At Davos, Time to Kill the Capitalist Shadow Puppet

Stop, children, what's that sound? Everybody look what's going 'round..."

That sound you hear is the whispering winds of the Marxist dialectic as it blows through the ruins of Wall Street. Or not.

End of Economic Days Exuberance: Noun A state of being, typified by mass indulgence in the belief that this year, and no other year in the history of capital markets, is the year where everything collapses and capitalism is to blame for everything.

You can read more about the world leaders who are indulging and arguably leading this End of Economic Days Exuberance

It is of note that the Chinese Premier, Wen Jia-bao, states that America's poorly managed economic policy is to blame for world disorder.

China is most recently known for hosting the Olympics, which, according to Chinese leaders, ushered in a new world order of harmony and One-ness with the universe. If we are really living in a One World mentality, then America surely cannot be held to account exclusively. Let's not jump on this anti-capitalist saw horse just yet.

We know there is no "Developing World Decoupling" in this era of global finance and marketplaces. So, is it fair to pinpoint Laissez-faire economics for the crushing blows that have caused real economic pain around the world?

We are only beginning to just now see the destruction. Surely it will be revealed that other countries made not entirely capitalistic mistakes in running their economies and marketplaces.

How I do love the debate, though!

Paul Volcker in NY TIMES Lead for Secretary for Treasury

A Little Economic Karaoke, Paul and Alan?


The New York Times is running a poll to choose five members of Barack Obama's new cabinet

Paul Volcker, the inflation beating former Fed Chair, is in the lead for Secretary of the Treasury.

Who would you pick?

Looks like bullhorn-voiced Jim Cramer of MSNBC is in dead last for the pick.

Will the Last Marxist in America Turn on the Lights?

Courtesy: Breakthrough Generation Blog

Friends and colleagues and business contacts will know that I am not a Marxist. However, I have been brought up in the postmodern world of CDOs and this recent market collapse.

That's why I find this week's "The Critics" article by John Lanchester in The New Yorker a fascinating exegesis on American capitalism and a somewhat bizarre prediction of where that same progenitor of global free market capitalism is headed, or has headed.

Lanchester says that the use of derivatives, but really the invention of the mathematical profundity that led to their widescale and, in some cases, irrational use to make money, has essentially crippled America's financial system.

And that crippling has led to worlwide panic, disorder and weakness everywhere. He draws parallels to Marx's claim that capitalism ends up destroying itself. He conjures up the work of Yale economist Robert Shiller's ideas on how to save the economy:

Shiller’s basic idea is that there should be more market activity. He has a number of suggestions for spreading the risk of home ownership: “continuous workout mortgages,” in which loan terms are adjusted monthly against economic conditions and the borrower’s ability to pay; comprehensive financial advice targeted at the poor (an idea that nobody could argue with, and that nobody will want to pay for); a “financial product safety commission,” as proposed by the Harvard legal scholar Elizabeth Warren; improved disclosure on the part of financial institutions; and the expansion of housing-futures markets. These would mean that “any skeptic anywhere in the world could, through his or her actions in the marketplace, act to reduce a speculative bubble in a city.” Anyone who thought property prices in an area were too high could bet against them by selling them short—which would, the theory goes, exert a downward pressure on prices. This would help all of us, by reducing the bubble-and-bust cycle of property prices. We need every tool we can get to help reduce the risk of having all our capital tied up in a single heavily leveraged, highly illiquid asset—that is to say, our homes.

See the trappings of socialism here? Make everything transparent to the point that it seriously begins to resemble collective ownership. That is, essentially, what a market should be, right? The masses should have some say about how things are priced. In fact, the market has not been working that way. There are no rational "efficient markets." The elite and the "smart" control how things are sold and bought, following Lanchester's argument.

A bit further, he writes:

Shiller approvingly quotes an argument that “the introduction of derivatives tends to improve the liquidity and informativeness of markets,” which, given what has just happened, might be the worst-timed assertion ever to have been made by a prominent economist. That doesn’t mean he’s wrong, though, and his book would have to be on the bedside table of whoever gets to design the systems that make a repetition of this particular crash less likely. (Shiller also points out that “bailout” has no entry in the twenty-volume Oxford English Dictionary.)

It seems loopy that the cure for a disaster caused by a headlong dash in the direction of ever freer capital markets should be even freer capital markets; but that is part of Shiller’s point. When it comes to the free global movement of capital, there is no plan B.

