Glenn Wilson

Nighttime on The City of New Orleans,
Changing cars in Memphis, Tennessee.
Half way home, we'll be there by morning
Through the Mississippi darkness
Rolling down to the sea.
And all the towns and people seem
To fade into a bad dream
And the steel rails still ain't heard the news.
The conductor sings his song again,
The passengers will please refrain
This train's got the disappearing railroad blues.

Good night, America, how are you?
Don't you know me I'm your native son,
I'm the train they call The City of New Orleans,
I'll be gone five hundred miles when the day is done.

The City of New Orleans by Steve Goodman

A notable voice that predicted much of the current mess is Nouriel Roubini. Here's Nouriel:
The shadow banking system is unravelling:

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies.

Thus the financial crisis of the century will also envelop European financial institutions.

Say Goodbye To The Investment Banks

The era of the independent investment bank appears to be over.

Goldman Sachs and Morgan Stanley, the only two major investment banks left standing, sought and won Federal Reserve Board approval to become bank holding companies late Sunday.

The moves come on a weekend when the Treasury Department proposed a sweeping and controversial $700 billion bailout of the U.S. banking industry. The Treasury has asked for broad powers and little oversight to buy mortgage-related assets from U.S. banks over the next two years to alleviate the strain on the lending markets, which are choked with bad assets.

I guess this will enable them to get a share of the $700 billion?

Wall Street in crisis: Last banks standing give up investment bank status

In a statement released overnight, the Fed said its board had approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies and authorised credit to the two firms "against all types of collateral" that commercial banks can use to get loans from the central bank.

Dollar May Get `Crushed' as Traders Weigh Up Bailout

``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,''

``The fact that they mentioned taxpayer money implies that they're going to issue debt. If there's going to be a huge new supply of Treasuries, this will be dollar negative. It's too much for the dollar to take.''

Another drawback for the dollar is that the Fed's key rate is 3.4 percentage points less than the rate of inflation, the most since 1980, so investors lose money by investing in short- term U.S. fixed-income assets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States. NY Times

And raises the national debt ceiling to $11.3 trillion which is over $35,000 for every man, woman and child in the United States.

Morgan Stanley freezes merger talks with Wachovia: Report

US investment giant Morgan Stanley has frozen talks on a merger with Wachovia bank but is pressing on with talks for CIC of China to end up with a big stake in it, a media report said on Monday.

But Morgan Stanley continued to pursue talks to sell a big slice of its capital to Chinese sovereign wealth fund China Investment Corporation (CIC), the report said.

Media reports have suggested that CIC could end up with 49 percent of Morgan Stanley.

So, US taxpayers will bail out a company that may be 49% owned by the government of China?

It gets better:

Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.
...
If a battle does develop in Congress over foreign participation, UBS, among others, is poised to make just these arguments.Foreign Banks Hope Bailout Will Be Global

Former Texas Sen. Phil Gramm has emerged as the key behind-the-scenes economics/Wall Street guy for John McCain and is being touted as the treasury secretary in waiting. link

U.S. Sen. John McCain's presidential campaign faces questions regarding a top economic adviser's work for Swiss banking giant UBS Warburg.

Economist and former U.S. Sen. Phil Gramm is vice chairman of UBS Investment Bank and has lobbied Congress on the company's behalf. link

Of course, the Swiss deserve their fair share too! And, isn't it nice to see the man that may be the next U.S. Treasury Secretary shoveling U.S. Taxpayer money to a foreign bank?

Mitsubishi UFJ Financial Group Inc (MUFG), Japan's largest bank, said on Monday it planned to acquire as much as 20 percent of U.S. investment bank Morgan Stanley as part of a broader strategic alliance. link

We have said more than once that the the US in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It looks like we will have the opportunity to see how those two assets influence the end game. Why You Should Hate the Treasury Bailout Proposal

Nukes may be our saving grace economically? "Nice little country you got there. I'd hate to see anything bad happen to it." Tony Soprano would be so proud.

As we quoted Paul Krugman in yesterday's post:

Anybody that knew what was going on would be in a bomb shelter by now.

I see Krugman's comment as half-joke and half-hyperbole. There are real economic problems in the US and in the world and they have been brewing for some time. These problems require rational and thoughtful responses instead of knee jerk $700 billion handouts to the people that caused or contributed to the problems or stood idly by as they festered.

It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution. Open Letter To Congress

Meanwhile, what is an investor to do? Here's your piece of the America Pie:

And in the streets: the children screamed,
The lovers cried, and the poets dreamed.
But not a word was spoken;
The church bells all were broken.
And the three men I admire most:
The father, son, and the holy ghost,
They caught the last train for the coast
The day the music died.

Don McLean - American Pie

Labels: economy