Overview

The Republic of Ireland, known as the Celtic Tiger was the fastest growing economy in the Eurozone until last year when the US led recession brought the economy to a grinding halt. Ireland, which has the second highest per capita income (following Luxembourg) and fourth highest per capita GDP in the world, was the first country in the Eurozone to enter a recession. Ireland earned its name Celtic Tiger due to rapid growth of industry, exports and services spurred by huge influx of foreign direct investment (especially from the US). The country grew at a CAGR of above 7% during 2000-2007 but slipped into a recession following sharp decline in the property market which continues to erode public finances and an economic slowdown in major trading partners - primarily the UK and the USA. Ireland now faces twin challenges of reviving key sectors of the economy and managing rising government deficit. It remains to be seen how best the government tackles the domestic crisis in the short term and resumes exports at earlier levels to come back on track and regain its title "Celtic Tiger".

Background

The tertiary sector was the main growth driver of the Irish economy during the last two decades. The availability of the skilled,

English-speaking and cheap workforce (relatively to other countries in the Euro and the US) led to solid growth of services such as insurance, customer service, legal services and banking. Currently the service sector contributes 49% to GDP and employs around 64% of the workforce. Many leading US-based companies (such as Dell, IBM etc.) operating in computer manufacturing, software, pharmaceuticals and machinery have set up shop due to the country's trained workforce, favorable taxation policies and free access to the Eurozone nations; the maximum tax applicable is 12.5%. Consequently industry and trade grew profoundly with the US, not to mention the European nations. Industry accounts for 46% of Ireland's economy and employs 29% of the workforce. In 2007, the country's net exports were US$31.4 billion; Great Britain and Northern Ireland being the largest trading partners followed by the US. Ireland exports beef, computers and software (it is the largest software exporter in the world) and imports steel, car, machinery and trucks.

Banking

Irish banks have been the backbone of the economy and played a key role in the development of the country. The Central Bank & Financial Services Authority of Ireland (CBFSAI) is the apex banking and financial services institution. Being a member of the Euro zone, the European Central Bank monitors the functioning of the CBFSAI. The important banks in Ireland are Allied Irish Banks (AIB), Bank of Ireland, Halifax, National Irish Bank, Permanent tsb and Ulster Bank Group. Recently, the government nationalized Anglo Irish Banking after the breaking of a scandal involving the bank. As per data from the European Central Bank, the value of banking assets almost trebled from EUR474.6 billion in December 2002 to 1.3 trillion by December 2007. The value of the banking assets as a percentage of GDP increased from 674.4% in 2006 to 714.8% in 2007.

The economic boom due to growth of the industry and services sectors and rising immigration from other European countries fuelled demand for housing. Consequently construction became an important contributor to the economy and a major employer. The sector accounted for 10% of the nation's GDP in 2006 (as compared to just about 5% a decade ago) and employed around 13% of the population. House prices peaked representing an overvaluation of between 20-40% and filled government coffers with property taxes that constituted 15% of total taxes in 2006 (or 3.8% of GDP). One of the factors responsible for the growth of the Irish housing sector is the easy money made available by the Irish banks. Bank lead financing progressed unabatedly even with 100% LTV mortgage financing. The total value of household mortgages increased from EUR54,000 million in December 2003 to EUR1,14,561 million in January 2009. Lending however curbed during the last three quarters due to rising mortgage defaults on the back of rising unemployment, slowing economy and falling property prices.

However, the beginning of 2007 saw a correction setting in the sector (much like the US) and signaled a looming economic slowdown. House prices started to fall in March 2007 and since then have continued their freefall. This, together with the onset of recession at its two major trading partners (UK and US), declining exports and rising unemployment led the country to enter a recession in September 2008.

