Europe’s monetary union is about to fall apart

[CrackSmokeRepublican]

Get some D. Marks?
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Europe's monetary union is about to fall apart
By: Bo Nielsen -Copenhagen


Feb. 27 (Bloomberg) — Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe's monetary union is about to fall apart.
 
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe's biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.

"People said subprime could never blow up but it did and now they're saying the exact same thing about the eurozone," said Howard. "There's no stopping what is now a downward spiral." He declined to discuss his investments.

Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is "Europe's subprime."

Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc's gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.

Debt-Default Insurance

Irish banks took on debt equivalent to 11 times the nation's own gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.

As concern intensified that the loans won't be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision. Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.

The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street's rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.

Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe's benchmark government securities, to the widest since the euro's debut.

Steinbrueck, Soros

German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would "show our ability to act" should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn't expect a breakup of the region.

The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.

European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU "as a whole" to aid states in "economic difficulty." ECB President Jean-Claude Trichet said a day earlier "there is no weak link of the euro area."

"The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn't that bad," said Howard. "But the more dire it gets, the less are the consequences of departing from the euro."

Shrinking Economies

German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.

European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.

"Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany," Jim O'Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London. "Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere."

The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.

"A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora," former Bundesbank President Karl Otto Poehl said in London yesterday. "It's a very dangerous course that we will enter" and "I'm very much against it, many people in Germany are against it, but the political pressure will increase,"

http://www.bloomberg.com/apps/news?pid= ... MxJW2zhMjE

[CrackSmokeRepublican]

Looks like they are going to try and blame a Chinese guy for it all...
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Tuesday, February 24, 2009

Listen to the show
Did math formula cause financial crisis?
Felix Salmon

When math wizard David X. Li invented a formula to price collateral debt obligations, many on Wall Street adopted it. But now the formula's being blamed for spurring the collapse of the financial sector. Kai Ryssdal discusses the formula with Felix Salmon, who wrote about it in Wired magazine.

TEXT OF INTERVIEW

KAI RYSSDAL: With Wall Street down to somewhere near half of where it was 18 months ago, there is an understandable temptation to try and figure out why. Inevitably that's a complicated question. And the answer's pretty complicated too.

The cover story in this month's Wired magazine suggests one possibility. A guy named David Li and a formula he came up with to help Wall Street figure out how risky one set of bonds might be as compared with another -- and what happens when those bonds default.

Felix Salmon wrote that article. He also sometimes helps us wrap up the week on Friday afternoons as well. Felix, good to talk to you.

FELIX SALMON: Good to talk to you, Kai.

RYSSDAL: This guy, David Li, what was he trying to do?

SALMON: What David Li was trying to do was look at lots of different bonds and try and work out whether they were all moving in the same direction or not. Whether they were correlated or not. Whether they were independent of each other or not. And he created this astonishing piece of mathematics called the Gaussian copula function, which sought to answer that very question.

RYSSDAL: What does that mean -- Gaussian copula? I mean, if I can just take a little sidebar here for a second.

SALMON: People get very scared when they hear the word Gaussian. But this is just one way of looking to see whether one set of probabilities is associated with another set of probabilities. The really key part of the Gaussian copula function is the copula bit. It's what's known as a multivariant copula. You can take lots of different bonds or stocks or any kind of securities you like, and you can throw them all into one big equation and out the end get a single number which is easily manipulable and trackable as they say in the world of quantitative finance.

RYSSDAL: It comes across in the article that this formula is a little bit like the Grand Unified Field Theory of financial economics. Once this guy figures out correlation between when bonds default and when they don't, well then Wall Street says, "Holy cow. We found it. We just have to look at this one simple thing and now we can trade a million different securities.

SALMON: Exactly. You can throw this formula at so many different problems and get this very elegant, simple number out the other end. And it made it far too easy for people to be able to just say, "Hey, we've solved this problem, and let's go away and start trading lots of money." And, eventually, what happens is that in their desire for things to trade, they end up buying huge amounts of debt, which they really shouldn't have been buying.

RYSSDAL: And they were buying it because this formula said: Well, this correlates to that, and everything should be fine.

SALMON: The slogan has it that in a crisis all correlations go to one -- it's something which no one really thought about during the good years.

RYSSDAL: That is to say, all those correlations going to one means everything moves together. And even bad things can move together.

SALMON: Especially, bad things move together. So, if you have one mortgage defaulting, then suddenly you have 100 mortgages defaulting. And even though you could cope quite happily with one or two mortgages defaulting, what you can't cope with is mortgages across the state and across the country all defaulting at the same time.

RYSSDAL: Alright, but let me ask you this, then, Felix. Here's this guy. He's a statistics PhD. He comes up with this formula. He thinks it works. Turns out, in reality, it has a fatal flaw. But is the fault his, or is the fault with the application that Wall Street did with it?

SALMON: The fault is really with Wall Street. The way you get bubbles on Wall Street is when everyone does the same thing at the same time. If no one used the formula, then it would have had no damage. If only a few people had used it, then they would have lost money. But the whole system would have been OK. The problem was the whole system started using the formula.

RYSSDAL: Obviously it's not David Li's fault that Wall Street took his formula and did all this crazy stuff with it. But do you get a sense at all that he wishes maybe he hadn't come up with it?

SALMON: I think he's built a really rather successful career on the back of this formula. And given that most people who know about it don't blame him personally for the meltdown of the global financial system, I think he's probably done all right for himself.

RYSSDAL: Felix Salmon blogs at Portfolio.com. He's writing on paper this month -- the cover story on Wired magazine, about the Gaussian copula formula. Felix, thanks a lot.

SALMON: A pleasure.

      By anonymous coward

          02/28/2009

          yes, well, i believe mr li is a convenient scapegoat here. the rating agencies were corrupt and full of people of low moral character.

          what im trying to say here is that greed is bad. greed is not what built this nation. people who want to go out, take, kill, conquer, and exploit, they do not create anything, but only destroy.

          without a moral backbone or some kind of moral philosophy underlying your actions, we backslide into barbarity and animalism... and no technology, formula, gizmo or gadget will save us from that fate.