By Chan Akya
On the back of my last article on the undoing of the American/Western financial system (see Waiter, there's a banker in my soup, Asia Times Online, September 18, 2008) I had intended to write a follow-up on the implications for Asia. Events over the weekend though spell the very end of capitalism for the US and its European allies, pushing lifeboats on their decrepit financial sector even as the rest of the economies represented by the Group of Eight (G-8)leading industrialized countries come unstuck at breathtaking pace.
Perhaps the epitome of this decline was the coordinated support for the US dollar, combined with the provision of some US$200 billion of funds for the banking system last week. No matter all that, and the price of gold at the end of last week was still higher than at the end of the previous week.
US Treasury Secretary Henry Paulson seemed to have hidden his metaphorical bazooka for one weekend only (see Pareto's Bazooka, Asia Times Online, September 13, 2008) only to quickly unleash its fury in coordination with the Fed and the SEC last week once his favorite firms of Morgan Stanley and Goldman Sachs were threatened with bankruptcy.
Last week was quite far from the ordinary. The collapse of Lehman Brothers, the hastily arranged and seemingly shotgun marriage of Merrill Lynch with Bank of America as well as the breathtakingly immoral rescue of American International Group (AIG) by the Federal Reserve, which wasn't even that company's regulator, all point to the moral bankruptcy of Washington. The Securities and Exchange Commission (SEC) banned 799 stocks from being shorted for 10 days on Thursday night, in effect moving the goalposts once again (see A stone for Chris Cox, Asia Times Online, July 19, 2008) for my views on the sheer idiocy of banning short sales in financial markets).
In its defense the SEC, along with affected firms such as Morgan Stanley, pointed to the deep and serious risks being presented to the financial system by these unscrupulous short-sellers. Well, my heart bleeds for the investment banks but as it turns out, only 2.9% of Morgan Stanley was "on borrow", that is being used for short sales, at the beginning of last week. The rest of the decline in the company's share price - it fell 40% on one day for example - was basically good old genuine panic; the type that has not yet been banned by the SEC but is surely under consideration by some jobsworth or the other.
Just 10 years ago it was the very same luminaries from the US government, investment banks and the rest who pilloried the stock market intervention of the Hong Kong and Malaysian governments in 1998, arguing in favor of allowing the free market to establish itself. In editorial after editorial, these amazingly intelligent folks castigated the actions of Malaysia's then prime minister Mahathir Mohamad for banning short sales on the Kuala Lumpur Stock Exchange. The level of hypocrisy displayed by the US government - free-market professing Republican led, no less - in recent days brings to mind George Bernard Shaw's famous dictum that the "ordinary Britisher believes that God is an Englishman".
Much as Shaw foretold the end of the English empire, Paulson and his motley crew have brought forward the end of American and even Western economic power. As some wits remarked on television, there are even rumors that the Federal Reserve will guarantee personal happiness for the next few weeks, if so desired.
Call that triple-A?
Even away from the mumbo-jumbo of qualitative intervention, actual dollars being thrown around stack up nicely. There is firstly the $8.6 trillion in contingent liabilities that the US government has accepted within two weeks and without any apparent authority to do so - $5.2 trillion of liabilities guaranteed by Fannie Mae and Freddie Mac and $3.4 trillion outstanding at the country's money market funds that now enjoy a Federal guarantee.
For anyone keeping score, all that adds up to 160% of US government debt at the beginning of September. Add to these monstrosities the $700 billion that "Hank" Paulson now demands as new government funding to purchase every manner of decrepit mortgage-backed asset that US (and presumably European and Asian) banks wish to sell, and the total debt has increased by around 175%.
Against the gargantuan increase in total debt of the US, likely tax receipts will decline for many years to come as the combination of slower economic activity and historically built up tax-adjustable losses help individuals and companies to avoid paying taxes for many years to come. Indeed, one of the key tangible items for any bank to purchase its investment banking counterpart (Bank of America buying Merrill for example) is the billions in tax losses that can be absorbed in the event; these would more than pay for the purchase prices alone, leave aside the potential for revenue additions a few years down the line.