But is that what he is saying? On the one hand, Shiller could be arguing for freer markets. But looked at another way, it is easy to get a little twisty with the argument and say that actually, a "freer" market means a more "controlled" market, where prices are more solid, regulated and less prone to fluctuation by panic.

Are there any unreconstructed Marxists left, anywhere in the wild? (Universities don’t count.) If there are, now would be a good moment for one of them to publish a book saying that the man in the beard would regard himself as having been proved right.

What is your take? What direction is the American market heading? What is going on?

Monem Salam and A Muslim's Guide to Investing and Personal Finance

A Muslim's Guide to Investing and Personal Finance

On October 14 Lightbulb Press released A Muslim's Guide to Investing and Personal Finance by Virginia B. Morris in association with Monem A. Salam. The guide was developed to meet the growing need by banks, brokerages, asset managers, insurance and home finance companies, and other financial services organizations to provide Shariah-compliant products for Muslim customers who want to live their financial lives in accordance with their beliefs.

"The guide is an invaluable reference for Muslims who need to invest and make personal finance decisions while adhering to the Shariah, or Islamic law — often a challenging endeavor," according to Salam, the Deputy Portfolio Manager for Saturna Capital and recipient of the "20 Rising Stars " award from Institutional Investor News.

A Muslim's Guide to Investing and Personal Finance describes the newest, as well as more established, Shariah-acceptable investment products and specialized financial transactions that have been developed to help Muslims navigate the financial realities of the modern world, including investing for retirement, buying a home, paying for college, and maintaining a savings account, as well as insuring personal assets.

"The purpose of the Guide is to acquaint Muslims and non-Muslims alike with the essentials of investing and personal finance from a uniquely Islamic perspective that is wholly consistent with the letter and spirit of Islamic law," says Shaykh Yusuf Talal DeLorenzo, an internationally recognized scholar of Islamic Transactional Law and Chief Shariah Officer of Shariah Capital. "At the same time, the Guide does so in a thoughtful and user-friendly format that approaches the subject from a practical and individual perspective.'

The Guide distinguishes between financial products that are considered halal, or acceptable, such as Islamic equity funds, Sukuk (fixed income), and Takaful (insurance) and those that are considered haram, or unacceptable, because they violate the Shariah principles of riba, or paying of interest, or involve investing in companies with haram business activities, such as the manufacturing or marketing alcohol, gambling, pork products and pornography. It also explains how Shariah applies to individual finances, such as basic investing, home purchases, retirement savings, and the use of savings accounts and the "Islamic windows" that financial services are opening to offer Shariah-compliant financial products.

Available for bulk and retail sales directly through Lightbulb Press.

Clinton and the Subprime Fiasco

"I did not cause this mess." Or, did he?

Saturday lunch was the beginning of celebrations for Diwali. We had a great meal, but by the end of the meal, my friends started talking about who is to blame for the current financial crisis.

I am not interested in provoking conversations about blame, but I am interested to know what the community thinks of these two names.

The two men talked about at length were former Federal Reserve Chairman Allan Greenspan and former US President Bill Clinton.

This commentary from a September 18, 2008 Financial Times comes to mind. It neatly summarizes what one side of the table considered a fair judgment of the problem:

Where Mr Greenspan bears responsibility is his role in ensuring that the era of cheap interest rates created a speculative bubble. He cannot claim he was not warned of the risks. Take two incidents from the 1990s. The first came before he made his 1996 speech referring to “irrational exuberance”. In a Federal Open Market Committee meeting, he conceded there was an equity bubble but declined to do anything about it. He admitted that proposals for tightening the margin requirement, which people need to hold against equity positions, would be effective: “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” It seems odd that since then, in defending the Fed’s inaction, he has claimed in three speeches that tightening margins would not have worked.

The second incident stems from spring 1998 when the head of the Commodity Futures Trading Commission expressed concern about the massive increase in over-the-counter derivatives. These have been at the heart of the counter-party risk in the crisis. Mr Greenspan suggested new regulation risked disrupting the capital markets.

At the turn of the millennium, with no move to tighten margin requirements, a feedback loop sent share prices into orbit. As prices rose, more brokers were willing to lend to buy more shares. As share prices went up the buying continued, until the bubble burst. To create one bubble may be seen as a misfortune; to create two looks like carelessness. Yet that is exactly what the Greenspan Fed did.

