What is most remarkable about the world a year after Lehman fell is that so little seems to have changed. Even the papers have noticed.

“A year after Lehman, little change on Wall Street,” says the headline on today’s International Herald Tribune. “Backed by huge U.S. government guarantees, the biggest banks have re-structured only around the edges. Employment [on Wall Street] has fallen just 8% since last September.”

“Obama to push banking overhaul,” says another headline at the Telegraph. Yes, the pols will try to convince the world that they have regulated risk out of the market. Perhaps they will limit salaries… or insist on more disclosure… or require that the capitalists hold onto more of their capital. Then, they will stand before voters and say they have made the world safe for democratic capitalism. Don’t believe it; their bailouts have made it more dangerous.

We don’t know whether this was what Nobel prize winning economist Joseph Stiglitz had in mind. But he has come to the same conclusion:

“Stiglitz says banking problems are now bigger than pre-Lehman,” says the Bloomberg report.

Yes, Wall Street has a good gig going. The whole industry now benefits from the hedge fund formula – ‘heads I win, tails somebody else loses.’ When the hedge funds play the game, it’s their clients who lose money. But the way Wall Street banks play it, the big loser is the US government, directly, and US taxpayers and bondholders indirectly.

When the going is good, the bankers make millions in profits – which they take home as salary and bonuses. An analyst at JPMorgan (NYSE:JPM) estimates that American and European banks will pay their 141,000 investment banking employees $77 billion in 2011… or about $543,000 per employee. Since they pay out so much of what they earn, they lack the capital to survive a crisis. But when they’re threatened with extinction, the feds step in to bail them out. No wonder they have no fear of a meltdown…

Wall Street was quiet on Friday. The Dow was down just 22 points.

The most exciting news was that gold closed at $1,006. But if gold buyers were afraid of inflation they neglected to mention it to the folks over in the bond market. The US 10-year Treasury note yielded all of 3.34% on Friday. Which is to say, fear of inflation is probably NOT what is driving up gold. But we’ll come back to that tomorrow… We’ve been doing a lot of thinking about gold… Stay tuned.

Meanwhile, the Financial Times says world equity markets have rallied 65% since their lows in March. There is no longer any sign of panic. Or fear. People seem to think the crisis of over. This has reinforced their illusions. They desperately want to believe that their financial authorities have the matter under control. So long as things seem to be stabilizing – or actually getting better – they figure they can relax.

‘Nothing has really changed,’ they tell themselves. ‘It was just a hiccup… nothing serious,’ they say. They look out their windows and see the same trees, same buildings, same automobiles; it certainly seems as if nothing had changed.

Of course, when you set out on a drive from Manhattan, it takes a long time to get out of the city. For a long time, the buildings… the landscape… and the people still look the same. But you haven’t even crossed the Hudson yet! It is only later, after a lot of driving, that you realize… you are a long way from home. We suspect that there’s a long trip ahead of us too. We have begun the process of reversing a half-century of credit expansion. Since 1945, debt per person has increased. Now it is decreasing –with vast consequences. If we’re right, the financial sector will shrink for many years. Profits will be hard to come by. A job will be difficult to get too. And the part of the world dominated by Anglo-Saxons will diminish.

Fear will make a comeback… when people realize where they’re headed…

And more thoughts…

*** As you’ll recall from Friday, between the fall of the Berlin Wall and the fall of Lehman was perhaps the happiest, most worry-free period in American imperial history. The country had no military challengers (it had to pretend that a handful of muslim fanatics armed with box cutters represented a serious threat). Finance was the world’s highest margin business… and New York’s hustlers were good at finance – rivaled only by those in London. And English was the world’s dominant language. With these advantages behind them, Americans (and Brits) saw nothing before them but growth and prosperity. They had gotten used to living off the kindness of strange lenders. They thought they could get away with it forever. But when Lehman went down, so did hopes for the eternal reign of the anglo-american financial empire.

Now, savings rates are going up in America. Spending is down. So are salaries and prices. It’s a deflationary world… Practically everything is deflating…

Consumer prices… inflation is negative in the US and Europe…

Wages… household income is down in the US. Unemployment is up and the length of the average workweek is down. Result: lower wages.

Housing…“house price decline [in England] will continue after false dawn fades,” says a headline at today’s Telegraph. A study by Ernst and Young predict a 1.6% drop in British house prices in the first half of next year, after an 11.4% fall this year.

Net household wealth… down too, caused by falling house prices and falling incomes.

Oh… but here’s one thing that is up: government deficits. The US posted a deficit of $111 billion in August. A few years ago, that would have been a frightening deficit for an entire year. Now, we have hundred-billion deficits every month… with no end in sight.

