protected.
• When distressed assets were later sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies in public offerings.
• The government announced the state would guarantee all bank deposits and creditors of the nation’s 114 banks.
• Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

This bailout initially cost about 4% of Sweden's GDP, later lowered to between 0-2% of GDP depending on various assumptions due to the value of stock later sold when the nationalized banks were privatized.

Later on there were few more bialouts in the recent past for Bearstearns , AIG and the list is on...

Proposed Bailout of US financial System

From the Last week, leaders of the U.S. Treasury and the Congress proposed a three-page bill called Troubled Asset Relief Program, which was much modified, expanded to 110 pages, and renamed the Emergency Economic Stabilization Act of 2008, an act intended to bailout the U.S. financial system. This measure, which involved the federal government's acquiring or insuring as much as $700 billion of troubled mortgage-backed securities, was intended to reduce uncertainty regarding these assets and restore confidence in the credit markets. This bill was rejected by the United States House of Representatives on September 29 by a vote of 228 to 205.

Following a series of financial crises that affected several major U.S. financial institutions, including Fannie Mae and Freddie Mac, Lehman Brothers, American International Group, Countrywide Financial and Merrill Lynch, U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities.

Alternatives sugested by few

A number of alternatives to the current proposal have been suggested. These include:

• A ten-point plan by New York University economist Nouriel Roubini which would involve a recreating a combination of a Resolution Trust Corporation, a Home Owners' Loan Corporation and a Reconstruction Finance Corporation.He also said, "It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the Monitor Finance blog forum – alternative plans that were more fair and efficient. This is again a case of privatising the gains and socialising the losses; a bail-out and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this treasury scam that does little to help millions of distressed, debt-saddled home-owners."
• Christopher Ricciardi, former Merrill Lynch banker, wrote a letter to Treasury Secretary Henry M. Paulson Jr. proposing alternatively that the government should be backing some troubled assets to encourage private investors to purchase them — as opposed to the direct purchase of troubled assets from financial institutions.
• Conservative Republican Representatives have offered a mortgage insurance plan as an alternative to the bailout.There has been speculation that U.S. Senator John McCain may support this plan but this has not been confirmed.
• Some other less-risky plans have also been suggested by other sources, such as letters published in Denver Post some of which suggested taking steps similar to Warren Buffett's to reduce the taxpayers' risk and commitment.
• Luis Zingales, Professor of Entrepreneurship and Finance at the University of Chicago, has proposed a special chapter of the bankruptcy code to convert bank's debt to equity which would improve capital adequacy ratios and enable a return to lending Zingales Plan

Bailout rejected

The House vote caused the Dow to drop over 777 points in a single day, its largest point drop ever.[104] The loss, which wiped out approximately $1.2 trillion in market value, the first $1 trillion plus loss in Dow history, still does not rank among its 10 biggest drops in percentage terms. The S & P lost 8.8%, its seventh worst day in percentage terms and its worst day since Black Monday in 1987. The NASDAQ composite also had its worst day since Black Monday, losing 9.1% in its third worst day ever. The TED spread, the difference between what banks charge each other for a three-month loan and what the Treasury charges, hit a 26-year high of 3.58%; a higher rate for inter bank loans than Treasury loans is a sign that banks fear that their fellow banks won't be able to pay off their debts. Meanwhile, the price of U.S. light crude oil for November delivery fell $10.52 to $96.37 a barrel, its second largest one-day drop ever, on expectations of an economic slowdown reducing oil consumption and demand.

      Markets, which had expected the bill to pass and had moved on to debating whether it would be sufficient, were already skittish after news that Wachovia Bank was being bought out by Citigroup to avoid collapse. To add to the bad news for the day, in Europe Dutch-Belgian Fortis Bank was given a $16.4 bil lifeline to avoid collapse, failing British bank Bradford & Bingley was nationalized, and Germany extended banking and real estate giant Hypo Real Estate Holding AG billions to ensure its survival.

A Talent Shortage For European Banks

European banks face a looming talent shortage. In the next five years, some large institutions will face difficulties filling positions crucial to the execution of their evolving strategies.

While the best talent managers can tap strong internal contenders for such roles, many others will be forced to fill pivotal jobs with second-tier Internal talent or with external candidates--a relatively expensive and risky approach for banks.

To date, McKinsey research finds that European financial institutions have made little progress in managing talent effectively. Those that fail to act soon may have to forgo important growth opportunities.

