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bkkandrew

No - it is the Internet savings division (as was) and had customers from all over Northern Europe. It did have a branch in the UK, but had many others, even one in Gibralter.

bkkandrew

...And I wonder what the odds are on it not opening then?

Article

bkkandrew

Oh dear - it seems many Icelanders took out EURO and USD denominated loans to avoid high domestic rates. Now their currency has collapsed they have no hope of meeting repayments.

IcelandReview - Online

I wonder where I have heard of that phenominen before.

bkkandrew

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall.

Officials at the central bank declined to comment, while finance ministry officials did not respond to calls or questions via fax seeking comment. Data in a study by the Bank of International Settlements based in Basel, Switzerland, sometimes called the central bank for central banks, shows that many central banks had small capital bases relative to foreign reserves at the end of 2002, though few were as low as the People’s Bank of China.

Given the poor performance of foreign bonds, the Chinese government could decide to shift some of its foreign exchange reserves into global stock markets.

The central bank started making modest purchases of foreign stocks last winter, but has kept almost all of its reserves in bonds, like other central banks.

The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value.

The central bank’s difficulties do not, by themselves, pose a threat to the economy, economists agree. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.

The actual declines in value of the central bank’s various investments are a carefully guarded state secret.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.

China spent more than one-eighth of its entire economic output last year on foreign bonds, and then picked up the pace during the first half of this year. Chinese officials have suggested in recent comments that they are increasingly interested in stopping the yuan’s rise, and thus are willing to continue buying foreign securities to support the dollar. In fact, the yuan weakened slightly against the dollar last month after 26 consecutive months of gains.

Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion.

Some bond traders suspect that the central bank has scaled back its purchases of these securities, as have China’s commercial banks. But the central bank trades this debt through many third parties in many countries, making its activity opaque to outside analysts.

The central bank has gone to great lengths to maintain its foreign purchases. The money to buy foreign bonds has come from the reserves required that commercial banks must deposit with the central bank. In effect, China’s commercial banks have been lending the central bank more than $1 trillion at an interest rate of less than 2 percent.

To keep the banks strong when they were getting such little interest on their reserves, the central bank has kept deposit rates low. The gap between what banks are paying on deposits and the rates they are charging ordinary customers to borrow is several percentage points. This amounts to a transfer of wealth from ordinary Chinese savers to the central bank and on to Americans who are selling their debt to the Chinese.

The central bank is now under considerable pressure to reduce the commercial banks’ reserve requirements to encourage growth as the Chinese economy shows signs of slowing.

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.

From:

Main Bank of China Is in Need of Capital | HeraldTribune.com | Southwest Florida's Information Leader

(My bold) Oh dear me. 200 Aircraft Carriers eh?

bkkandrew

AIG May Tap $37.8 Billion From Fed, on Top of $85 Billion Loan


By Hugh Son and Erik Holm




Oct. 9 (Bloomberg) -- American International Group Inc., the insurer taken over by the government, may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion loan that helped it stave off bankruptcy.

AIG can swap as much as $37.8 billion of its ``investment- grade, fixed-income securities'' for cash to ``replenish liquidity'' at the New York-based insurer, the Fed said late yesterday in a statement. AIG spokesman Nicholas Ashooh said the assets were held mainly in U.S. life insurance subsidiaries and declined to say how much of the new program has been used.

``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG.

Continued here:

Bloomberg.com: Worldwide

You're in for a dime, you're in for a dollar on this one - you certainly are!

Spin

^AIG have used up $61 billion of the initial $85 billion so an extra 38 billion is a timely top up to keep things ticking over for a while longer.

A year ago today the Dow jones Industrial Index hit record highs of 14,164. Todays trading saw the 9000 level taken out and 8850 was touched.

Oil, whose price now trades in sympathy with the dow and spx fell below a key support level of 87 and now can in theory fall unimpeded easily down to the 75$ level.

bkkandrew

It would probably be cheaper to light a bonfire of $100 bills and keep feeding it with them on the Whitehouse lawn.

Indeed:

U.S. Stocks Tumble, Sending Dow Below 9,000; GM, Insurers Slide

By Lynn Thomasson

Oct. 9 (Bloomberg) -- U.S. stocks slid and the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis.

General Motors Corp. tumbled as much as 22 percent, heading for its lowest close in 58 years, and Ford Motor Co. slumped 12 percent. XL Capital Ltd., the Bermuda-based insurer, lost as much as 60 percent on concern investment losses will weigh on results. Exxon Mobil Corp. led the Standard & Poor's 500 Energy Index to its lowest level in two years, while a gauge of financial stocks sank to an almost 12-year low as the three- month Libor rate climbed to the highest of the year.

``Nobody living today has been in a market environment like this,'' said Robert Schaeffer, a money manager at Becker Capital Management Inc. in Portland, Oregon, which oversees $2 billion. ``People are flying blind.''