When debt increases and income declines, it is usual more difficult for the borrower to repay their debt. That is what creates a ratings event, ie for credit rating agencies to downgrade the borrower. The US government is now in the peculiar position wherein its debt is still rated at the triple-A level but there are very few quantifiable reasons for it remain so. While the overall situation is still better than that of the demographically-challenged European countries, I still cannot accept the notion that the US government is triple-A after last week's events.
A downgrade of the US government's debt will render much of its borrowings - Treasury bonds, agency bonds and the rest - unviable for holdings by the rest of the world. Alone, this could push up costs for the highly leveraged US economy at exactly the worst time in its cycle, and pummel growth for another couple of quarters by itself.
Of course, two of the three major credit rating agencies (Moody's, Standard & Poor's and Fitch) in the world are American while the third is European. Not to put too fine a point on it, I believe that it is quite unlikely that these agencies will proactively look to downgrade the US government - or indeed the governments of the UK, France, Italy et alia on the back of the most recent financial crisis. Whether the folks buying their bonds - Asian central banks and savers - will quite buy into that logic remains to be seen. Call me a cynic, but somehow I do not expect they will eat this "triple-A because we say so" nonsense twice. Then again, perhaps Asian central bankers ARE that stupid. We will find out soon enough.
Psst ... want a bailout?
The demand for Congress to pass some $700 billion in new purchasing power for the US Treasury acting in its own capacity goes beyond the dictionary definition of chutzpah, by making the very people responsible for driving the US economy aground also most likely to benefit from its recovery. It seems that there is hardly enough time to man gravy boats one last time in Washington, every lobbyist has gotten something valuable in the past week.
My views on the agency bailouts were aired previously (see And now for Fannie and Freddie, Asia Times Online, July 12, 2008) so perhaps it is apt to look at the other beneficiaries of last week's actions. Firstly, money market funds, where trillions of US savings are deposited by individuals and companies. These funds invest in short-term assets with strict ratings guidelines, therefore the chances of losing money are seen as minuscule. Yet, that is precisely what happened when Lehman Brothers declared bankruptcy last weekend.
Some funds had been holding hundreds of millions in Lehman short-term paper, which promptly went from being valued at par to being worthless from Friday to Monday. This led aggregate losses to eat into total capital, that is after accounting for interest received, creating a situation called "breaking the buck" - when the fund will return less than par to its investors. Alarmed at the potential for money deposited in these funds disappearing and taking with it any chances of a financial system recovery, the Fed quickly stepped in last week to guarantee the deposits.
People putting their money into such funds aren't the sort that would bother with neighborhood banks; they are the very rich across America and the rest of the world. Thus, the bailout wasn't intended so much for the investors as the borrowers, that is US financial and other companies.
If even this made sense to you - and it doesn't to me - the second bit of moral hazard thrown out by Paulson boggles the mind a bit more so. His proposal for Congress to approve within a week a package of some $700 billion in funding for the US Treasury to directly purchase mortgage-backed securities (MBS) from financial firms has all kinds of danger signals popping up.
Paulson seems to believe that buying these securities and removing them from the public arena would create breathing room for the financial sector to re-emerge from the ashes of the financial crisis, but in so doing he will sow the seeds for the next few bubbles in the US and European financial systems.
These MBS that the Treasury intends to buy are the very same securities that private sector financial firms - investment banks, their commercial counterparts, insurers, credit rating agencies - all failed to properly understand or value. This wasn't a uniquely American problem either, as the rest of the world is also caught up in the same whirlpool of losses.
If profit-seeking folks couldn't understand these securities and figure out what they were worth, what possible hope is there for a government body to do so? The idea is to relieve the banks of these messy assets so that they can get back to their usual functioning, but it is more likely that the banks will simply sell all their dud assets to the Treasury and walk away with all the good stuff.
In any event, the Treasury initiative addresses only the parts of the leveraged market that have failed so far; these assets all based on mortgage lending were but the first to decline. Looking ahead, there are the hundreds of billions in leveraged loans made to companies buying other companies, billions of money lent to project finance for a global economy that is simply not likely to have the same kind of steam, and so on. If banks believe that they have put a couple of dud financial years behind them, the willingness to lend into the next bubble will increase.