Americans started buying houses, in record numbers. And many people who probably should not have been given loans, were given loans, because of what many blame as the second culprit in this issue: Bill Clinton.

Now, this was the unpopular idea at the table. Only one person really espoused it, and she was a former mortgage broker. She was quickly poo-pooed when she brought it up, but in essence, it was this, as written in the Daily Telegraph:

If you lose your house, blame Clinton.

Capitalists have traditionally looked at the colour of people's money, not of their skin. In 1999, under pressure from the Clinton administration, Fannie Mae started a programme for extensive expansion of loans to people with low to moderate credit. The share of subprime mortgages to total origination was 5 per cent ($35 billion) in 1994; it had risen to 20 per cent ($600 billion) by 2006. The impetus originated with Bill Clinton. This madness included "Ninja" (No income, no job, no assets) loans.

Under legal penalties, Clinton's Federal Reserve compelled banks to accept welfare cheques and unemployment benefit as income sources to qualify for a mortgage. The affirmative action ideology so invaded the market that brokers advised people to claim they were 1 per cent Native American to benefit. In one extravagant instance a $480,000 mortgage was awarded to an illegal alien from Mexico.

This insanity had nothing to do with capitalism and everything to do with sub-Marxist social engineering. Capitalism was in a strait-jacket of political correctness - no wonder it imploded. If you lose your house, place the responsibility where it belongs - blame Bill Clinton.

Do we have more to fear if Barack Obama is elected president? An acquaintance of mine said at a Halloween part recently, "Obama will make us all poorer." I said, "Don't be too rash, we have all made ourselves poorer." She said: "Yes, but Obama will help us a great deal."

What do you think? What will happen if Obama is elected? What will happen if Senator John McCain is elected? What will regulation look like then?

Sen. John McCain

Sen. Barack Obama

Property Market Sinking in Middle East Due to Market Crunch

Those who thought the Middle East was invunerable to the recent market panic that has sunk Wall Street into a blistering recession-beginning dive, now need to re-evaluate that assumption.

The Dubai real estate market has shown signs of increased weakening.

The Wall Street Journal reports:

Analysts have been forecasting a downturn in prices for months. Earlier this month, property consulting firm Colliers International said Dubai property prices rose 16% in the second quarter. That was much slower than the 42% price rise in the first quarter. Regional bank EFG-Hermes said last month that it expects prices to peak next year and fall -- as much as a cumulative 20% -- by 2011.

Bashar Al Natoor, a Fitch analyst in Dubai, warned in a report in July that the fresh supply of new property may exceed demand and weigh on the market starting in 2009. Now, he says, the ramifications of the global financial crisis are also likely to take a toll, as would-be buyers scramble for financing.

"The ability of people getting money will be put to the test," he says.

Real-estate agents in Dubai said they're now seeing a clear slowdown. They say speculators, especially those who were financing their property investment, have largely fled the market.

Investors in new luxury villas at one Dubai development -- each priced at between $1.4 million and $2.2 million -- were reselling property at premiums of 10% to 15% of the original purchase price just six months ago, Ms. Firetti says. Now, premiums have shrunk to zero in many cases. That means investors are willing to sell at a loss, because they've already sunk in upfront fees.

Allan Greenspan "Shocked" That People Only Operate with Self Interest

The award for "Best New Thinking on the Economy" goes today to former Federal Reserve Board Chairman Allen Greenspan, who today in front of Congress told them he had no idea that bank executives would act in their own self-interest in a capitalist economy.

Mr. Greenspan told the House Oversight Committee on Thursday:

[T]hat his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proven in the latest crisis to be wrong.

Mr. Greenspan said he had made a “mistake” in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.

Questions still remain. First, who feels angry about this commentary?

Another question is this: At one point did Mr. Greenspan come to this conclusion?

Was it this morning as he prepared for the meeting? Was it sometime several years ago, as the housing bubble started making itself apparent?

I would like to question some other people, namely journalists and ratings agencies. At what point did you realize that people would continue to act in their own self-serving fashion in a capitalist economy?

What were your methods for addressing that realization? Is this a new development?

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”

Is this parody? It would seem that anyone who trades stocks, or currencies, or develops new financial vehicles knows this already. The spirit of the market is to seek personal gain. IN a market that for years allowed all sorts of wacky new-fangled ideas reach investors, why wouldn't bank executives see this? And are we really to believe that bank shareholders did not condone it? Bank shareholders were probably so over-gleed with ROI that it would not matter to them in the slightest.