Continued here:

Bloomberg.com: Worldwide

bkkandrew

Tomorrow sees the Lehman CDS Settlement Auction.

Now, Butterfly thinks that Lehman are still alive and well, so he can ignore this post. For those in the real world, we have a massive event tomorrow:

FACTBOX-Lehman CDS settlement auction timeline


NEW YORK, Oct 8 (Reuters) - The value of credit default swaps backed by defaulted Lehman Brothers bonds will be set on Friday, with protection sellers expected to face massive losses of around 90 percent of the insurance they sold.
Bondholders have seen their investments virtually wiped out by Lehman's bankruptcy filing on September 15, with most of the defaulted bonds which will be used to settle the swaps trading in the area of 12-to-13 cents on the dollar, according to MarketAxess.

The auction to settle credit default swaps on this debt will likely be the second-largest settlement of the contracts in the $55 trillion market, following an auction to settle swaps on Fannie Mae and Freddie Mae on Monday.

Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan.

9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.

10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.

12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published. (Reporting by Karen Brettell; Editing by Chizu Nomiyama)

From:

FACTBOX-Lehman CDS settlement auction timeline | Markets | US | Reuters

So, the day of reckoning, insurers of Lehmans debt pay up (or not). Perhaps, when they examine their lack of funds, they will try the Butterfly approach:

Policyholder: You must pay up - you insured Lehman's bonds!
Butterfly: No way! Lehman are not bust...
Policyholder: But........
Butterfly: Technically they are restructuring. Business as normal, don't you see? Perhaps record profits this year. Amazing, wonderful! What was the question again?
Policyholder: Are you OK?
Butterfly: Wibble.

Butterfly

^ for someone proficient in bankruptcy laws as you previously claim, you surely missed the bond pricing issue,

during the Chapter 11 phase, interests payments will default, that's normal, and the bond price of the issuer will crash, also normal.

What you don't know about is the recovery phase, and this is where a lot of money is made in bonds. Basically you buy those bonds when their ratings are "D" and when the company emerges from Chapter 11, their ratings are gradually restored. There is still a liquidity issue of the bonds as fewer dealers will make a market for them, but you still could make a bundle with those. Of course, there is risk attached to this process, but the returns are worth it. The recovery rate is historically high for high quality corporate bonds, so overall complete default is quite rare.

Will it be the case with LBH ? we will know for sure once they emerged from Chapter 11.

Butterfly

well, IceSave only operates in 2 countries, the UK and Netherlands, so I doubt very much your claim that the Internet Bank was providing 70% of the deposits for the parent bank, from only 2 countries, above all when the Netherlands Branch was just opened this year. So in technical terms, ICESAVE was mostly a UK Internet Branch and only affected UK depositors (5b BP) and even if some depositors were nationals of a different country, they are still considered UK depositors as they contracted with IceSave UK. It's as simple as that. So the total amount for those deposits is still 5b BP, that is less than 16% of the parent bank total assets.

Thanks for playing,

Butterfly

Well actually, I found their parent bank annual report on the Internet, and the only reference to 70% was about their loan/deposit ratio, no mention of IceSave UK providing 70% of their deposit, so again this is another of your myths

http://www.landsbanki.is/Uploads/Doc...eport_2007.pdf

who

bkkandrew

Well done, you have been furiously googling for house just to prove my point - page 58 (if you had a copy on your desk you could have just turned to it).

I quote:

bkkandrew

bkkandrew

If you actually could read, you would find a few more than 2 countries:

Butterfly

^ link ? not from their website

confusing IceSave with the parent bank again !!!

From your own quote, I know you can't read and count

that's for the parent bank, not IceSave, they have branch in many countries

Thanks for playing,

bkkandrew

^They have defaulted on all foreign depositors. That was the issue at hand. Go and get a calculator.

bkkandrew

http://www.landsbanki.is/Uploads/Doc...eport_2007.pdf

I have jumbled up the order so you can waste more time studying the report.

bkkandrew

"DETROIT (Reuters) - General Motors Corp shares plunged to their lowest level since 1950 on Thursday as concerns mounted that an industry decline that started in the United States was spreading and a leading forecaster warned global auto demand could "collapse" in 2009."

More at:

GM shares drop to 58-year low, global risks eyed | Reuters

bkkandrew

Iceland teeters on the brink of bankruptcy



REYKJAVIK, Iceland (AP) — This volcanic island near the Arctic Circle is on the brink of becoming the first "national bankruptcy" of the global financial meltdown.
Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy — from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world's highest per capita incomes. But now they are watching helplessly as their economy implodes — their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

"Everything is closed. We couldn't sell our stock or take money from the bank," said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik.

Continued here:

The Associated Press: Iceland teeters on the brink of bankruptcy

Perhaps we ought to send Butterfly there to explain to Johann Sigurdsson that everything is, in fact, fine!