*** As forecast, protectionism is on the rise. The Obama administration put a tariff on tires imported from China. It was done do to protect American tire manufacturers from competition. Free trade? Sure, when it suits us.

But China is getting huffy about it. In an “unusually strong riposte,” Beijing, using diplomatic language of course, said to the US roughly what Serena Williams said to her net judge:

“I swear to God, I’m f**** going to take this f**** ball and shove it down your f**** throat…”

Why’s China so upset? In an expanding world, everyone greedily grabs market share. Even if they’re not as fast as the next guy, they still feel they’re making progress. In a deflating world, on the other hand, if you give ground… you’re not just losing market share…you’re losing money!

*** This weekend we traveled back to Paris to take part in a panel discussion on freedom. Liberty is not a hot topic in Paris. In a metropolitan area of some 4 million people only about 50 turned out to hear our talk – and half of them were American or English. Still, we were surprised there were so many. Liberty is a popular word. But freedom has never been much in demand. Millions of books are sold that promise to reduce your weight. How many are sold that promise to increase your freedom? We don’t know of any. Our guess is that the bookseller who makes freedom his market niche will soon have dust on his books and cobwebs in front of his door.

Still, the little group was enthusiastic. Assembled in a stuffy miniature theatre off the Rue Mouffetard, the freedom enthusiasts had a number of ideas for promoting their cause. One wanted to infiltrate the government with closet libertarians. Another suggested a takeover of academia. Still another suggested engaging taxi drivers in Socratic dialogues.

We looked for a fire alarm. Clearly, the heat was getting to them. They needed a good hosing down. We live in a world dominated by rules, laws, edicts, taxes and regulations. But it is not because the masses have never heard of liberty. They know what freedom is; they just don’t want it.

Instead, what they want is an edge, an angle… a law that protects them from honest commerce… a special tariff that gives them an advantage… a monopoly… a privilege…

They want food stamps and unemployment compensation. They want free medical care for their parents and free schools for their children.

They want what we all want… growth and prosperity, without corrections. And they want to go to heaven without dying.

Source: No Fear

And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) – outbidding Citigroup Inc. (C) and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.

The deals are the latest examples of how billions of dollars in U.S. bank rescue funds are helping fuel buyouts worldwide, and not lending at home, as a Money Morning investigative report demonstrated.

By closing its buyout of Merrill Lynch, Bank of America reaches $2.7 trillion in assets, and bypasses both JPMorgan Chase & Co. Inc. (JPM) and Citigroup in size (as measured by assets). To finance the merger, BofA had expected to issue 1.71 billion common shares, equal to $24.1 billion, plus 359,100 preferred shares. Merrill Lynch shareholders received 0.8595 of a Bank of America common share for each of their Merrill common shares.

The transaction, originally valued at $50 billion, was announced in the early morning hours of Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. The deal ends more than 94 years of independence for Merrill, but very likely saved the investment bank from a fate similar to Lehman in a year in which five top Wall Street banks were bought, went bankrupt, or changed their business structures.

By acquiring Merrill, BofA’s Lewis is swallowing Merrill’s so-called “thundering herd” of 17,000 brokers, which he has labeled as the “crown jewel” of the buyout deal. The Charlotte, N.C.-based Bank of America also will absorb Merrill’s big investment bank, which by volume ranked fifth in debt and equity underwriting and third in merger advice in 2008, Thomson Reuters reported.

The combined company’s brokerage, credit card, investment banking, mortgage and wealth management operations, plus its deposit base, will make it the nation’s largest, or close to it.

Bank of America also takes over Merrill’s nearly 50% stake in the powerful money manager BlackRock Inc. (BLK).
“We are now uniquely positioned to win market share and expand our leadership position in markets around the world,” Lewis said in a statement on Thursday.

Big Challenges for the Big Bank

The Merrill Lynch transaction creates new challenges for Bank of America, whose shares fell 66% last year as the worsening economy led to soaring loan losses, including from Countrywide Financial Corp., which BofA bought in July. A big challenge: Lewis must find a way to stem defections of top performers and key executives even as he slashes at least 30,000 jobs in a cost-cutting initiative that should save the big bank $7 billion annually by 2012.

That won’t be enough, however. While Bank of America and Merrill together raised $25 billion of capital from the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program (TARP), and BofA halved its dividend, analysts believe another dividend reduction is inevitable. And it may have to raise additional capital, too.

BofA has managed to navigate the banking mess – and has tried to capitalize on it.