This is the return of socialism with a vengeance. The very people who tut-tut the record of the Bank of Japan and the lost decade have implemented its rule book in double quick time. Japan continues to face a recessionary environment. Europe has gone back to its shell with poor economic data, mounting job losses, significant financial sector declines, widening pension deficits all helping to destroy its economic innards. The only part of G8 that was doing well - Russia - has also entered crisis mode due to its government's mishandling of corporate governance issues as well as the silly geopolitical maneuver in Georgia that helped to evaporate investor confidence in the country.
G-8 is thus a spent force, with the final chapters coming rather more quickly than I had predicted in a previous article (see Dear Dinosaurs, Asia Times Online, October 20, 2007). The icing on the cake is that when looking at the political landscape in these countries, no change appears imminent. European leaders all appear fairly secure in their jobs with even the UK's Brown postponing leadership challenges; so does the Russian dictatorship after all its recent misadventures. Japan faces the potential demise of the Liberal Democratic Party, but without any significant ideological change being espoused by the Democratic Party of Japan, I am at a loss to explain quite what will change for the country in enough time to pull out of its terminal economic decline.
Leaving the best for last, I am deeply entertained by polls showing that the Republican candidates are likely to win the US presidency once again. John McCain exhorted the strength of US fundamentals last week, clearly showing quite how in touch he was. When challenged, he praised the "fundamentals of US workers", presumably referring to the same folks who produce cars / machine tools / capital goods and the like at double the labor cost and triple the product faults of their Japanese and European counterparts.
As for his running-mate, Sarah Palin, her statement on the AIG rescue said it all:
Certainly AIG though, with the construction bonds that they're holding and with the insurance that they are holding (is) very, very impactful for Americans, so you know the shot that has been called by the Feds - it's understandable but very, very disappointing that taxpayers are called upon for another one.
Don't worry if that statement flummoxed you with its arcane references to construction bonds and insurance holdings; I couldn't understand it either. To think that Americans are willing to repose their confidence in these two characters after the level of economic destruction carried by the Bush-Cheney team points to their deeply forgiving and almost saintly nature.
For Asian countries looking to supplant the US as the pre-eminent economic engine of the world as well as muster up the occasional dance on the grave of the sole superpower, the return of the Republicans would truly be a godsend.
Heavy costs will be inflicted on the American taxpayer, who is now subsidising Wall Street – and indeed financial institutions around the world – in a bail-out of unprecedented size.
The sequence of events that led to this extraordinary socialisation of finance began with the de facto nationalisation of Fannie Mae and Freddie Mac, the bankrupt government-sponsored mortgage lenders at the heart of the US housing finance system. There followed a rise in the cost of insuring against default in the world's most powerful economy. On some independent estimates, the overall response to crisis could take the outstanding US public sector debt from readily manageable status to a level comparable with such fiscally stretched countries as Italy and Japan.
Concern about the creditworthiness of the US is nonsensical, according to Charles Goodhart of the London School of Economics. It has nonetheless surfaced, along with worried punditry about the dollar's role as a reserve currency.
Then came the absorption of Merrill Lynch by Bank of America and a bold decision by Hank Paulson, US Treasury secretary, to allow Lehman Brothers, the fourth largest US investment bank, to go to the wall. This constrasted with the government orchestrated rescue of the smaller Bear Stearns by JPMorgan Chase earlier this year.
The disappearance of these two Wall Street securities giants raised questions about the durability of the independent model of investment banking. Shares in the two independent survivors, Morgan Stanley and Goldman Sachs, were quickly savaged by short-sellers. In the UK, such short-selling is alleged to have been what pushed HBOS, the country's biggest mortgage lender, into its shotgun marriage with Lloyds TSB.
Still more startling was news that the Federal Reserve was advancing $85bn (€59bn, £47bn) of taxpayers' money to AIG, the world's biggest private insurer. Thanks to its role in the global market for credit insurance, AIG was so interconnected with other financial institutions that its bankruptcy would have been catastrophic for the whole system.
