主题：【讨论】“六个月之后不会再有投行存在了”。 -- 厚积薄发

这是纽约大学经济学教授Nouriel Roubini在上周的预言。我本来以为他有些过于悲观，现在看来被不幸言中了：Goldman Sachs, Morgan Stanley Become Banks, Ending an Era for Wall Street 。

下面我附上他的三篇文章，都是全文文摘。西西河不欢迎全文文摘，但是我所附三篇都是需要付费才能看到，网上只有摘要。文章所谈对在北美生活工作的海外华人或许有所启迪帮助。尤其是银行挤兑和股市崩盘的风险，和大家切身利益相关。本来应该是翻译之后再贴上来的，但是工作太忙没有时间。如果有感兴趣的河友据此全文翻译，另开主题贴放在经济管理版，引来高人点评，那就再好不过了。严格讲来，我这样做是违反知识版权的。不过非常时期，俺就不做奉公守法的良民了。恳请版主法外开恩，多谢多谢。

【文摘】大萧条以来最严重的金融危机，我的全文翻译。

【文摘】走向金融灾难的十二个步骤

【文摘】美利坚帝国的衰落, nasa河友的全文翻译。

• 【翻译】大萧条以来最严重的金融危机（一）
• 美国不给

恭喜：你意外获得【通宝】一枚

谢谢：作者意外获得【通宝】一枚

鲜花已经成功送出。

此次送花为【有效送花赞扬，涨乐善、声望】

文章蓝字部分表明该论点有Roubini教授以前所写文章专门论述。由于需要付费才能看，我就不给出链接了。但是文末的三个视频链接和一篇访谈录都是可以直接看的。旅居美国的华人，对文中提及的银行挤兑和股市崩盘的可能性不可不防。文章后面的读者发言也很有意思，但是太长，没有时间整理，只好先放过了。

The Worst Financial Crisis Since the Great Depression

Nouriel Roubini | Sep 16, 2008

Regular readers of this blog are familiar with my views. But here below is a repeat of detailed summary of the reasons for my views (as presented on this forum last month) that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument). As I wrote in August:

This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.

At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.

This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.

Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.

Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.

Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L's that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) - do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.

In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.

The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found。

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

• 【讨论】“六个月之后不会再有投行存在了”。

Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.

Additional earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions' managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam that auditors and regulators are abetting on a regular basis. An example of such a scam is the recent Merrill Lynch transaction with Lone Start to “sell” its exposure to CDOs.

The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loan – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.

The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie - to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.

The entire Federal Home Loan Bank system – another GSE system that is another effective arm of the government - has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.

The ability of US financial institutions to recapitalize themselves is constrained by financial protectionism: the only large players that have funds to put at work are sovereign wealth funds, especially from countries that are strategic rivals – not allies – of the US or from unstable petro-states. Thus, the backlash against such SWF will seriously limit the ability of banks and other financial institutions to recapitalize themselves.

This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (August). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.

This will be a long, ugly and nasty U-shaped recession lasting at least 12 months and more likely 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects. While an L-shaped decade long economic stagnation is unlikely the recovery of the economy from this recession will be weak as the financial crisis and serious macro imbalances will lead to sub-par (below trend) economic growth for years to come.

The US recession has already started in Q1 of 2008 based on the five indicators tracked by the NBER. The Q2 rebound is only driven by the temporary tax rebates and GDP growth will slip into negative territory from Q3 2008 until at least Q2 of 2009.

Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of US and global stock markets.

The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing. Indeed all of the G7 economies are now entering a recession. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.

But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 30% will further reduce inflationary pressure.

The Fed will have to cut the Fed Funds rate much more as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial crisis and severe recession cycle.

The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.

Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.

This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.

This crisis also represents a Crisis of the Suburbian (“McMansions and Gas-Guzzling SUVs”) American Way of Life. The sharp rise in gasoline and energy prices and transportation costs, together with the sharp fall in home prices, will radically change the pattern of living of the typical American household.

Some of my views are fleshed out in more detail in my recent interview on Barron’s and in the profile article about me recently published by the New York Times magazine.