Call me cynical. Of course I am. Everyone seeks gain, whether it looks good on paper is besides the point.

According to the New YOrk Times, Greenspan does not put himself to blame.

Mr. Greenspan’s critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed’s powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

In his testimony, Mr. Greenspan put the blame for the subprime collapse on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

“It was the failure to properly price such risky assets that precipitated the crisis,” Mr. Greenspan said.

Two Roads Home

CPI Financial has come out with a new study called Two Roads Home.

New BNP Paribas Deal, Thailand Bonds, and Malaysia Election Drama

Salama, the largest takaful and re-takaful group [paper doesn't say on what basis], has tied up with BNP Paribas Investment Partners to offer its Islamic fund, the Global Equity Optimizer, with investor returns linked to Shariah-compliant global equity markets.

And in reference to our post yesterday about the shaky political situations in Thailand and Malaysia, a brief roundup of some developments:

Malaysia's Prime Minister Abdullah Ahmad Badawi says he will not go forward with plans to run in an upcoming election.

Prime Minister Abdullah Ahmad Badawi, who led the government to its worst ever election result and will become the shortest lived Malaysian leader, said he would not stand in a party election next year, effectively ceding power to his deputy.

Najib Razak, the son of one prime minister and the nephew of another, will have to wait six months to take charge, although he is seen as a shoo-in in the leadership election for the United Malays National Organisation (UMNO), the biggest government party.

"I know that I was not doing well enough during the (March) election so it's time for someone else to take over," Abdullah said on Wednesday when asked whether he was forced out of office.

The outcome for resurgent Datuk Seri Anwar Ibrahim, the country's former deputy Prime Minister, now does not look promising, say some of the political analysts covering the local scene.

Malaysia, ruled by an UMNO-led government since independence from Britain, is facing a challenge from opposition leader Anwar Ibrahim, who was forced out of government in the late 1990s and then imprisoned on sodomy and corruption charges.

Anwar, who is facing new charges of sodomy which he denies, has said that he has won over enough government MPs to oust the government and assume power.

But analysts said after several false starts, Anwar's chances of toppling the government now looked slim as MPs would stick by Najib. "Anwar is unlikely to topple the Barisan Nasional government by crossovers but the opposition threat remains," said Lim Hong Hai, political science lecturer at Malaysia's Science University.

Malaysia election future changes tack.

And in Thailand, an oldish story, but worth mentioning: Thailand plans to float 7-year Islamic bonds.

Indonesia Sees Itself as Safehouse for Shariah Investors

We're pretty much calling it a market crash over in the International Islamic Finance Forum's offices, and it looks like other countries have taken up the mantle of pitching antidotes to the fear contagion spreading through the stock markets.

Indonesia as an FDI gold mine during the 2008 crisis? here we have a case of overextending the reasons and the potential for Shariah investing.

The thinking goes: since oil-rich nations can't trust the United States or Europe as markets to invest in, the next logical choice is Indonesia, because there are many Muslims there. Also, allowances have been made to accommodate Shariah investing. Because Malaysia and Thailand, other nations with Muslims in them, are a bit shaky, Indonesia is the next logical gathering point for funds.

Given the unfavorable political developments in Thailand and Malaysia over the past few months, Indonesia, with its largely Muslim population, could become one of their favorite places for FDI if the conditions are right and the legal and market infrastructure is conducive for Islamic financial instruments.

Our basic infrastructure and natural resource development projects could now become much more attractive for sovereign funds from the Middle East to be used as major sources of long-term, stable revenues.

The government has improved the legal framework with the recent enactment of laws on sharia banking and sukuk (Islamic) bonds. The long-term nature of Islamic bonds could make them the most suitable investment instrument for Indonesia because of the country's need for huge funds for infrastructure development, as these bonds grant an investor a share in an asset along with the cash flows and risks commensurate with such ownership.

Caveat: But not all Middle Eastern investors are shariah investors. And the idea that political risk in Thailand only just lately made it risky to invest does not seem to be a solid one.

When a butterfly in Riyadh, liquidates its bond portfolio, a broker in Indonesia claps his hands.

Will Islamic Investments Become More Attractive in the Post-Chaos?

The Islamic Finance Forum Group at LinkedIn is up and running and already we are enjoying a healthy and robust discussion about whether global volatility in the markets will lead to more financial executives leaning towards Islamic investments as alternative instruments for conventional investors.

