Consumer confidence unexpectedly rose but it’s just before big events

The Conference Board's confedence index which published today rose to 59.8, but it may lead to a misunderstanding. Since the survey cutoff date was Sep. 23, look at what happened after that date:
As the environment has become pretty negative, the momentum will certainly turn down. Americans are likely to lose confidence heading into the presidential election if the tumoil continues.

A more conservative bailout

As the bailout plan was killed in House today, the chance to pass this plan eventually still remains. But the package would be reshaped.

The problem with the original Paulson plan is not merely the lack of direct equity injections but also too aggressive and risky. By purchasing junk securities at above market prices, the plan is indiscriminate in that the bail-out would apply to each bank with junk debt on its balance sheet. It would recapitalise the financial sector in its current form, dosen’t resolve the fundamental problem.

Besides, without a contraction in the financial sector, the US administration risks a debt explosion. Look at the Fed’s balance sheet, it remains a risk that a sudden withdrawal of foreign financial investors. So now American faces two risks from different ends: don’t rescue the financial sector would lead to the depression while a too big rescue package would lead to macroeconomic instability.

Why not learn from history? I already talked about the banking crisis in history and some of them would give us a good lesson.

As in the US, the Swedish financial crisis was also triggered by a property bubble, which was pricked by a rise in real interest rates. Severe stress in the financial system and the economy were to follow. In each of the three years 1991, 1992 and 1993 Swedish gross domestic product fell in real terms, at an accumulated rate of about 5 per cent.

In response, the Swedish government set up an agency to recapitalise the financial sector. But the Swedish government did not bail out all banks, only a subset. They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged. And those that were bailed out had to write off their bad debts first. All depositors were covered by an explicit government promise of compensation. The goal was to minimise the cost to the taxpayer. It turned out as one of history’s most successful financial system bail-outs.

So now the U.S. lawmakers or Paulsons would think about a package similar to Swedish one – a more conservative bailout package would help both sides reach a compromise. It shoud be a hard and painful job to tell good assets from bad assets as Swedish government did, but it’s worthwhile from taxpayers’ standing point. And in the long time, it would help U.S. economy recover soon as only trustable financial institutions stand in the market. So I think more banks with garbages will be gone in next week or so, just as blocks in the way should be removed.

Fiscal stimulus fades

This picture shows that fiscal policy could change fundamentals. The only areas fiscal policy may have impact are personal income and personal savings, nothing to do with consumption. U.S. consumer spending may deteriorate further, putting a shadow on the personal credit market. That's would be a disaster if that happens.

Interest on Reserve, new route for Fed?

Today Fed announced another $630 billion injection to market. The Fed's expansion of liquidity, the biggest since credit markets seized up last year will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders. On the other hand, the Fed's balance sheet is about to explode.

Under current procedures, any time the Fed has provided market liquidity by injecting reserves into the banking system, the increase in reserves has had to be ’sterilized’ by selling Treasuries, or conducting reverse repos. However, those means of sterilization threatened to run up against certain balance sheet constraints: The Fed now has less than $250 billion of Treasuries that it hasn’t lent out, and the Treasury’s overfunding could eventually bump up against the debt ceiling.

With interest on reserves, the Fed would not have to sterilize injections of reserves into the banking system. Normally, reserve injections need to be sterilized to prevent the fed funds rate from undershooting the FOMC’s funds rate target. With interest on reserves, wherever the Fed sets the rate on its deposit facility would effectively set a floor under the funds rate: anytime the effective funds rate would be below the deposit rate, banks would have an incentive to deposit excess reserves with the Fed. Excess reserves would be ’sterilized’ by banks depositing them with the Fed.

One proposed method would be like this: Fed set the deposit rate at the FOMC funds target rate and then inject massive amounts of reserves into the banking system — possibly by increasing TAF or similar facilities — and allowing the excess reserves to be deposited with the Fed at the target rate. Following such an operation, the Fed’s balance sheet would contain more risky assets and — on the liability side — more deposits and the monetary base would be roughly unchanged; the private sector’s balance sheet would contain less risky assets and more safe assets in the form of deposits with the Fed. The effect on the private sector balance sheet from the TARP is similar, though in that plan Treasury debt takes the place of Fed deposits.

This is regarded as an alternative route for Fed compared to direct bailout. Instead of buying bad assets in one step, Fed leaves himself a backdoor and increases its ability to expand its existing size of liquidity facility. But the key problem left here is how to determine the floor rate and how about the willingness of banks to deposit the money in Fed other than pursue other higher profitable investments?

Financial Crisis summary

A nice summary banking crisis in history via New N Economics:

Out of 42 systematic banking crises across 37 countries, despite the implementation of a wide range of policies, all resulted in the re-allocation of wealth away from taxpayers and towards debtors (banks). None avoided recessions and all recessions were severe.
There are always three phases in financial crisis:
(1) Initial Condition - macroeconomic conditions are usually weak before a banking crisis.
· fiscal balances are usually negative (-2.1% of GDP on average);
· current accounts are usually negative (-3.9% on average);
· inflation is high (137% on average);
· GDP growth is average (2.4% on average);
· non-performing loans tend to be high (25% of total loans on average).