Since I wrote those words in August financial and economic conditions are severely deteriorated; we are now closer to the financial meltdown that I described in my February paper in my “12 Steps to a Financial Disaster” . Stock prices are sharply down and there is a risk of a market crack; interbank spreads and credit spreads are wider than ever since the beginning of this crisis; Lehman and Merrill are gone and soon enough Morgan Stanley and Goldman Sachs will also need to find a larger partner with deep pocket or risk getting in severe trouble; the biggest insurer in the world – AIG – is teetering near bankruptcy; the biggest US S&L – WaMu – is effectively insolvent and close to going bust; dozens of other banks are near bankruptcy; there is a beginning of a silent bank run as depositors are nervous about their assets; the panic is mounting in financial market; the CDS market is frozen because of the collapse of Lehman and the soon collapse of AIG, WaMu and other financial institutions; many hedge funds are now teetering as their losses are mounting; investors in fixed income – including preferred stocks – have experienced massive losses; overnight LIBOR spiked over 300bps to over 6% as panicky investors seek the safety of cash while the Fed lost control of the Fed Funds rate yesterday as the liquidity demand push such rate from the target of 2% to over 6%; the financial turmoil is becoming global with stock markets all over the world plunging.

Worst of all policy authorities are now running out of bullet and going towards desperate measures that will end up being counterproductive.

• 房地产跌30%，股市跌40%，

Now that the collapse of Lehman is leading to the risk of the generalized run on the shadow banking system (the other independent broker dealers, the broker dealers that are part of larger commercial banks such as Citi and JPMorgan, hedge funds, private equity funds, the remaining SIVs and conduits, money market funds, other smaller broker dealers) the policy reaction is to try to build a new set of levies while the financial perfect storm of the century has destroyed the first sets of levies. This reaction includes the following steps.

First, the Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.

Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit. Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.

Third, an attempt to bail-in the private sector and provide a private lender of last resort support of the financial system is at work: ten major global banks will each fork $7 billion to create a $70 billion fund; each of these firms could borrow up to a third of such fund or $23 billion. But this private lender of last resort (LOLR) facility will not work since if any firm were to access this facility in case of a run on its liabilities panic will ensue – as the use of it will signal severe trouble - and the run will continue. The IMF created a similar facility to deal with liquidity runs on sound and solvent but illiquid countries; but no country ever used or even signed up for such facility as it would have been associated with “stigma”. Also such private LOLR facilities need to come with rules on their use (“conditionality”); otherwise an illiquid and insolvent broker dealer could access the facility with no restrictions and bankrupt the fund and the other members of the fund. But the new facility apparently does not come with any conditionality; so it is flawed in its design.

Fourth, since Lehman is bust the new line of defense was the takeover of Merrill by BofA. After taking over the insolvent Countrywide now Ken Lewis is making another reckless gamble by taking over at a vastly inflated price another distressed broker dealer. This is dangerous behavior for BofA. The lesson for Mack of Morgan Stanley and Blankfein of Goldman is that they should find a buyer today. After the collapse in six months of three major broker dealers Morgan Stanley and Goldman will be next unless they find a large financial institution with a large commercial bank that provides stable FDIC-insured deposits. As predicted here months ago no independent broker dealer will survive.

Fifth, the Fed may cut the Fed Funds rate and discount rate today. But this policy rate cut will make no difference to the fundamental solvency and credit problems of the economy. The economy does not suffer only of illiquidity; more seriously it suffers of severe credit and solvency problems that the Fed cannot address in any way.

Therefore any rally from Fed actions today will be short lived. When Bear was rescued the financial market rally lasted two months; when in July the Fannie and Freddie legislation was proposed the rally lasted a few weeks; when the actual nationalization of Fannie and Freddie occurred a week ago the rally lasted only one day. The ability of policy authorities to prop financial markets is rapidly eroding as market participants perceive that policy makers are desperate and running out of options. At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck.