According to data from a survey of members of the Irish Auctioneers and Valuers Institute (IAVI), property market sales have decreased from EUR2 billion in 2007 to just EUR300 million in 2008. House prices have dropped between 15 and 20% following a 90% drop in sales volume while rents have fallen by 5% to 9% due to oversupply. With employment rising at an alarming rate the downslide is expected to continue in 2009. Rents are expected to drop further by 10% in 2009. Unemployment is projected to rise to 12% by the end of 2009 leading to mortgage defaults and higher loan write-offs spelling disaster for the Irish banks which have over the years had heavy exposure to the real estate sector.

Key measures taken by government to revive banks

Taking into account the deteriorating condition of its banks, the Irish government in September 2008 announced its decision to guarantee all bank deposits and debts worth €440 billion (US$593 billion) of its six banks for a period of two years. This comes to around 220% of the country's GDP. However this step has been severely criticized by the European Commission citing that such a measure could have a long term impact on public finance.

Furthermore in February 2009, the Finance Ministry announced a EUR7 billion recapitalization plan for AIB and Bank of Ireland that would increase the banks' lending power. Accordingly the government is to invest EUR3.5 billion in Core Tier 1 capital in each bank by way of preference shares. The infusion will increase the Core Tier 1 capital of AIB to EUR12 billion and that of Bank of Ireland to EUR10.7 billion. The preference shares will have a fixed dividend of 8% with an option to buy shares in five years time at a predetermined strike price. The government will not take control of the banks but will have the right to appoint 25% of the directors and 25% of ordinary voting rights. The recapitalization plan had a positive impact on bank lending and made available EUR2 billion for mortgages lending to first time buyers at reduced interest rates. Accordingly, Bank of Ireland announced that it would offer mortgages worth EUR1 billion at a fixed interest rate of 2.45% to first time buyers. AIB made a similar announcement at a fixed interest rate of 2.49%. This in addition to European Central Banks move to bring down interest rates will enable other banks also to shore up lending.

Adding to the woes, a spate of events unturned that tarnished the image of the country's third-largest lender, Anglo Irish Bank and raised concerns about regulatory competence. In January 2009, only days after the government first announced its plan to recapitalize banks, it was discovered that the bank had systematically failed to disclose EUR87 million of personal loans made to its chairman for eight years and that the Irish Financial Services Regulatory Authority was aware of the scandal since 2008 but failed to take a action or inform the finance minister. The revelations were followed by the resignations of Anglo Irish Chairman and CEO and the Chief Executive of the Irish Financial Services Regulatory Authority. In the wake of the scandal and fears that it would trigger the bank guarantee programme to the extent of EUR100 billion, the finance ministry announced its decision to nationalize the bank. Estimates say about EUR30 billion of its loan book could turn out to be bad and this could increase as the housing market further plummeted. Considering the impact this would have on national debt, the government made its decision to nationalize the bank.

Risks facing the economy

Slowing economy

Ireland's economy which grew 6% in 2007 contracted by an estimated 1.1% in 2008 and various estimates suggest that it might further shrink by around 4.0% in 2009. Further deterioration in exports, housing and the state of the financial system are the key challenges facing the economy and could further drain public finances and pile up national debt. On January 09, 2009, the government announced its budgetary strategy over a five-year period up to 2013 to restore public finances. In that, the government aims to bring down deficit to below 3% of GDP by 2013 and significantly reduce public expenditure and increase tax revenues.

Deteriorating public finances

Ireland's public finances continue to deteriorate rapidly. The National Treasury Management Agency (NTMA) estimates a fiscal deficit of EUR12.7 billion (6.3%) in 2008 due to decrease in tax revenues. Tax revenues decreased by EUR8 billion to EUR40 billion in 2008. The various measures undertaken to revive the banks (bank guarantees and recapitalization plan) and decreasing tax revenues associated with the housing sector could push the deficit even further. The Economist Intelligence Unit expects deficit to rise to at least 10.7% of GDP in 2009 and be 10.5% in 2010. This is a far cry from the government's budget strategy. Increased government borrowing to finance the deficits could see a major jump in Ireland's national debt.