McKinsey interviewed top human resources executives at 13 large European universal banks, 10 of which are among the top 30 in the region by market capitalization. Most bank executives told us that they don’t currently have enough qualified people inside the organization to fill critical positions. Within three years, McKinsey estimate, the talent gap will expand, leaving most banks unable to use top internal talent to fill 25% to 40% of their senior-executive positions and other roles with economic or strategic significance.

Exhibit 1

Moreover, McKinsey found that in the next three to five years, banks may be desperate for capable people to work in specific areas that are vital to the banks’ evolving business plans. In retail banking, for example, we estimate that almost half of most banks’ critical functions will be deprived of talent (Exhibit 1). Bank functions--such as cross-border integration, turnaround management, push marketing, third-party channel development (for mortgages and consumer lending, for example) and underwriting and monitoring retail credit--all will require skills that are in relatively short supply.

   Several trends are behind the growing need for more sophisticated skills in these areas. One is the banks' rapid growth in emerging markets, which frequently involves mergers and acquisitions. Others include the increasing sophistication and declining loyalty of customers, heightened competition for deposits and the effects of the subprime lending crisis.

Exbhit 2

All executives in our sample recognize that developing, retaining and, if necessary, recruiting top talent is fundamental to ensuring a bank’s future profitable growth. Very few banks have benefited substantially from their talent-management efforts, however (Exhibit 2). Only a third of the respondents, for example, say that their organizations manage to fill critical vacancies quickly and effectively with internal talent. Indeed, the extent to which these banks have implemented talent-management strategies varies widely.

Exhibit 3

We found that the 13 banks represented in our study can be grouped into three distinct categories based on the relative effectiveness of their talent-management practices (Exhibit 3).

Banks in the beginner group do not treat talent management as a priority. As a result, they tend to rely on external recruiting for their evolving talent needs. To retain top talent, the beginners also tend to emphasize compensation and brand names rather than career prospects and inspirational leadership.

Banks in the intermediate group recognize the importance of talent management and have put in place basic practices centered on identifying and reviewing talented mid-level and senior executives. Yet these banks have not applied themselves consistently in other areas, such as talent development, where progress is less visible.

Banks in the advanced group are clearly the most effective in the war for banking talent. The top team makes a high priority of talent management, developing and applying key processes and creating a specific, centralized unit to handle it.

Even the intermediate and advanced banks that have attempted to transform the way they manage talent have much room for improvement. Our experience suggests that, to succeed, they’ll need to be more rigorous in their talent-management processes--for instance, by using objective indicators (such as the average time to fill critical positions) to measure and improve the effectiveness of these efforts.

Furthermore, members of the top and senior-management teams must work harder to incorporate talent-management activities into their own weekly routines--for example, by personally advocating, endorsing and communicating key messages to middle management and to front line employees. Such commitment drives active participation in talent management, rather than mere compliance with it, throughout the organization and shows employees that it is a top priority.

***This article was originally published in The McKinsey Quarterly

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Investment Banking ?

Banking terms to be in three categories


1. Retail Banking Services
2. Whole sale banking services
3. Private equity Banking services.


Investment Banking falls under the category of whole Banking services and even terms to be as Global Markets.Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and bond), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions.

An investment bank is split into the so-called Front Office, Middle Office, and Back Office


Front office -

Investment banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions.The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt.
Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management ( High Networth Individuals)
Sales & trading In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade
Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities
Merchant banking is a private equity activity of investment banks. Examples include Goldman Sachs Capital Partners and JPMorgan One Equity Partners.

Middle Office -
Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately..
Finance areas are responsible for an investment bank's capital management and risk monitoring. By tracking and analyzing the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses.
Compliance areas are responsible for an investment bank's daily operations' compliance with FSA or other government regulations and internal regulations. Often also considered a back-office division


Back office -
Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers.Operations terms to be critical part of the bank and hence included in the Basel II approach.

Technology refers to the IT department. Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support.

*******
Next Article we can see the various products being handled and soon a description of them.

*******

Central banks infuse cash

Stock indexes around the globe reacted favorably after several national banks announced a joint effort to pump more money into the markets.Major central banks across the world on Thursday acted promptly to infuse thousands of millions of U.S. dollars into the financial market to rescue the battered sector and restore confidence among investors.
The Bank of Canada, the Bank of England, the European Central Bank (ECB), the U.S. Federal Reserve, the Bank of Japan, and the Swiss National Bank jointly announced that they would be working together to provide reciprocal credit arrangements to institutions facing a financial crush from the U.S. dollar. The credit arrangements, also known as "swap lines", will be used to help short-term funding of smaller loan groups.