PBS (Sept 15, 2008): Uncertainty Hits Wall Street After Lehman, Merrill Meltdown ([URL=http://www.pbs.org/newshour/video/module.html?mod=0&pkg=15092008&seg=2

]click for video[/URL])

Bloomberg (Sept 15, 2008): Reshaping Wall Street (click for video)

Charlie Rose (Sept. 15, 2008): A discussion about the crisis on Wall Street (click for video)

Advisor Perspectives: Our Interview with Nouriel Roubini

The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to

Financial Disaster

by Nouriel Roubini

February 5, 2008

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past

January? It is true that most macro indicators are heading south and suggesting a deep

and severe recession that has already started. But the flow of bad macro news in mid-

January did not justify, by itself, such a radical inter-meeting emergency Fed action

followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a

“catastrophic” financial and economic outcome, i.e. a vicious circle where a deep

recession makes the financial losses more severe and where, in turn, large and growing

financial losses and a financial meltdown make the recession even more severe. The Fed

is seriously worried about this vicious circle and about the risks of a systemic financial

meltdown.

That is the reason the Fed had thrown all caution to the wind – after a year in which it

was behind the curve and underplaying the economic and financial risks – and has taken

a very aggressive approach to risk management; this is a much more aggressive approach

than the Greenspan one in spite of the initial views that the Bernanke Fed would be more

cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the “nightmare”

or “catastrophic” scenario that the Fed and financial officials around the world are now

worried about. Such a scenario – however extreme – has a rising and significant

probability of occurring. Thus, it does not describe a very low probability event but rather

an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as

likely - that this recession – that already started in December 2007 - will be worse than

the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession

of 2008 will be more severe for several reasons: first, we have the biggest housing bust in

US history with home prices likely to eventually fall 20 to 30%; second, because of a

credit bubble that went beyond mortgages and because of reckless financial innovation

and securitization the ongoing credit bust will lead to a severe credit crunch; third, US

households – whose consumption is over 70% of GDP - have spent well beyond their

means for years now piling up a massive amount of debt, both mortgage and otherwise;

now that home prices are falling and a severe credit crunch is emerging the retrenchment

of private consumption will be serious and protracted. So let us suppose that the recession

of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the

consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown

associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom

out any time soon. At this point it is clear that US home prices will fall between 20% and

30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of

household wealth. While the subprime meltdown is likely to cause about 2.2 million

foreclosures, a 30% fall in home values would imply that over 10 million households

would have negative equity in their homes and would have a big incentive to use “jingle

mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank).

Moreover, soon enough a few very large home builders will go bankrupt and join the

dozens of other small ones that have already gone bankrupt thus leading to another free

fall in home builders’ stock prices that have irrationally rallied in the last few weeks in

spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to

be as high as $250 to $300 billion. But the financial losses will not be only in subprime

mortgages and the related RMBS and CDOs. They are now spreading to near prime and

prime mortgages as the same reckless lending practices in subprime (no down-payment,

no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only,

negative amortization, teaser rates, etc.) were occurring across the entire spectrum of

mortgages; about 60% of all mortgage origination since 2005 through 2007 had these

reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not

just a subprime one. And losses among all sorts of mortgages will sharply increase as

home prices fall sharply and the economy spins into a serious recession. Goldman Sachs

now estimates total mortgage credit losses of about $400 billion; but the eventual figures

could be much larger if home prices fall more than 20%. Also, the RMBS and CDO

markets for securitization of mortgages – already dead for subprime and frozen for other

mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to

originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of

billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP

market has forced banks to bring back on balance sheet these toxic off balance sheet

vehicles adding to the capital and liquidity crunch of the financial institutions and adding

to their on balance sheet losses. And because of securitization the securitized toxic waste

has been spread from banks to capital markets and their investors in the US and abroad,

thus increasing – rather than reducing systemic risk – and making the credit crunch

global.

• 【讨论】“六个月之后不会再有投行存在了”。
• 【翻译】大萧条以来最严重的金融危机（三）
• 再次花谢，鞠躬。您可真是帮了大忙了。

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on

other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are

dozens of millions of subprime credit cards and subprime auto loans in the US. And again

defaults in these consumer debt categories will not be limited to subprime borrowers. So

add these losses to the financial losses of banks and of other financial institutions (as also

these debts were securitized in ABS products), thus leading to a more severe credit

crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout

the mortgage market and from mortgages to consumer credit, and from large banks to

smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake

on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such

losses are much higher than the $10-15 billion rescue package that regulators are trying to

patch up. Some monolines are actually borderline insolvent and none of them deserves at

this point a AAA rating regardless of how much realistic recapitalization is provided.