Before buying Merrill, Lewis had spent close to $110 billion to buy FleetBoston Financial Corp, credit card issuer MBNA Corp., LaSalle Bank Corp., the wealth-management business of U.S. Trust, and Countrywide Financial.

Now Bank of America is generally viewed as being “too big to fail.” For his efforts, American Banker, the banking industry trade journal, last month named Lewis “Banker of the Year” for the second straight year.

However, the competitive landscape Lewis faces going forward is changing radically – as is evidenced by Wells Fargo’s $12.7 billion buyout of Wachovia, a Charlotte-based rival of BofA.

John A. Thain, who became Merrill’s chief executive after losses in mortgage-related investments led to the October 2007 ouster of Stanley O’Neal, agreed to run the merged company’s global banking, securities and wealth management businesses. If he remains with the merged entity, Thain will be a prime candidate to eventually replace Lewis, who is 61 and became Bank of America’s CEO back in 2001.

Wachovia Closes Deal, Too

The Wells Fargo/Wachovia merger closed yesterday and more than doubles Wells Fargo’s size, making it the No. 4 U.S. bank as measured by assets. Wells Fargo now also has the nation’s largest retail brokerage operations, as well as its largest branch network, with more than 6,600 offices in 39 states and Washington, D.C.

The San Francisco-based Wells Fargo agreed on Oct. 3 to buy Wachovia, beating out a smaller bid by Citigroup, which was planning to only buy a portion of Wachovia. Citigroup’s bid included government backing, while Wells Fargo’s did not. Wells Fargo said Wachovia branches will keep their brand name – or they will at least for the “near future,” Reuters reported.

Regulators pushed Wachovia to find a buyer after it was pushed to near ruin by zooming losses from “option” adjustable-rate mortgages (ARMs) that it took on back in 2006 when it bought California lender Golden West Financial Corp.

In November, Wells Fargo announced that it expected it would have to write down $71.4 billion of Wachovia’s $482.4 billion loan portfolio, including $36 billion of option ARMs and $9.6 billion of commercial real estate.

According to Reuters, analysts have said Wells Fargo was cautious in its assessment of the risks Wachovia’s mortgage portfolio, but the U.S. economy and housing market have continued to deteriorate so quickly that those estimates might now be out of date.

“We’re not at the end” of the housing slump, Wells Fargo CEO John G. Stumpf said on Dec. 10 at a conference. “But we’re starting to see some early signs that maybe we’ve reached the bottom in housing or close to it.”

Wells Fargo is the nation’s No. 2 mortgage lender. It remained profitable by avoiding many of the risky loans that plagued Wachovia, caused the failures of Washington Mutual Inc. and IndyMac Bancorp Inc. and drove Countrywide Financial into the hands of BofA.

Wachovia shareholders received 0.1991 of a Wells Fargo share for each of their shares, valuing the bank at $5.87 per share. That’s down from $59.39 when the Golden West merger was announced in May 2006, a level never again reached. Wachovia shares closed Wednesday at $5.54, down 85.4% in 2008.

Shares of Wells Fargo closed Wednesday at $29.48, down just 2.4% for the year. The KBW Bank Index, which includes Wells Fargo, fell 50% last year, Reuters said.

Wells Fargo expects the merger to result in at least $5 billion of annual cost savings, and to boost earnings per share by 20% or more in 2011 and higher amounts thereafter.

Including Wachovia, Wells Fargo has about $1.4 trillion of assets.

Source: Bank of America, Wells Fargo End Year by Closing Major Buyout Deals

Leaders from around the world gathered in an attempt to solve the crisis facing the global economy. This meeting was being billed as “Bretton-Woods II” and the markets were counting on some action. But the meeting was largely a non-event, as leaders did little more than point fingers and try to pass the blame for the financial crisis. President George W. Bush and his counterparts from the Group of 20 blamed the looming global recession on imprudent investors who sought higher yields without an adequate appreciation of the risks. They also mentioned the regulators who failed to address the dangers building in the market were at fault, but no mention at all of the Wall Street banks and investment houses who concocted complicated investment vehicles, bought them a AAA rating, and sold them to unsuspecting investors. Granted, these investors who purchased them without proper due diligence are partially to blame, but some fingers should also be pointing in Wall Street’s direction.

But pointing fingers won’t solve our problems, so what did the G-20 come up with to rescue the markets? Nothing more than a statement calling for higher capital standards and stronger risk management at banks, hedge funds, and credit rating firms. I agree that more regulation is needed, but the markets were looking for a coordinated response to the current crisis, and this announcement will undoubtedly disappoint them.