In this case of U.S. financial crisis:
· In 2007, annual fiscal balances as a % of GDP were negative in the U.K. (-0.29%) and the U.S. (-1.36%)
· current account as a % of GDP was negative in the U.K. (-4.32%) and in the U.S. (-5.30%)
· GDP growth was 3.06% in the U.K. and 2.03% in the U.S.
· Exceptions: high inflation and non-performing loans (4.8% in the U.S.)

(2) Crisis Containment – emergency liquidity support and blanket guarantees are commonly used. In the 42 banking crises, 71% were complimented by new liquidity measures, while 29% included blanket guarantees on deposits.

In this case of U.S. financial crisis:
The U.S. Federal Reserve Bank (Fed) has extended its liquidity facilities since December 2007 when the first Treasury Auction Facility (TAF) was announced. In addition, the Fed has opened additional funding measures, the Term Securities Lending Facilities (TSLF) and the Primary Dealer Credit Facility (PDCF); both facilities accept a wide range of collateral from Depository Institutions (regulated by the Fed) and Primary Dealers in exchange for Treasury bills or direct funding.
The Bank of England (BoE) extended its lending facilities in April 2008. Like the Fed, and under the Special Liquidity Scheme, the BoE now accepts a wide range of collateral, including mortgage-backed securities in exchange for government bills and bonds for a one year term. Further, the government offered a guarantee on deposits at Northern Rock (mortgage lender in the U.K.) during its collapse.

(3) Crisis resolution – reduced regulation is often a theme in the resolution phase, but strict regulatory standards follow the resolution. This does not usually solve the problem, and often, a restructuring of the banking system occurs.

In 86% of the 42 crises, despite regulatory forbearance, governments were forced to intervene directly by closing banks, facilitating mergers, or nationalizations.

In this case of U.S. financial crisis:
Fed had a blind eye to the bad assets these banks hold. They tried to maintain phony asset prices to keep those institutions alive. An alternative way showed somehow success in Sweden is to let asset prices fall, strip out bad assets and sell them, combine and recapitalize the good pieces, and sell those to the public too. But U.S. government chose to come down the path which most of cases in history also proved failed.(all data is from IMF)

Overall, the current financial crisis in U.S. and U.K is not unusual in the world of banking crisis. The difference is this crisis is rooted and spread in developed market other than in developing market as most crisis stemmed from. In developed economy, a significant amount of capital is at stake. The current financial crisis puts $66.1 trillion, 40% of the world’s stock of capital at stake.

Now the U.S. financial crisis has hit the second phase and moved toward resolution phase. I think the financial sector cannot recover until U.S. housing market bounces. As we still forecast the housing market would reach bottom this year and will not become health until 2010, most of banks’ assets, especially mortgage-backed securities cannot restore their value for a long time. So the future for U.S. market is not good, and the total cost of this crisis will be high.

Brutal period for Asian hedge fund

Asia's hedge fund industry, one of the world's worst performers even before the latest surge in volatility, will see a major shake-out as the global financial turmoil shuts down a huge number of managers.

While the worst global financial crisis since the Great Depression was caused mainly by problems with the U.S. housing markets and investment banks, Asian hedge funds have actually done much worse than their U.S. and European peers.

Analysts said part of the reason for Asia's poor performance is that a larger proportion of managers use an equity-focused long/short strategy in which they mostly buy stocks they hope will rise, with a small proportion of short bets. U.S. managers are more likely to use complex and sometimes highly levered strategies like convertible bond arbitrage and trading volatility using options. Short selling has traditionally been more difficult in Asia, partly because less liquid markets make it more expensive and risky. So Asia-focused funds are often long-biased, collecting hefty fees in rising markets but offering little downside protection.

However, there should be no blow-ups, as Asian managers generally don't use much leverage.
In terms of size, funds with $500 million or more would be in a better position to survive on management fees alone. But just 10 percent of Asia-Pacific hedge funds manage $500 million or more.

The Asian hedge fund industry has been too hot for a couple of years, now it’s the time to lose some of the more entrepreneurial players that have come in at the margin.

A letter to Warren Buffett from former Lehman CEO

Mr. Fuld pointed out that: 'As such, our firm cannot fail in the traditional sense. The federal government’s balance sheet is impregnable'. But he unluckily did not get the money from Republican party.

Dear Mr. Buffett:

First off, I would like to thank you for meeting with me and my Lehman Brothers (LEH) team earlier this week. The opportunity to outline our plan to you personally was the highlight of my professional career. I know that it has been a few years since you had an office in Manhattan, and we aren’t asking you to take a chair and a desk, but your steady hand at Salomon Brothers is an example of what all of us on Wall Street are so desperately seeking in these difficult times.

