Fundamentals for the 25th of September, With Bush and Gordon Brown meeting...

Gordon Brown is to fly to Washington tomorrow for emergency talks on the international financial crisis with his US counterpart, George Bush, at the White House.

The unscheduled talks follow the British prime minister's announcement today that he is publicly backing the controversial US $700bn plan to bail out Wall Street, saying action was required to "get these bad assets out of the system as quickly as possible".

Speaking in New York, where he is meeting a series of world leaders
to discuss both the credit crunch and efforts to meet the UN's millennium development goals, Brown said the financial package, set to be considered by Congress, was vital to restore stability.

The prime minister is finding his trip to the UN general assembly increasingly diverted towards the financial crisis, although he is also trying to make sure his original agenda of extra cash for Africa from both public and private sector is not squeezed out altogether. Brown is hoping to hear an extra £7bn in commitments.

He held a breakfast today with 19 big asset fund managers from Wall Street at the Waldorf Hotel, including chief executives from Goldman Sachs and George Soros, head of Soros Fund Management. Unlike Brown, Soros is opposed to the bail-out plan proposed by the US treasury secretary, Henry Paulson.

But Brown said: "It is necessary to get these bad assets out of the system as quickly as possible. We need to make sure we stabilise the financial system immediately.

"We support and welcome the American Resolution Trust Corps. Let us make sure this never happen again. It is important that we support the American action."

Brown said he was not going to discuss Congressional opposition to aspects of the plan, including the limit on salaries earned by executives whose companies benefit from it. "It is a matter of detail to be worked out by the authorities," he said.

He also claimed that many world leaders at informal meetings with him yesterday supported his plan for greater international supervision, largely based on proposals being mapped out by the financial stability forum, a group of bankers, regulators and treasury officials from more than 30 countries.

Brown discussed the plan last night with leaders, including
Spanish prime minister Jose Zapatero, European commission president Jose Barrroso, Australian prime minister Kevin Rudd, Brazilian president Luiz Inacio Lula da Silva and Danish prime minister Anders Fogh Rasmussen.

The prime minister is fighting for a multi-part package but has no meeting scheduled with senior US Treasury figures as they battle in Washington over the bail-out package.

Brown has called for international regulation, greater transparency and responsibility in executive bonuses to encourage longer-term decision making. He believes the IMF, working with the Financial Stability Forum - a group of central banks, regulators and international bodies - "should be at the heart of an early warning system for financial turbulence affecting the global economy". The forum is due to report on a proposal in autumn.

He has also been privately testing the water to see whether there are grounds for restarting world trade talks in the near future.

Initial polls suggest Brown's standing in the polls has been boosted by his promise in his Labour party conference speech this week to be a rock of stability in the credit crisis.

He will, however, be aware that the economy can swing votes massively, and will have witnessed the Democratic presidential candidate, Barack Obama, enjoying a poll surge as the Republicans suffer from the incumbency factor.

Brown insists he has done everything he needed to increase liquidity in UK markets, and privately complains the crisis could have been minimised had his proposals on international regulation been implemented earlier.

He says his form of risk-based regulation has worked, but the scale of the new financial instruments outwitted the regulators.

Brown is concerned the costs of the credit crisis, as well as the economic down turn, will mean the developed world turns off the tap on funding to alleviate poverty. He has been working on ambitious packages on education, health and eradicating deaths from malaria by 2015.

Pound for How Long?

After discussions last week and the Labor party annual conference we have this big question, when is the United Kingdom going to join the Euro? Answering to this question, the Prime Minister Gordon Brown said: “We will join when the time is right”.
Taking into account the financial meltdown and the currency fluctuations Britain will stay relying on pound stability, but another senior British Laborist MEP, without shadows of doubts, that “the economic downturn in Britain would be so protracted and the slump in the pound so profound that the next government would take steps to join the Euro.”
So maybe we don´t need to worry in the short term, but the strength of a currency relies on its credibility, now people won´t be sure how the GBP is going to behave, therefore investors, brokers and forex traders have to keep both eyes wide open and use all the tools in order to make the right decisions when trading GBP.

REFLECTIONS

“I think therefore I am.” That was the one certainty the philosopher Descartes could find after he set himself a discipline of radical doubt – trying to doubt everything, so that he would be left only with what was certain, starting with his own existence.
This exercise is useful after a week that changed the parameters of global capital markets, probably for generations. More news of huge import will come this weekend, as politicians in the US try to hammer out a rescue vehicle for the US mortgage market.
After this week, is there anything we cannot doubt?

New Fundamental, specially for the GBPUSD and GBP EUR

The woes of financial sector are likely to squeeze the wider UK economy even more powerfully than had been expected, while the other threat to growth – that from inflation – appears to be subsiding, according to Sir John Gieve, deputy governor of the Bank of England.

Speaking to a conference in London on Monday, Sir John’s remarks are likely to be interpreted as a sign that he is closer to supporting a cut in interest rates. He is a member of the Bank’s rate-setting Monetary Policy Committee and has so far not voted in favor of lower rates as the financial crisis deepened through the summer.