Yet despite the rescue, the festering lack of trust that has dogged the banking system since August last year worsened after this move. On Wednesday, the interest rate on one-month US Treasury bills turned negative, bearing the astonishing message that investors would rather lose money on government paper where repayment was certain than invest in money market funds. The climactic point had been reached where nobody trusted any credit other than the government's.
In such circumstances, experience teaches that central banks have to lend freely. In the event, the Federal Reserve injected $180bn into the markets, while other leading central banks said they were taking co-ordinated measures to help short-term dollar markets.
To round off the week, Mr Paulson announced discussions with political leaders to create a government-sponsored vehicle to take on toxic assets created during the bubble, prompting a manic stock market bounce.
The paradox in this remarkable tale is that extreme illiquidity exists in a world awash with the excess savings of Asia and the petro-economies. Russia illustrates the point. Thanks to the oil windfall, it sports high economic growth, the third largest foreign exchange reserves in the world and low public sector debt. Yet Moscow stocks are collapsing and trust in the financial system has eroded to the point where overstretched Russian investment banks are starved of funds and threatened with bankruptcy.
This is what happens when an overleveraged global financial system unwinds. Borrowing is being forcibly reduced across the world after the greatest credit bubble in history. It amounts, says David Roche of Independent Strategy, a research boutique, to a "tectonic shift from leverage to thrift as the means of financing growth and the concomitant dramatic reduction in global imbalances such as the US current account deficit".
The reality is that the financial system has been operating as if it were an off-balance-sheet vehicle of the government. Private-sector companies and individual bankers have been making huge profits in the bubble. Their risk appetite has been enhanced by previous bail-outs and, in the case of Fannie and Freddie, by the government's implicit guarantee. Yet their market pricing does not reflect the potential cost to the system of their own collapse.
This inability to handle externalities has again been apparent in the markets over the past two weeks as speculators have engaged in short-selling strategies against AIG and the investment banks in the US and HBOS in the UK. This threatens the financial system because the rating agencies respond to the consequent falls in share prices by cutting credit ratings, so jeopardising the victims' ability to fund the business.
Once again, property has been at the heart of a financial debacle, in spite of the assurances of central bankers that a nationwide fall in US house prices was an impossibility. Yet the peculiarity this time lies in property being wrapped in complex financial products that few could understand.
When investors go outside their areas of competence, trouble follows. Walter Bagehot, the 19th-century economist who defined the rules for central bank management of financial crises in his book Lombard Street, said: "Common sense teaches that booksellers should not speculate in hops, or bankers in turpentine; that railways should not be promoted by maiden ladies, or canals by beneficed clergymen ... in the name of common sense, let there be common sense."
The twist in the current decade is that even bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.
In this off-balance sheet Alice in Wonderland world, the most absurd feature has been a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products and does not permit much of the money to be clawed back now that the going is bad. Almost as absurd has been the degree of leverage racked up by investment banks.
As Michael Lewitt, the Florida-based money manager, puts it: "Allowing investment banks to be leveraged to the tune of 30 to 1 is the equivalent of playing Russian roulette with five of the six chambers of the gun loaded. If one adds the off-balance-sheet liabilities to this leverage, you might as well fill the sixth chamber with a bullet and pull the trigger."
So what stage in the the crisis have we reached? Bagehot quoted the banker Lord Overstone's description of the progress of an unstable cycle thus: "quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [Bagehot's capitals], pressure, stagnation, ending again in quiescence".
Over the past two weeks we have experienced convulsion. Yet it ought to be possible to avoid stagnation, because the authorities are following the prescriptions of Hyman Minsky, the economist whose work Stabilizing An Unstable Economy best explains the dynamics of this crisis.
Minsky saw fiscal activism by big government, alongside last-resort lending by central banks, as the modern way of coping with financial distress. That is now taking place. In effect, the US government is replicating what happened in the private banking system earlier in the crisis, when institutions were obliged to take entities they had created, such as structured investment vehicles and conduits, back on to their balance sheets as funding dried up.
Having implicitly guaranteed Fannie and Freddie and underpinned the operations of irresponsible bankers at AIG and elsewhere, the US government is putting bankrupt institutions back on to the public sector balance sheet via nationalisation. Now, Mr Paulson's proposal for the system's toxic assets has the makings of a turning point.