Rising cost of debt

According to NTMA, the country's gross external debt stood at EUR1,671 billion at the end of September 2008. This is an increase of over EUR160 billion over that of last year. The debt-to-GDP ratio increased from 24.8% in 2007 to 40.8% in 2008 mainly due to an increase in exchequer cash balances; it however remains substantially low as compared to other countries in the Euro area or European Union. Exchequer cash balances stood at EUR20.6 billion (or 10% of GDP) at the end of 2008. As per the National Treasury Management Agency, Ireland plans to borrow EUR25 billion in 2009. Of this, 40% of the requirement has already been met by new bonds issue since January 2009. Ireland's debt raising has however come under immense scrutiny. Standard & Poor's downgraded Ireland's debt outlook from stable to negative in light of the mounting fiscal pressures and the slowdown in key sectors. The credit rating agency affirmed Ireland's 'AAA/A-1+' ratings on the debt programs and instruments guaranteed by the Republic of Ireland but has warned that the country is at a risk of losing its credit status as fiscal pressures increase. The increasing spread between Irish and German debt is also pointing to the increase in future debt servicing costs. In the second week of February, yield spreads on Irish 10-year government bonds over benchmark German bonds increased to 203 basis points, up from just 20 basis points at the beginning of 2008.

Decreased competitiveness

An important challenge amidst the current macroeconomic scenario is for Ireland to regain international competitiveness which had been its driving force for the past two decades. According to the latest monthly bulletin issued by the Central Bank of Ireland, Harmonized Competitiveness Indicator (HCI) has deteriorated from 110.44 in December 2007 to 113.27 in January 2009. High commodity prices, wage inflation and a strong euro were the main factors for the decrease in competitiveness. However the scenario has been improving since the past six months due to decline in inflation and significant depreciation of euro.

The Irish Government in February announced EUR2 billion of spending cuts as part of its strategy to narrow the fiscal deficit. Most of these cuts, running to the tune of EUR1.4 billion will be in the form of increased pension levies on public-sector employees. Although the announcement invited public wrath (a one-day strike was called by civil servants and nearly 100,000 people protested), the government seems to be firm on its decision. Further planned cuts include EUR4 billion in 2010 and 2011, EUR3.5 billion in 2012 and EUR3 billion in 2013.

Next in the Asset Securitization Series will be my outlook on additional UK, Asian and Eurozone banks, asset managers and insurers.

Better late than never, here is the Macro Spanish bank research. Due to the time and resourced that the hacker caused me, I fell behind in both research, strategizing, and publishing to the blog. Since this piece is not as timely as it could be, I am making it a freebie - all you have to do is register. This is a whopper piece of research as well, including sample currency hedging/speculating samples, a full macro analysis, and my usually rigorous forensic analysis of the company itself. Let this serve as an example of what subscribers get at the pro and institutional level.

Reggie Middleton on Banco Bilbao Vizcaya Argentaria SA (BBVA)

The current financial crisis, being proclaimed as the worst since the Great Depression, has virtually pounded financial systems across the world. Fear of a global crash amid a worsening macro-economic environment and mounting loan losses have hampered nearly all efforts to restore calm in the global markets as the exposure of leading banks became unmanageable. Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters.

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Register (for free) and download the full report pdf Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

1. Spain Facing 'Exceptional' HardshipEU Observer
2. Spain: Overall analysis ( 369,54 KB ) la Caixa
3. The economy in 2009: out of The Twilight Zone ( 160,73 KB )
4. Spain: Dies Irae; Beyond the real estate crisis Société Générale Economic Research
5. The IMF on Spain
6. An adjustment in Spanish saving has begun - JP Morgan
7. Economic Survey of Spain 2008 - OECD
8. Spain: The Worst Is Yet to Come - Morgan Stanley Global Economic Forum
9. Spain: First GDP contraction in 15 years (-0.2% q/q in Q3 2008) - BNP Paribas
10. Quarterly Report On The Spanish Economy: Spain's GDP Contracted 0.2% in Q3 Compared to Q2 - The Bank of Spain
11. Inflation Is Dead In Spain, Fasten Up Your Seat Belts For A Sharp Dose Of Deflation - A Fistful of Euros
12. Spain: External imbalances persist, fiscal surplus disappears - European Commission Autumn 2008 Forecast
13. Macro: Construction Correction Driving Economy Down - Morgan Stanley - Global Economic Forum