I received a phone call from a Reuter’s reporter on Friday asking my thoughts on the probably outcome of the G20 meeting. I told her I had little expectations for any market moving announcements, and that the most likely result would be the agreement to have another meeting later next year. That is exactly what occurred, with the leaders scheduling another meeting for the first quarter of 2009.

The dollar fell vs. most of the major currencies, as with the British Pound turning in the best performance, increasing 1.28% vs. the US$. Chuck had a reader send him a very important newsflash from the Telegraph UK paper. The Financial Services Authority (FSA) has completed a liquidity/stability stress test on the capital ratios of UK building societies and found that they’re much more stable than the Banks. This undoubtedly helped the pound rally, but this move up could prove short lived, as the underlying fundamentals for the pound are weak, and getting weaker.

The Brazilian Real was the biggest loser vs. the US$ over the weekend, as weak economic data caused investors to move out of the emerging markets. I continue to believe that the commodity based currencies hold some of the best values in today’s markets. The stimulus package announced by China, along with government infrastructure which will likely be announced here in the US, should increase demand on raw materials. More and more governments will try to ’spend their way’ out of the global slowdown, investing into big infrastructure construction projects. These projects should bring commodity prices back up, which would be supportive of the Brazilian real and the Australian dollar two of the major exporters of raw materials.

Today we will get the Empire Manufacturing data, which will likely show more rot on the vine for manufacturing in the NY area. The number is expected to show a record drop for November. We will also see the Industrial Production and Capacity Utilization numbers for October. The Industrial Production number is actually expected to show a slight pick up after falling almost 3% in September.

The rest of the week will bring even more data on the US economy, with PPI and TIC flows scheduled for tomorrow; CPI, US Housing starts, and the minutes of FOMC’s October meeting on Wednesday. And to finish the week, the jobs numbers will be printed on Thursday along with the Leading Indicators. None of this data should be dollar positive, as the fundamentals of the US economy continue to deteriorate. But as readers know, bad economic numbers have had a dollar positive effect, as investors flock to the ’safe haven’ of US treasuries. So the dollar could actually see more strength as the bad numbers roll in.

This is what happened with the Japanese Yen over the weekend, as Japan announced GDP fell .4% during the third quarter. Japan’s economy, the world’s second largest, entered its fires recession since 2001 last quarter and the government economists say conditions may get even worse. The bad news was met with currency investors buying the Japanese yen. Yes, investors moved back into yen as they reversed carry trades, selling high yielding currencies to pay down loans in Japan. So poor economic data in the US and Japan are driving investors back into these currencies.

Crazy days!

Currencies today 11/17/08: A$ .6485, kiwi .5564, C$ .8119, euro 1.2646, sterling 1.4922, Swiss .8352, ISK (No Quote), rand 10.13, krone 6.9728, SEK 7.923, forint 212.13, zloty 2.9817, koruna 20.07, yen 96.51, baht 34.99, sing 1.5231, HKD 7.7501, INR 49.3375, China 6.8270, pesos 13.062, BRL 2.305, dollar index 86.97, Oil $55.54, Silver $9.50, and Gold… $742.84

Source: Nothing Comes Out of the G20 Meeting

* The Conference Board said yesterday (Tuesday) that its consumer confidence index fell to 38 – the lowest level since the Conference Board began tracking consumer sentiment in 1967. The index registered a revised 61.4 in September, which makes this month’s drop the third-steepest drop on record. A year ago, the index stood at 95.2.

* The Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 16.6% from August last year – the largest drop since its inception in 2000, The Associated Press reported. Prices in the 20-city index have plummeted more than 20% since peaking in July 2006, the group reported. The 10-city index tumbled 17.7% — the biggest decline in its 21-year history.

* The Organization of Petroleum Exporting Countries (OPEC) said yesterday (Tuesday) that it would continue to prop up the oil market and may call another meeting before the group’s next scheduled conference in December. “If circumstances dictate we have to have another meeting, we will have a meeting before the Algerian meeting,” OPEC Secretary General Abdullah al-Badri told Reuters.

* Whirlpool Corp. (WHR) said yesterday (Tuesday) it will eliminate about 5,000 jobs this year and next, as the U.S. economy continues down its path to recession. The nation’s largest home appliance maker said its earnings fell 7% in the third quarter.

* Despite a market deep in bear territory, Wall Street professionals still expect year-end bonuses. According to a survey by eFinancialCareers, a unit of specialty jobs site operator Dice Holdings Inc. (DHX), 67% of workers expect a bonus for 2008. But some companies, such as Deutsche Bank AG (DB) have already announced top executives would not receive bonuses for the year, Reuters reported.