Raj Mohamad, a Managing Director at Shariah financial advisory firm Five Pillars in Singapore, weighs in:

I don't think we can yet say that investors will have a sure winner in Islamic investments. But as the financial tsunami unfolds globally we observe some very interesting developments that add more weight to [considerations of] the tenets of Islamic finance.

The following are some examples:

(1) Iconic financial institutions are at the brink of either bankruptcy or are forced to merge to survive. Islamic banks on the contrary are giving impressive returns. Check Emirates Islamic Bank.

(2) Naked shorting is banned. Islamic finance forbids naked short-selling or the concept of selling something you do not own.

(3) Investors everywhere are scrambling to understand the convoluted securitisation that [was prevalent in the lead up to] the sub-prime crisis. Even Lehman's mini-bond series and FTD structures are leaving investors baffled as to how to liquidate or realise their capital let alone the returns.

This is referred to in Islamic finance as Maysir or Jahl i.e. ambiguous or unclear contractual obligations and terms.

In summary, I think Islamic products may not give you phenomenal returns but I'm more or less confident you wouldn't lose as much as through conventional products.

Question of Sustainability at Wachovia Triggered Sale

It was pretty bad. The bank run that led to decreasing confidence in Wachovia's balance sheets pressed the FDIC to force Wachovia to sell to Citigroup.

A report in the Charlotte Observer gives the Wachovia 'silent bank run' play-by-play.

Wachovia's loss of deposits Friday was enough to catch the attention of the OCC, sources said. The WaMu failure as well as mounting speculation that Wachovia was for sale – it had been in earlier talks with Morgan Stanley – contributed to the run. By Friday afternoon, news leaked that Wachovia was talking to Citi and Wells Fargo.

San Francisco-based Wells, a major West Coast retail bank, was the front runner but decided to pass because officials were worried about a piece of Wachovia's commercial loan portfolio, one of the sources said. By then, regulators were worried that Wachovia would not be able to access the funding it needed on Monday. “Banks are not lending to each other” in turbulent markets, and if more depositors withdrew money on Monday, it could need cash to meet its obligations, the source said. “It's a confidence issue.”

During merger discussions, Wachovia officials, working in New York, frequently consulted with regulators, often in lengthy conference calls. Comptroller John Dugan, who presides over the OCC, worked late into the night Sunday in Washington. He had returned Friday from Europe, skipping a meeting of an organization called the Financial Stability Forum in Amsterdam.

The FDIC became more heavily involved as the weekend progressed because of its role in protecting consumer deposits. For the first time, the agency triggered a “systemic risk exception” under the 1991 law that allows it to ignore a requirement to choose the “least costly” method for resolving a failing bank.

After a vote by the FDIC board on Monday morning, Wachovia chief executive CEO Bob Steel received word of the decision and concurred. The FDIC issued a press release at 8:17 a.m.

The Day Wall Street Melted Down

The House voted down the bill. How bad is the nation's economy?

We have also created a survey at the IIFF. Take a few moments to tell us what you think about the current state of the finances of this country.

Click Here to take survey

Will this financial meltdown today confirm many people's thoughts that we are headed towards a recession? Where will we go from here?

Have we lost the plot?

Click Here to take survey

Take two minutes to tell us. Results will be published tomorrow afternoon.

Financial Rescue Plan Published

Imtiyaz Ahmed at the Shariah Capital Markets blog asked me to put this article on the blog: Lawmakers publish US$700 billion rescue plan.

Things are starting to get exciting.

The move, backed by both Republican and Democratic leaders, allows the Treasury to spend up to $700bn (£380bn) buying bad debts from ailing banks in the US.

President George W Bush urged lawmakers to support the bill, which needs approval by both houses of Congress.

The bill, which will be voted on this morning, is not a lump sum payment, but is dished out by the Treasury in a short-term buyout plan, with safeguards for checks and balances.

the Emergency Economic Stabilization Act of 2008 will give the Treasury Secretary $700 billion to buy up bad mortgages from banks, but with conditions: Instead of handing over all of the money at once, the bill allocates $250 billion now and requires the president to certify that the next $100 billion is needed.

Welcome to Your Friday Failure

The WaMu Washout

In The Wall Street Journal this morning panic and this little factoid: Bank Failures happen on a Friday.

Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.

In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.

WaMu Sold for $1.9B to JPMorgan.