What are these Swap lines ?
In the early 1960s, when the United States began to operate more actively in the foreign exchange market and was reluctant to draw down its gold stock, the U.S. authorities began the practice of establishing reciprocal currency arrangements—or swap lines—with central banks and other monetary authorities abroad, as a means of gaining rapid access to foreign currencies for market intervention and other purposes.

These reciprocal swap lines were developed as a technique for prearranging short-term credits among central banks and treasuries, enabling them to borrow each other’s currencies—if both sides agreed—at a moment’s notice, in event of need. Over time, a network of these facilities was built up,mainly between the Federal Reserve and the major foreign central banks and the Bank for International Settlements.

An advantage of the central bank reciprocal swap lines was that drawings could be activated quickly and easily, in case of mutual consent.Technically, a central bank swap drawing consists of a spot transaction and a forward exchange transaction in the opposite direction. Thus, the Federal Reserve might sell spot dollars for, say Euros, to the German central bank, and simultaneously contract to buy back the same amount of dollars three months later. By mutual agreement, the drawing might be rolled over for additional threemonth periods.

Fed on Swap Lines
Totaling US $180 billion, the Federal Reserve arranged to increase existing swap lines with the European Central Bank from US $55 billion to US $110 billion, and with the Swiss National Bank from US $12 billion to US $27 billion. Additionally, it opened new swap lines with the Bank of Japan for up to US $60 billion, up to US $40 billion with the Bank of England, and up to US $10 billion with the Bank of Canada. These swap lines will be available until January 30, 2009.

Positive Indices
According to official figures, the Bank of England has provided a total of 25 billion pounds (44.8 billion U.S. dollars) to markets since Monday, and the Bank of Japan also pumped a total of 8,000 billion yen (about 76 billion U.S. dollars) into the markets in recent three days.


Nevertheless, the continuous infusion of money into the markets seemed to work. Stocks jumped Thursday after the previous session's drastic decline, but safe assets such as gold and Treasury bills still saw heavy demand as investors are expecting more instability in the financial system.
 
Eye on Russian Markets
 
The Russian markets continued to remain closed for a third day under orders of the Russian government. Russia announced that it would be infusing their own markets with an additional US$ 19.7 billion, half of which would come from the federal budget. Russia's exchanges will re-open on Friday morning

Every one on US Crisis - What about Russia ?

While everyone are looking at US from and around the world , there is a silent financial crisis erupting in Russia.

The 2008 Russian financial crisis is an ongoing crisis on Russian markets, as nervousness over the global banking crisis has been compounded by political fears after the war with Georgia, as well as renewed concern about state intervention in corporations of strategic interests. Russia's economy is also heavily dependent on energy prices, especially oil which has lost more than a third of its value since its record peak of USD 147 on July 11, 2008

Russian stocks, already hurting before U.S. investment bank Lehman Brothers ( went bankrupt and the Federal Reserve took over insurer AIG , have suffered heavy losses during a week of turmoil on world financial markets, while its banking system has run alarmingly short of cash.

July 24 - Mechel's stock plunged by almost 38 percent on July 24, 2008 after Russia's Prime Minister Vladimir Putin criticized its CEO Igor Zyuzin, and accused the company of selling resources to Russia at higher prices than those charged to foreign countries

July 25 - On the following day, Mechel issued a contrite statement promising full cooperation with federal authorities, while share values rebounded by nearly 15 percent. Presidential aide Arkady Dvorkovich also sought to restore calm on July 28, declaring that all parties would "act in a civilized way," and confirming that Mechel was cooperating with antitrust authorities.Just hours later, however, Putin announced that Mechel had been avoiding taxes, by using foreign subsidiaries to sell its products internationally. His renewed attack caused share prices to tumble once more—this time by almost 33 percent

September 16 - Russia's most liquid stock exchange MICEX and the dollar-denominated RTS were suspended trade for one hour after the worst one-day fall in 10 years as Finance Minister Alexei Kudrin reassured markets there was no "systemic" crisis.

September 17 - Trading was suspended for the second day in succession on Russia's two main stock exchanges (the MICEX and the dollar-denominated RTS) after shares fell dramatically, forcing the central bank in Moscow to intervene.
Russia's government lend the country's three biggest banks, Sberbank, VTB Bank and Gazprombank, as much as 1.13 trillion rubles ($44 billion) for at least three months to boost liquidity.

"If this crisis develops into something more serious that perhaps weakens Russia's financial position and weakens the economy, then it would obviously weaken Russia overall and have an impact on its political leverage, and Russia would perhaps become more dependent on the rest of the world," said UralSib's Weafer