Any business that required an AAA rating to stay in business is a business that does not

deserve such a rating in the first place. The monolines should be downgraded as no

private rescue package – short of an unlikely public bailout – is realistic or feasible given

the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS

portfolios for financial institutions that have already massive losses. It will also lead to

additional losses on their portfolio of muni bonds. The downgrade of the monolines will

also lead to large losses – and potential runs – on the money market funds that invested in

some of these toxic products. The money market funds that are backed by banks or that

bought liquidity protection from banks against the risk of a fall in the NAV may avoid a

run but such a rescue will exacerbate the capital and liquidity problems of their

underwriters. The monolines’ downgrade will then also lead to another sharp drop in US

equity markets that are already shaken by the risk of a severe recession and large losses in

the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to

the subprime one. Lending practices in commercial real estate were as reckless as those

in residential real estate. The housing crisis will lead – with a short lag – to a bust in nonresidential construction as no one will want to build offices, stores, shopping

malls/centers in ghost towns. The CMBX index is already pricing a massive increase in

credit spreads for non-residential mortgages/loans. And new origination of commercial

real estate mortgages is already semi-frozen today; the commercial real estate mortgage

market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to

mortgages, residential and commercial, will go bankrupt. Thus some big banks may join

the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern

Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will

have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail.

But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective

nationalization of the affected institutions. Already Countrywide – an institution that was

more likely insolvent than illiquid – has been bailed out with public money via a $55

billion loan from the FHLB system, a semi-public system of funding of mortgage lenders.

Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and

growing. The ability of financial institutions to syndicate and securitize their leveraged

loans – a good chunk of which were issued to finance very risky and reckless LBOs – is

now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck

on the balance sheet of financial institutions at values well below par (currently about 90

cents on the dollar but soon much lower). Add to this that many reckless LBOs (as

senseless LBOs with debt to earnings ratio of seven or eight had become the norm during

the go-go days of the credit bubble) have now been postponed, restructured or cancelled.

And add to this problem the fact that some actual large LBOs will end up into bankruptcy

as some of these corporations taken private are effectively bankrupt in a recession and

given the repricing of risk; covenant-lite and PIK toggles may only postpone – not avoid

– such bankruptcies and make them uglier when they do eventually occur. The leveraged

loans mess is already leading to a freezing up of the CLO market and to growing losses

for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will

take place. In a typical year US corporate default rates are about 3.8% (average for 1971-

2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such

default rates surge above 10%. Also during such distressed periods the RGD – or

recovery given default – rates are much lower, thus adding to the total losses from a

default. Default rates were very low in the last two years because of a slosh of liquidity,

easy credit conditions and very low spreads (with junk bond yields being only 260bps

above Treasuries until mid June 2007). But now the repricing of risk has been massive:

junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate

default rates and the junk bond yield issuance market is now semi-frozen. While on

average the US and European corporations are in better shape – in terms of profitability

and debt burden – than in 2001 there is a large fat tail of corporations with very low

profitability and that have piled up a mass of junk bond debt that will soon come to

refinancing at much higher spreads. Corporate default rates will surge during the 2008

recession and peak well above 10% based on recent studies. And once defaults are higher

and credit spreads higher massive losses will occur among the credit default swaps (CDS)

that provided protection against corporate defaults. Estimates of the losses on a notional

value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to

$250 billion with a number closer to the latter figure more likely). Losses on CDS do not

represent only a transfer of wealth from those who sold protection to those who bought it.

