Friday, January 16, 2009 0 comments ++[ CLICK TO COMMENT ]++

Thoughts on the banking crisis... oil... dumb idea from Sarokozy

Some thoughts on a Friday...

  • IEA projects oil decline for two years (MarketWatch): Like most analysts, IEA's views tend to be projection of the present into the future. Nevertheless, they are calling for oil demand to decline two years in a row, which is quite rare and last occurred in 1982 and 1983. People may recall how that was also when we had the last big recession.
  • Sarokozy calls for price-fixing of oil (The Globe & Mail): Dumb idea of the week goes to French president Sarokozy who has called for developed countries to negotiate a fixed price for oil. I thought only liberals and left-leaning individuals were supposed to promote ideas like that but guess conservatives aren't immune to such thinking ;)
  • Bank of America receives huge government bailout (Bloomberg): I'm dissapointed to see things unravel at BAC, given how my feeling was that it was one of the few megabanks in good standing. Some are calling for Ken Lewis' head but I'm still supportive of his strategy. It will take a while for the strategy to show results. I'm still not a fan of megabanks (you are basically running black boxes and getting paid extremely high salaries with little accountability until it's too late) but BAC seems safer than many others IMO.
  • Citigroup separates into good-bank and bad-bank (Bloomberg): I have always said that the banks that made big mistakes (Citigroup, UBS, Lehman Brothers, etc) should be broken up or nationalized. I really don't want to see the incompetent leadership as well as shareholder stewardship remain. The failed ones should wither away. It looks like Citigroup is breaking up into a bad-bank and a good-bank. This is likely the beginning of the end of Citigroup as a megabank. Citigroup was the largest bank in the world but will likely never regain that title for a long time, if ever.
  • Protests in Baltic states (Bloomberg): Protests over economic problems... the most important thing to watch is what happens on the political side. Will there be change in ideology, affiliations, and so forth?
  • Ireland nationalizes their 3rd biggest bank (MarketWatch): Ireland nationalizes Anglo Irish Bank, supposedly their 3rd largest bank. Supposedly the nationalization is somewhat of a surprise, although shares are down 98% in the last year. The strong hand of the government, which is necessary in many cases, will prevent private capital from flowing into financial institutions for a long time. It is also quite possible that there isn't enough private capital to recapitalize the financial institutions. Bearish economists such as Nouriel Roubini has speculated that a bigh chunk of banking system is insolvent and his numbers are way too large for private capital to make up. He has recently revised up the total losses in the banking system to something like $3 trillion (he was calling for around $1.5 trillion last year) and banks have only raised around a trillion. If we go with his superbearish numbers, it is unlikely that private investors will funnel another $2 trillion into these firms. There is just way too much risk of shareholders losing everything so I doubt many will want to invest except post-bankruptcy or with some special deal with the government or something like that.

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