* Credit Suisse Group AG (ADR: CS) and Deutsche Bank AG (DB) yesterday (Tuesday) both refused to provide financing for the $6.5 billion buyout of Huntsman Corp. (HUN) by a unit of Apollo Global Management LLC. The banks refused to fund the purchase of the chemical company because the combined company could prove insolvent, Bloomberg News reported.

* The 100-year-old Christian Science Monitor said yesterday (Tuesday) that it would stop printing a daily edition next year in order to focus on the Internet – becoming the first nationally distributed newspaper to do so, Bloomberg News reported. And in a related story, national newspaper publisher Gannett Co. Inc. (GCI) said it would cut 10% of the workers at its community newspapers – a move that follows a cut of 3%, or 1,000 jobs, back in August. The cuts should be completed by early December and don’t apply to USA Today, Gannett said. Gannett, which publishes 85 daily newspapers, recently reported that third-quarter revenue declined 9%, and said it would re-evaluate its dividend policy.

Source: Global Investing Roundups Wednesday, October 29, 2008

It’s as if the entire workforce at Goldman Sachs Group Inc. and Morgan Stanley vanished in less than a year.

From Tokyo to London to New York, financial companies announced plans to shed more than 83,000 jobs since last July as revenue and compensation pools evaporated, according to figures compiled by Bloomberg. The dismissals range from 90 jobs, or 0.1 percent of the total, at London-based HBOS Plc to about 9,160 jobs, or 66 percent of the workforce, at New York-based Bear Stearns Cos., which is being acquired by JPMorgan Chase & Co.

Bankers only have themselves to blame for their predicament, says William Patalon III in Money Morning.

“The banking system’s ‘originate-to-distribute’ model changed the rules of the game. No longer did banks make loans that were based on very careful risk-of-loss analyses. Under the new system, banks make loans – such as subprime mortgages – which are then ’securitized’, or packaged together, into debt instruments that the trading operations of banks, investment banks or institutional investors might then purchase, believing it was a way of achieving higher returns.

“Initially, this led to higher profits. Which induced banks to boost lending so that they could boost securitizations. But here’s the problem. First, since the banks were no longer going to keep the loans, they relaxed lending standards. In fact, they actually had to since, second, they wanted to boost those volumes. When the underlying loans unraveled as the subprime-mortgage crisis spiraled deeper and deeper out of control, companies such as The Bear Stearns Cos. Inc. (BSC) took losses that just kept growing. Bear Stearns is now being taken over by JPMorgan Chase & Co. (JPM), with the help of the U.S. Federal Reserve.”

The wider jobs picture in the US isn’t much better, and Andrew Gordon in Investor’s Daily Edge sees as lot more pain ahead for the US economy.

“The truth is, employment isn’t holding up well,” says Andrew. “And prices aren’t being held down too well.”

“What seasonality giveth, it will taketh away… come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

“This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.”

The second quarter has seen lower client-related trading volumes, little banking activity, losses related to ineffective hedging and reversals of gains on fair valuing liabilities, [Citigroup analyst] Prashant Bhatia wrote in a note dated May 16.

He expects significant asset sales related to leveraged loan inventory, and commercial and residential mortgages as a result of a greater degree of liquidity in the marketplace.

“While the environment seems to have improved considerably in May, it will not offset the considerable weakness in March and April,” he added.

Meanwhile, consumer sentiment is getting “extremely grumpy”, according to a report by Jennifer Yousfi on Money Morning.

Mirroring the stagflation of the early 1980s, consumer sentiment hit its lowest level since that time period this month as short-term inflation continues to ramp up.

The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 59.5 in May from 62.6 in April. The index is at its lowest level since June 1980. Consumer confidence was at 85.6 as recently as 2007.

“The consumer is getting extremely grumpy,” Brian Bethune, director of financial economics at Global Insight Inc., who had forecast a decline in the confidence index to 59.6, told Bloomberg News. “The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on,” including aggressive interest-rate reductions by the U.S. Federal Reserve, the government’s stimulus package and deep discounting by retailers.

Lower-income households are feeling the rising prices at the pump and grocery store most acutely, the survey showed, as such households were the main cause for the index’s fourth consecutive monthly decline.

The loss is larger than expected, but a higher-than-expected top-line earnings number has given traders reason to celebrate, apparently. Ticker C rocketed up over 8% in premarket trading. Our best guess: A known loss is better than the great abyss. And there are still plenty of folks willing to time the bottom in any one of these behemoth Wall Street banks.

Au contraire, counters Dan Amoss. “I expect financials to keep trending down. Banks and brokers still have plenty of losses to report in 2008 and 2009, even if they can go to the Fed window and temporarily swap their illiquid, impaired mortgage-backed securities for Treasuries.””