If losses are large some of the counterparties who sold protection – possibly large

institutions such as monolines, some hedge funds or a large broker dealer – may go

bankrupt leading to even greater systemic risk as those who bought protection may face

counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely

the “shadow financial system” (as it is composed by non-bank financial institutions) will

soon get into serious trouble. This shadow financial system is composed of financial

institutions that – like banks – borrow short and in liquid forms and lend or invest long in

more illiquid assets. This system includes: SIVs, conduits, money market funds,

monolines, investment banks, hedge funds and other non-bank financial institutions. All

these institutions are subject to market risk, credit risk (given their risky investments) and

especially liquidity/rollover risk as their short term liquid liabilities can be rolled off

easily while their assets are more long term and illiquid. Unlike banks these non-bank

financial institutions don’t have direct or indirect access to the central bank’s lender of

last resort support as they are not depository institutions. Thus, in the case of financial

distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of

liquidity and inability to roll over or refinance their short term liabilities. Deepening

problems in the economy and in the financial markets and poor risk managements will

lead some of these institutions to go belly up: a few large hedge funds, a few money

market funds, the entire SIV system and, possibly, one or two large and systemically

important broker dealers. Dealing with the distress of this shadow financial system will

be very problematic as this system – stressed by credit and liquidity problems - cannot be

directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession –

rather than a mild recession – and a sharp global economic slowdown. The fall in stock

markets – after the late January 2008 rally fizzles out – will resume as investors will soon

realize that the economic downturn is more severe, that the monolines will not be

rescued, that financial losses will mount, and that earnings will sharply drop in a

recession not just among financial firms but also non financial ones. A few long equity

hedge funds will go belly up in 2008 after the massive losses of many hedge funds in

August, November and, again, January 2008. Large margin calls will be triggered for

long equity investors and another round of massive equity shorting will take place. Long

covering and margin calls will lead to a cascading fall in equity markets in the US and a

transmission to global equity markets. US and global equity markets will enter into a

persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit

derivative markets will lead to a dry-up of liquidity in a variety of financial markets,

including otherwise very liquid derivatives markets. Another round of credit crunch in

interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia

and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT –

Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of

investors’ risk aversion – will massively widen again. Even the easing of the liquidity

crunch after massive central banks’ actions in December and January will reverse as

credit concerns keep interbank spread wide in spite of further injections of liquidity by

central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation

and fire sales of assets at below fundamental prices will ensue leading to a cascading and

mounting cycle of losses and further credit contraction. In illiquid market actual market

prices are now even lower than the lower fundamental value that they now have given the

credit problems in the economy. Market prices include a large illiquidity discount on top

of the discount due to the credit and fundamental problems of the underlying assets that

are backing the distressed financial assets. Capital losses will lead to margin calls and

further reduction of risk taking by a variety of financial institutions that are now forced to

mark to market their positions. Such a forced fire sale of assets in illiquid markets will

lead to further losses that will further contract credit and trigger further margin calls and

disintermediation of credit. The triggering event for the next round of this cascade is the

downgrade of the monolines and the ensuing sharp drop in equity markets; both will

trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead

to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per

dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion

so far – will be unable to stop this credit disintermediation – (the move from off balance

sheet to on balance sheet and moves of assets and liabilities from the shadow banking

system to the formal banking system) and the ensuing contraction in credit as the

mounting losses will dominate by a large margin any bank recapitalization from SWFs. A

contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall

in asset prices and sharp widening in credit spreads will then be transmitted to most parts

of the financial system. This massive credit crunch will make the economic contraction

more severe and lead to further financial losses. Total losses in the financial system will

add up to more than $1 trillion and the economic recession will become deeper, more

protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the

credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will

exacerbate the financial and real economic distress as a number of large and systemically

important financial institutions go bankrupt. A 1987 style stock market crash could occur

leading to further panic and severe financial and economic distress. Monetary and fiscal

easing will not be able to prevent a systemic financial meltdown as credit and insolvency

problems trump illiquidity problems. The lack of trust in counterparties – driven by the

opacity and lack of transparency in financial markets, and uncertainty about the size of

the losses and who is holding the toxic waste securities – will add to the impotence of

monetary policy and lead to massive hoarding of liquidity that will exacerbates the

liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most

severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them

awake at night? The answer to this question – to be detailed in a follow-up article – is

twofold: first, it is not easy to manage and control such a contagious financial crisis that

is more severe and dangerous than any faced by the US in a quarter of a century; second,

the extent and severity of this financial crisis will depend on whether the policy response

– monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible.