I've also decided to include some illustrative hedging/speculative samples that I will intermittently include in future reports, time and resources permitting. I will be releasing a timely report on a UK insurer in 24 to 48 hours to subscribers. The insurer still has a little meat left on the bones. BBVA, due to the recent and uncalled for run-up in banks may be for the risk takers in my constituency, though.

The Spanish Bank Short Arbitrage View

Below is an illustrative analysis for investment in BBV put options along with different hedging scenarios. These examples are for the purposes of illustration only, and are not in any way to be considered, or intended to be construed as, investment advice. I want it to be know that this work sample has not been proofread, and to be honest I probably may not have the time to do so. Continue at your own risk. The Pound and Euro trade now has a diminished risk/reward proposition from a speculative perspective (not so as a hedge). Those of you who attended the BoomBustBlog Boat rides should have heard me express my opinions that I believed the Pound, Euro and oil would all head sharply southward. That was 7 months ago, and this is now. I still have opinions on the aforementioned, but they haven't been thoroughly and empirically vetted. I have included the currency argument in the downloadable PDF located at the end of this article, for any who may be interested.

In the current working model we have taken at-the-money put options for BBV (with strike price of $12.5) and at-the-money EURO options (with strike price of 1.365). According to information available on NYSE and Bloomberg BBV had option series for January, February, April and July. We have conducted analysis for February and July expiration series for above at-the-money options. (However my proprietary model - not to be confused with commercial models that I may use and are available through popular vendors - is built dynamically to change strike price, premium and the hedge ratio (currently 3:1) in the highlighted orange cells to conduct similar analysis for any other option chains). We have sourced option pricing data for BBV from Bloomberg and Currency Options from CME Group.

This sample assumes the following:

We have conducted scenario analysis for change in underlying BBVA (in Euros) and change in currency based for four hedging circumstances -

Position Currency Risk

•1) Un-hedged BBV Put Options - Appreciation of Euro (thru ADR)

•2) BBV ADR Put with Long EURO Put - Appreciation of Euro (on ADR as well as loss of put premium)

•3) BBV ADR Put with Long EURO Call - Appreciation of Euro (thru ADR) however offset by Euro Long Call

•4) BBV ADR Put with Long EURO Put and Long EURO Call (Straddle) - Appreciation of Euro (thru ADR)

•5) Un-hedged Short BBV - Appreciation of Euro (thru ADR)

•6) Short BBV with Long Futures - Hedged position

The payoff matrix for each of the position is given below.

BBV ADR Put with Long EURO Put, and Un-hedged BBV put options would provide same pay-off matrix (in terms of direction). However with depreciation of Euro strategy with long Euro Put would provide better returns to investors. On other hand BBV ADR Put with Long EURO Call would provide more diverse risk exposure compared to BBV ADR Put with Long EURO Put. The above strategy would provide returns when BBVA underlying declines (investor will only lose call premium) and would also provide returns when Euro Appreciates (investor will only lose call premium). The last strategy BBV ADR Put with Long EURO Put and Long EURO Call provides pay off similar to strategy with BBV ADR Put with Long EURO Call except that it would provide lower returns in exchange of added diversification.

Download the full addendum here: pdf Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro 2009-01-28 17:48:27 569.55 Kb

From Bloomberg :

HSBC Holdings Plc, Europe’s biggest bank, may seek to raise about $14 billion as increasing bad-loan provisions erode profit, CLSA Asia-Pacific Markets said.

The bank may raise funds through a share placement or a rights offering, CLSA analysts led by Bangkok-based Daniel Tabbush said in a note to clients today. CLSA cut its share price target for HSBC by 30 percent to HK$64, citing the risk that rising loan defaults in the U.K. and U.S. will hurt earnings.