What will the banking landscape look like after this saga? Much depends on the regulatory response. At the very least, tougher capital requirements will be imposed, which could mean the banking system reverts to a lower-risk, utility-like function. Yet one of the most important questions concerns the independence of central banks.
If central banks have to be recapitalised, as seems likely, politicians may want to extract a price that diminishes their operational independence. That could have damaging consequences. For a central point of Minsky's thesis is that fiscal activism and last-resort lending set the stage for serious inflation.
That, together with an increased burden on future generations of taxpayers, could be the cost of the last two weeks' frantic efforts to stave off deflation and keep some semblance of the Anglo-American model of capitalism afloat.
The writer is an FT columnist and chairman of Quintain
(This is to ignore the fact that if many applicants seek to play the numbers game then any perceived advantage will cease to exist and an applicant would have been better off applying to a college with a high number of applicants to places which, in the next year, will have fewer)
As with other guides for Oxbridge entrance, this one seems to have no basis in experience of what actually occurs. Having read all the books on the market, NONE of them give an accurate portrayal of the decision-making process.
As for the idea that schools have relationships with Colleges - this is at least twenty years out of date. The only schools which have an advantage are those which do not produce the bland pro forma references for applicants. Such references are entirely worthless.
This article isn't worth the server space it is hosted on.
Due to the pooling system, any attempts to 'play the game' when choosing colleges won't work.
The best advice? If you're good enough for Cambridge, apply to either a college that you really like, or a college with a good reputation in the pool.
Another New Hall friend of mine applied there because she actually likes the place. She is a very happy and active member of the college.
When I applied, I did all those stats for college, like the above article. My school teacher wanted to apply a certain college that I was not keen about, because he knows someone there. At the end, I didn't use these tricks. It's not just the 'getting-in Cambridge' part that is important; it's the 'three-years at Cambridge' part that is. So I went for the one I really liked and got in. It felt great to know that I got in because of my abilities, not what kind of tricks I used.
What happened? I got there on interview day to discover there was only one place on offer that year, and fourteen applicants for it... I wasn't the only one to have done the math and tried to game the system.
Yes, I got the place. But I hated the course and ended up switching to something else after just two weeks - arguably I would have been much better off at a bigger, less cliquey college.
I'd recommend you pick a subject you feel passionate about, that you've properly researched, at a college you feel most comfortable at.
To sum up, I believed those who do have the potential to be an oxbridge should just choose whichever they like. This article is quite futile and there is very little point to believe in what it says. TO THOSE WHO WANT TO APPLY OXBRIDGE: Just shows those interviewers that you are an interested person. BE YOURSELF.
The real star would always shine through the crowds.
My advice to anyone wanting to apply then, would be to do so, and to ignore all this nonsense. Picking a course and a college should be down to passion and gut feeling. Go to an open day, find a place you like, and apply. There is nothing to gain by trying to cheat the system, and ultimately, you'll only be cheating yourself out of what you want the most.
And it's Queens' with the apostrophe after the 's'. An apostrophe before the 's' is Oxford's Queen's College.
Moreover, as a Cambridge student myself, I should stress that choosing your college by what's least competitive is potentially foolish. Despite what you may have heard, not all colleges will suit everyone perfectly: there are many variances between colleges, including the Fellows' areas of expertise; you have to do your research to find out what (and who) suits you.
And anyway, who wants to spend three years of their lives at a college they chose because it seemed easier to get into? Where's the integrity in deliberately not going for what you feel is the best?
Another person selling his take on the supposedly secret knowledge behind getting to Oxbridge.
The reason why it more candidates get in to do history than social sciences may be that history is undersubscribed. Or it may be that the people applying to do history really want to do history and have got good scores at the right A levels. A bright student who is perfect for economics isnt magically going to improve her chances by applying to do history, if she has no interest in history and cant show a spark.
Improve your chances? go to the open days yourself (not your mum), talk to the tutors, do the A levels they tell you to do and learn to love your subject.
And dont waste any of your hard earned cash on any course that promises to sell you insider knowledge.