I will argue – in my next article - that one should be pessimistic about the ability of

policy and financial authorities to manage and contain a crisis of this magnitude; thus,

one should be prepared for the worst, i.e. a systemic financial crisis.

The Decline of the American Empire

Nouriel Roubini | Aug 13, 2008

Recent economic, financial and geopolitical events suggest that the decline of the American Empire has started. After the collapse of the Soviet Union there was a brief period where the world switched from a bipolar balance of two superpowers to a unipolar world with one economic, financial, geostrategic superpower, or better, hyperpower, i.e the United States. But by now three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.

Let us explain how and why...

First, the US squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan and in its unilateralist foreign policy – including economic issues such as global warming - rather than relying more on its soft power of diplomacy and multilateralist approaches to global policy issues.

Second, regardless of mistaken US policies the rise of other economic and financial powers – the rise of China, the recent resurgence of Russia, the process of economic and political integration in the European Union, the emergence of India, and the rise of other regional powers such as Brazil, South Africa and Iran – implies that the relative economic, financial and geopolitical power of the US will be reduced over time. We are indeed slowly moving towards a multipolar world where there will be a balance of Great Powers rather than the hegemony of a single hyperpower. While on military terms the US is still the only superpower even its military power is now restricted by imperial overstretch and its armed forces being bogged down in Iraq and Afghanistan; thus, Russia has now been able to flex its muscle in its Central Asian backyard and humiliated the US – not just Georgia – in the latest conflict on South Ossetia. For the Bush administration having supported Georgia by words only and show its impotence – or unwillingness - to support an ally in spite of the administration push to have Georgia join NATO shows the limits of the American power. The US is at fault for effectively letting Georgia start a reckless attack on South Ossetia. Russia has scary and dangerous neo-imperial goals but deeply flawed US foreign policy of encircling a paranoid Russia allowed the worst nationalist tendencies of the Russian bear to reemerge.

Third, and more important, the US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits. The last time around the current account started to go into negative territory in 1991 after a brief surplus during the 1990-91 recession. In the 1990s the growing US current account deficit was driven by a private investment boom – the internet technological revolution – and thus the accumulation of foreign liabilities of the US was driven by FDI and M&A activity, i.e the US accumulated foreign liabilities in the form of equity rather than debt. But since 2001 the further worsening of the US current account deficit was driven instead by growing fiscal deficits - especially in the 2001-2004 period – caused by unsustainable tax cuts and by the buildup of spending on foreign wars and on domestic security and since 2002 by the collapse of household savings and boom in investment in unproductive stock of housing capital that the housing bubble induced. And while the weak dollar is now inducing a modest improvement of the external deficit the looming sharp increase in fiscal deficits - that the current recession and financial crisis is inducing - will cause a return of twin deficits in the coming years. By now the US is the biggest net borrower in the world – running current account deficits still in the 700 billion dollars range – and the biggest net debtor in the world with its foreign liabilities now over 2.5 trillion dollars.

The trouble with these twin deficits is multi-fold. First, superpowers and empires - like the British Empire at its peak - tend to be net lenders – i.e run current account surpluses – and be net creditors, not net debtors; The decline of the British Empire started in World War II when the British fiscal deficits in the war and the current account deficits turned that empire into a net borrower and a net debtor both in its public debt and external debt. That financial switch into an external debtor and borrower position was also the reason for the decline of the British pound as the leading reserve currency. And the British twin deficits were being financed by a rising economic and financial power that was a net lender and a net creditor, the US.

• 【讨论】“六个月之后不会再有投行存在了”。

Second, the last time the US was running large twin deficits in the 1980s the main financers of these deficits were the friends and allies of the US, i.e Japan, Germany and Europe as the US external deficit was against these economies. Today instead the economic powers financing the US twin deficits are the strategic rivals of the US – China and Russia – and unstable petro-states, i.e Saudi Arabia, the Gulf States and other shaky petro-states. This system of vendor financing – with these US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.