HSBC, which earns more than three-quarters of its profit in emerging markets, has avoided the funding strain that forced Royal Bank of Scotland Group Plc and HBOS Plc into government bailouts. Tabbush said the bank will have to make more provisions in 2009 because 75 percent of its loans are in the U.S. and U.K., where customers are buckling under excessive debt.

“Every bank that’s raised cash has said its capital position is fine,” Tabbush said in an interview. “The regulators will probably require higher levels of capital and lower levels of leverage and HSBC will face the same issue.”

CLSA also cited HSBC’s failure to sell its headquarters in London for an expected $2 billion gain, together with the bank’s announcement yesterday that it lent $1 billion to clients who invested funds with the brokerage of Bernard Madoff, accused by regulators of using his investment advisory firm to run a $50 billion Ponzi scheme.

The bank also has clients in its “global custody business,” who have invested with Madoff, HSBC said in a statement yesterday.

Click to enlarger

Imagine if you could have shorted HSBC early in the summer when it was trading in the mid '70' and 80's. Just imagine... If you read the blog.

HSBC_Holdings_Report_04August2008 - pro

HSBC_Holdings_Report_04August2008 - retail <!-- -->

I was very clear in warning about the "everyman for himself" phenomenon back when the first US bailout package was announced in the US. All of the money given banks are going straight to the bank's coffers and nowhere else. It is a farce to believe that banks will act against their own self interest when given money. PNC took the money and bought a bank with a risky loan portfolio to boost deposits, AIG is paying margin calls with its taxpayer money, JP Morgan and Merrill chiefs flat out said, "No, I will not lend the new money out", and the Euro banks are also designing special textual diagrams to display their views on handling the new low interest rates they are benifititing from by way of the UK government. See what I just pulled off of the memorandum of understanding between HSBC and the government:

…………………../´¯/)
………………..,/¯../
………………./…./
…………./´¯/’…’/´¯¯`·¸
………./’/…/…./……./¨¯
……..(’(…´…´…. ¯~~/’…’)
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……….”…………. _.·´
……………………..(
…………..………….

HSBC Defies Brown, Signals It Won't Pass On All of Rate Cuts to Customers

From Bloomberg:

Global Recession - an economic reality

Part 28 of Reggie Middleton on the Asset Securitization Crisis

The repercussions of the historical events that unfolded on Wall Street in September 2008 are being felt across the global financial system-banks and insurers across the Atlantic and Pacific are beginning to implode at an increasingly rapid pace, held together by the glue of their respective government bailout packages. The crisis, thought to be restricted to US markets, has spread to their European and Asian counterparts, freezing credit markets in the region - with the emerging markets on tap. It looks like the investment banking era on Wall Street has ended with Lehman Brothers going bankrupt, Merrill Lynch being sold off to Bank of America, Bear Stearns imploding over a weekend and the conversion of Goldman Sachs and Morgan Stanley to bank holding companies. Nearly each week sees a new bank filing for bankruptcy (TGIF, its not - OMGIFDICFA). The latest to join the list are Washington Mutual and Wachovia Corporation. Washington Mutual's banking assets were taken over by JP Morgan Chase for US$1.9 billion, while Citigroup made a US$2.2 billion bid for certain banking assets of Wachovia. The crisis has spread to Europe as reflected by the nationalization of Fortis Bank-the governments of Belgium, Luxembourg and the Netherlands provided €11.2 billion to bail out the bank. The FDIC Troubled Bank List grew from 90 to 117 in Q2 08, indicating that more banks could head toward bankruptcy. These developments completely shook the confidence in the banking system, as jittery depositors queued to withdraw their deposits. What has emerged is a credit crunch, making it increasingly difficult for borrowers (individual and corporate) to fund their requirements (see The Butterfly Effect and the The Butterfly is released!). As a result, economic activities are slowing down.