”The biggest risk to the financial sector is also the biggest downside risk to the economy; namely that damage to bank balance sheets would lead to tighter credit conditions, lower asset prices, lower consumption and investment and to a severe feedback loop into more losses for banks and so on down a spiral,” Sir John said in remarks prepared for the Family Offices Leadership Summit.

Sir John, the deputy governor in charge of financial stability, said that the Bank had been preoccupied for much of this year with the need to combat high and rising inflation, adding that in more ordinary times its single biggest concern would have been two successive letters to the chancellor to explain why inflation is so far above target.

Moreover, he said that peak inflation had not even yet arrived, and when it did, it would be around 5 per cent, compared with a medium term target of two per cent.

“But so long as the prices of wholesale energy and foodstuffs on global markets stabilize at their new higher levels, their direct impact on inflation should wash out after one year,” he said.

But the news from financial markets was very worrying, and indeed, the squeeze on banks that the MPC had been counting on to hold inflation in check could prove even more powerful than expected.

He warned that while falling house prices amounted to a redistribution of wealth rather than a loss of wealth overall – a line several Bank officials have taken in response to demands for lower interest rates – he said that housing woes would seep into the wider economy.

In addition to the need to service more expensive credit, households may increase savings rates in the expectation that they will not be able to borrow as freely.

Sir John set out a robust defense of measures the Bank has taken so far, noting that monetary policy is a crude instrument for dealing with imbalances such as mispriced risk in the credit markets.

“It is hard to believe that a somewhat tighter monetary policy would have been guaranteed to head off the credit boom and subsequent crunch altogether,” he said.

He also urged reform to bank capital and liquidity measures to put in place counter-cyclical rules. These would require banks to add more, not less, capital when their balance sheets were strong. This, in turn, could be drawn upon when losses arose, he said.

Fundamentals, Why the Government Wouldn't Let AIG Fail By Justin Fox Tuesday, Sep. 16, 2008

After establishing a supposed hard line against bailouts over the weekend with Lehman Brothers, the government abruptly abandoned it Tuesday and announced an $85 billio Federal Reserve loan to insurance giant AIG. The explanation: AIG was deemed too huge (its assets top $1 trillion), too global and too interconnected to fail.

That, and the fact that unlike with Lehman — where the possibility of failure was openly discussed for months and to a certain extent planned for — federal officials and market participants don't seem to have really focused on AIG's problems until this week. As with all U.S. insurers, the company is regulated not by the Fed but by a state regulator, in this case New York insurance superintendent Eric Dinallo. Plus, it was awfully hard for outsiders — and even insiders — to understand the gravity of the company's problems. "You can read through every financial statement in the world and have absolutely no clue as to the risks they are taking," says Leo Tilman, a former Bear Stearns strategist who now runs the advisory firm L.M. Tilman & Co.

The particular risks that brought the company to the brink of bankruptcy seem to lie not with its core insurance businesses but with its derivatives-trading subsidiary AIG Financial Products. AIG FP, as it's called, merits a mere paragraph in the nine-page description of the company's businesses in its most recent annual report. But it's a huge player in the new and mysterious business of credit-default swaps: derivative securities that allow banks, hedge funds and other financial players to insure against loans gone bad.

AIG generally sells credit-default swaps, thereby promising to insure others against defaults. It's a great business when defaults are low; when they rise it can turn toxic. AIG FP lost more than $10 billion in 2007 and $14.7 billion in the first six months of this year. That, along with losses in other investment portfolios, has cut deeply into the parent company's capital reserves. The credit-default-swap contracts decree that if AIG's credit rating drops below a certain level, it has to fork over $13 billion in collateral to the buyers of the swaps. Monday night, because of the losses at AIG FP and in AIG's investment portfolios, Moody's and S&P cut the company's ratings. After that, the consensus was that the company could survive only another day or two.

The New York Fed asked Goldman Sachs and JPMorgan Chase & Co. to try to arrange a $70 billion private loan for AIG, but that didn't go anywhere. Treasury officials mulled a government conservatorship as with Fannie Mae and Freddie Mac, but it might have required an act of Congress to make that happen. So the Fed devised a deal in which AIG agrees to repay the loan with asset sales and give the government (and thus taxpayers) a 79.9% equity stake in the company.

Confused? You're not alone. The best case for the bailout seems to be that nobody has the faintest idea what the consequences of AIG's failure for financial markets would be, but the fear was that it could lead to total chaos. The biggest fears had to do with the credit-default swaps, which AIG appears to have sold in large quantities to practically every financial institution of significance on the planet. RBC Capital Markets analyst Hank Calenti estimated Tuesday that AIG's failure would cost its swap counterparties $180 billion.

"Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression,"wrote money manager Michael Lewitt in Tuesday morning´s New York Times. There's also the fact that through its insurance policies AIG touches far more regular Americans (and consumers around the world) than Lehman Brothers did. Plus, AIG's insurance businesses make so much money that they could conceivably pay off the cost of the bailout within a few years.

A link worth to read...

http://forextrue.wordpress.com/