Third, while it is unlikely that China, Russia and other powers would suddenly pull the rug from under the US feet – as such action would lead to a sharp appreciation of their currency and negatively affect their export led growth model – relying excessively on the kindness of strangers – especially that of your strategic rivals – is extremely risky. Since almost 100 percent of all US fiscal deficits since 2001 have been financed by non-residents – as US residents net holdings of US Treasuries have been flat since 2001 - by now the total stock of US Treasuries held by non-residents is getting close to 60 percent. And the foreign financing of the US current account deficits has also become more risky: less FDI and equity, more debt, more short term debt, more debt held by official political actors – central banks and sovereign wealth funds – , less debt held by foreign private investors, and more debt held by politicals rivals rather than allies of the US. This change makes the US vulnerable to such rivals using the financial terror weapon – dumping US assets and or reducing their financing of the US twin deficits – in situations of geostrategic tension.

Suppose Russia flexes further its muscle in its backyard – under the pretense of defending abused Russian minorities in Ukraine, the Baltics and other former Soviet Union or Iron Curtain countries. Then Russia could use its financial power – the ability to dump hundreds of billions of dollar assets – to exert both financial and military influence. So could China over time if trouble in Taiwan or other disputed Asian territories become big geopolitical issues. Russia and China are already winning the new war for the control of commodities and ressources through their investments in Africa and Latin America - in the case of China – and its domestic and foreign control of energy and pipelines in Central Asia in the case of Russia. China and Russia are indeed winning the new Scramble for Resources.

Fourth, the foreign creditors of the US are getting tired of financing the US in the form of low-yielding US Treasuries. Thus the switch of such reserve holdings to SWFs that are planning to make large equity investments possibly with actual control of corporate firms and financial institutions that are desperate for capital to recapitalize themselves. But this desire of our creditors to get equity investments – the gems of the US corporate world - rather than low yield debt instruments is hitting the political backlash of financial protectionism as the UNOCAL- CNOOC, the Dubai Ports cases and the likely protectionist reform of the CIFIUS process of approving FDI in the US suggest. But a country that needs to borrow from abroad 700 to 800 billion dollar a year to finance its external deficit cannot afford to be too choosy on the ways – equity rather than debt – that its lenders and creditors want to finance those deficits. The first rule of good manners if you are a guest is that you don't spit on the plate from which your host is feeding you. But in its creeping financial protectionism the US thinks it can dictate to other countries the form and the terms of the financing of its twin deficits. This attitude will not be allowed by such creditors to last much longer.

The ensuing decline of the US dollar as the main reserve currency will take time and will not occur overnight; but it is inexorable given the relative fall in US economic, financial and geopolitical power. Already Russia is flexing its muscle and pushing for an international role of the ruble; the euro is rising as a major reserve currency; central banks and SWFs will slowly but surely start to diversify away from dollar assets especially as the Bretton Woods 2 regime starts to unravel; and even the RMB may become the dominant currency in Asia in the next decade as capital controls are slowly removed in China. It will take little time – if the secular decline of the value of the dollar continues – for oil and other commodities to be priced in currencies other than the dollar or in a basket of currencies.

All these changes in the economic, financial, reserve currency and geopolitical role and relative power of the US will not occur overnight. But the trend is clear. The rise of the BRICs and other emerging market economies; the continuation of the process of economic and political integration in Europe; the US policy mistakes in economic, financial and foreign policies will steadily erode the power of the American Empire. This process will not be sudden and will take a couple of decades. But the trend is clear: the brief period of unipolar power of the American hyperpower is now over and a new age of balance of great powers is starting in the world. Also, the rise of non governmental actors – multinational corporations, NGOs, terrorist groups, non-nation state powers, failed and unstable states, non-traditional global players – will radically change the traditional balance of power as the power of nation states will shrink relative to that of other global players.

Whether the decline of an hegemonic power providing global public goods – security, free trade, freer mobility of capital and people, inducements to free markets and democracy, better environment, peace – will lead to a more stable world with many powers multilaterally cooperating on these global economic, financial and geopolitical issues; or whether the absence of such stable hegemonic power will lead to a more unstable world characterized by conflicts – economic, political and even military – among traditional nation states, great powers and non-traditional actors is an open and difficult issue. But it is certain that the decline of the American Empire has started.