Paying subscribers who took a position against HSBC based on my research should know that I believe that this company was much too richly valued given the risk in its major revenue and profit centers and the minimal writedowns taken thus far. In addition... Bloomberg: HSBC, Royal Bank, Barclays in Financing Double Whammy as Debt, Rates Rise -

HSBC Holdings Plc, Royal Bank of Scotland Group Plc and the biggest U.K. banks face the most debt coming due in at least 10 years as the credit market seizure raises borrowing costs to the highest on record.

The six largest British banks have 54 billion pounds ($95 billion) of debt to refinance by April, triple the amount of the year-ago period, according to data compiled by Bloomberg. HSBC, the U.K.'s biggest bank, and RBS each have about 11.5 billion pounds of debt due, while Barclays Plc has 15.9 billion pounds maturing, the data show.

Financing costs are soaring as banks hoard cash after the credit crunch triggered by the U.S. subprime mortgage crisis a year ago. The three-month London interbank offered rate in dollars rose to 4.32 percent from 2.64 percent in March, while the equivalent rate for euros increased to a record 5.38 percent, from 4.74 percent six months ago.

``The banks have no idea how they are going to manage rolling over their debt,'' said Kornelius Purps, a Munich-based bond strategist at UniCredit SpA. ``The central banks will have to intervene.''

From the WSJ :

The U.K. government unveiled plans to partially nationalize major banks, with taxpayers taking a share stake in a bid to restore stability to the industry. The Treasury said eight banks have signed up for the so-called recapitalization plan, which offers up to 50 billion pounds ($87.5 billion) in the form of preference shares. The Treasury said the eight banks are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. The Treasury also said the Bank of England will make "at least" 200 billion pounds in funds available to the banks through its Special Liquidity Scheme.

The Butterfly Effect offers a macro overview of HSBC's market's deterioration, and the forensic analysis explicitly outlines it. It was populary believed that they could rely on China and India for revenue growth in the capital markets and lending...

Oct. 8, 2008

Deepening fears over the global financial crisis sent Asian markets plunging with Japan's Nikkei dropping 9.4% to close at 9203.32, its biggest one-day percentage drop since 1987. Australia closed down 5%, South Korea ended 5.8% lower and Hong Kong was down about 7% in late trading. Indonesia's stock market was halted for only the second time in its history after shares fell more than 10%.

In currencies, the dollar briefly fell below the 100-yen mark, while other regional currencies, including the Korean won and Australian dollar fell to multiyear lows against the greenback.

Japan's Nikkei 225 Stock Average plummeted 9.4% to close at a five-year low on deepening fears over the global financial crisis. The benchmark index on Wednesday nose-dived 952.58 points to 9203.32, the lowest finish since June 2003. The Nikkei has lost 24% in the last two weeks.

The massive selloff in Tokyo follows a plunge on Wall Street overnight, when the Dow Jones industrial average lost more than 5% despite steps by the Federal Reserve to reinvigorate dormant credit markets.

The dollar also briefly fell below ¥100 yen as the plunge in Japanese stock prices accelerated selling of major currencies against the yen in a stampede of risk-aversion.

Falls accelerated as the day progressed with the stock market in Australia ending down 5% while South Korea lost 5.8%, closing at a two-year low. India fell 5.7% and Hong Kong was off 7% at an intraday low of 15621.59 and the Shanghai Composite traded down 4%.

Trading in Indonesia's stock market was suspended after the main index skidded 10.4% -- the second time this week it has fallen by more than 10%.

For more on Asian markets, see: http://online.wsj.com/article/SB122342399172013397.html?mod=djemalertMARKET

The Butterfly Effect: Paulson, Bernanke, the Asset Securitization Crisis & their impact on the Industrial and Manufacturing Sectors - Part 27 of Reggie Middleton on the Asset Securitization Crisis

The Butterfly Effect (adapted from Wikipedia): refers to the idea that a butterfly's wings might create tiny changes in the atmosphere that may ultimately alter the path of a tornado
say from an open corn field to the center of a crowded urban populace; or delay, accelerate or even prevent the occurrence of a tornado in a
certain location. The flapping wing represents a small change in the
initial condition of the system, which causes a chain of (oft unforeseen) events leading
to large-scale alterations of said events. Had the butterfly not flapped its
wings, the trajectory of the system might have been vastly different.
Of course the butterfly cannot literally cause a tornado. The
kinetic energy in a tornado is enormously larger than the energy in the
turbulence of a butterfly. The kinetic energy of a tornado is
ultimately provided by the sun and the butterfly can only influence
certain details of weather events in a chaotic (and upnredictable) manner.

The moral to the story: Regulators should be quite cautious when playing with, capturing, aiding or killing butterflies. The resultant tornado could be devastating. Special "shout out" to SEC Commissioner Cox for banning short selling and guaranteeing a literal crash in financial stocks, Mr. Paulson and Bernanke for saving Bear Stearns and AIG but allowing Lehman Brothers to fail, central bankers worldwide led by Mr. Greenspan for keeping rates very low in an attempt to prevent a natural correction (thus causing an unnaturally violent correction ~ butterflies), and a whole host of other government butterfly afficiandos... Note: I realize that the role of Central Banker is not an easy one, but we must be cognizant of our errors if we wish not to repeat them!

Before we go on, I would like to mark our current location in the Asset Securitization series. I consider this a very useful roadmap that clearly illustrates how we got to where we are today. It is so much more than a subprime or credit crisis...

Now Cuomo is looking to prosecute short sellers who "spread false rumors" to manipulate share price. Let's look at this on the long side.

Schwartz of Bear Strearns says on public TV he has no liquidity problem -

Lehman's CFO and CEO caught in multiple lies in public when Einhorn confronted them about there bad asset situation, evidently to "manipulate" the share price upwards of what normal valuations portend.

GGP's entire management saying they have funding in hand and or in no financing predicament, evidently to "manipulate their share price.

MBIA and Ambac CEO's saying on TV and in print media they are solvent, their losses will revert, and that they expect no more significant losses from mortgages and real estate.

The homebuilder CEOs calling the bottom of the housing market 3 or 4 times in the last year.

I can go on for a while. I know one can say these guys are just expressing their opinion (at least some of them can say that, but some were just flat out lying), but the same can be said for the shorts. That's what makes a market. The US and the UK are trying to clog free market capitalism, and that never works out to the positive. Now, certain junk companies can continue to sell shares to your 401k manager and float up and up until the economics finally catches up to them, then bank - your broke just because the government tried to censor the guys who perform some of the most rigorous research on the street. Tell me lawyers, do the 401k plan participants have legal recourse against the censors???

Our republican administration shames me. They go through all of this effort, and have yet to demand that the companies who are holding all of this trash on their balance sheets come clean and show the "transparency" they are requesting from the hedge funds who invest in the companies. As a matter of fact, the FASB rules that would have given more transparency were pushed back to allow companies to hide this trash!!! Yet, the guys who short the trash companies have to become more transparent!

Rant offline...

This is a company that popped up on one of my European screens. I don't have a position in this company, but thought my readership may find it interesting. Each of my shorts are usually the result of a screen of about 250 to 600 companies in a particular sector, industry or segment.

Tomkins
Plc (TKS US)

Comparative
Price Chart of S&P 500 Index Returns and Tomkins Stock price Returns:

Tomkins Plc, along with its subsidiaries, is
a global engineering and manufacturing company. It has two business groups:
Industrial & Automotive and Building Products. Under the Industrial &
Automotive business group, the company manufactures a range of systems and
components for cars, trucks and other industrial equipment. The Industrial
& Automotive segment operates through four business divisions: Power
Transmission, Fluid Power, Fluid Systems and Other Industrial & Automotives.
Building Products consist of two business divisions: Air Systems Components and
Other Building Products. Air Systems Components supplies the industrial and
residential heating, ventilation and air conditioning market. Other Building
Products manufactures a variety of products for the building and construction
industries.