As I clearly outlined during our meeting, I firmly believe that an investment in Lehman Brothers by Berkshire Hathaway is a classic opportunity for your great company to, once again, buy a fabulous global franchise at a very fair price. This isn’t at all like the situation that John Gutfreund put you in, and I recognize that you are wary given your previous experience. Wall Street has changed dramatically since 1991; it is far more of a franchise business that relies on capital than the “people” business that you were once used to. As you mentioned, the $700 million Salomon deal was the single largest commitment of your career at that point; and I take your point that such sums are now just the bonus pool for the commodity division

However, much has changed. Over the past year, our firm’s market capitalization has shrunk by more than $30 billion (about 75%). All of the shareholder wealth that we’ve created over the past 10 years has been completely erased in a matter of months, and yet our firm has never had brighter opportunities or a stronger safety net. This is the investment opportunity that we see for you and the rest of the Berkshire family. You have the opportunity to invest in the brokerage industry at prices not seen for a decade.

Our firm is poised to return to greatness, and many of Bear’s clients are coming our way.
Just the other day, a survey of U.S. institutional investors by Greenwich Associates found that “among the largest players, [Lehman and JP Morgan] scored highest in providing their [fixed income] clients the best support and understanding during the market turmoil.” This survey, conducted between February and April, also found that while JPMorgan (JPM) was found to have slightly more institutional trading relationships, Lehman Brothers had slightly more market share.

What this survey will confirm for you is that our trading desk has continued to serve our many international clients, even when other brokerage firms were pulling back. This bodes well for the next Bull Market.

I have spoken to both the Treasury Secretary and Chairman Bernanke, and they are prepared to assure you personally that Lehman will continue to have access to the Fed’s discount window for many years to come, if so required. As such, our firm cannot fail in the traditional sense. The federal government’s balance sheet is impregnable. This is an investment circumstance that rarely presents itself in the lifetime of any investor; even one as successful as your own.
We are very reluctant to raise capital at this juncture. Our recent $6 billion equity raise was intended to help us weather even the worst storm. I understand that some intermediaries reached out to you at that time, and that you rightly advised that your modus operandi was not to invest in a club format. I regret that anyone troubled you with the idea back in May, and recognize that by passing then, as you said in our meeting, you avoided suffering the 44% drop in our shares since that deal was announced on June 10th.

Your wisdom is clear. However, this time it will be different.

As we discussed, approximately $145 billion of long-term debt is outstanding including current year maturities of $18.5 billion with $8 billion of commercial paper. We have a plan to deal with these debt tranches, but recognize that a partnership with you would be a tremendous asset when we return to the debt markets. My Treasury team advises that we could save in excess of 200 basis points on our medium term paper if Berkshire agreed to be our strategic investor prior to commencing our current year debt refinancing activities.

The investors who joined our shareholder group in June recognize that much of what has happened over the past five weeks was unforeseen. But no one likes losses, paper or otherwise. That being said, they will be elated if you join their ranks, let me assure you of that. That old saying, “dilution is your friend”, rings even more true when the name “Buffett” is involved in the dilution.

My partners and I are prepared to consider a $5 billion convertible preferred investment, paying an 8% annual cash yield, with redemption and retraction rights in, say, 20 years. Our stock rallied yesterday on the back of the positive news out of Wells Fargo. However, with a sensible discount to yesterday’s closing price of $16.65, your firm would own approximately 33% of our Company, at closing. Naturally, we would very much want you to consider joining our Board of Directors at the earliest opportunity. Other names would be welcome as well.

As we both know, an announcement that Berkshire had agreed to invest capital in our firm would propel both LEH shares and the broader bank index. If yesterday’s rally is any indication, you could earn a 25% return in a single day merely on the news of your financial commitment to me and our franchise.

I appreciate that you have been displeased with the role that you believe Wall Street has directly played in the credit crisis of the past 12 months. I noted that, during our meeting, you specifically named Lehman and Bear Stearns as two of the financial institutions that were at the forefront of the growth in the CDO, CLO, ABS, subprime and credit swap markets.

As you know, the job of an investment bank is to bring to market the products that the market wants to buy. Although we pride ourselves in our Top Five ranking in the M&A tables, the fees generated on advisory assignments pale in comparison to the revenue that flows from the underwriting side of our industry, whether it is equity, structured products or debt. I took your point that Wall Street must play a “quality control” role in the process of selling products to our clients, and I strongly believe that we did our utmost on that front.

We were so convinced that these vehicles were money machines that we bought them for the accounts of our own captive hedge funds. We put our money where our mouths were.
I understand that you are also dubious about the long-term capability of the hedge fund industry to produce returns that exceed your sense of market norms. I have two points to make on that front.

Hedge Funds are a key revenue driver on our trading desks, and excellent Prime Brokerage clients as well. Up to 40% of our daily block trades are done for hedge fund clients. Moreover, our ability to create our own hedge funds has generated substantial fees from institutional investors and pension funds around the world. Although the recent SEC push to curtail some of the more attractive trading strategies of hedge funds such as ours may hamper our ability to beat the index, the fee streams that our funds generate are extremely valuable. Particularly at times, such as now, when the underwriting and advisory revenues are weaker than we would like.

However, if you would like a commitment from me to exit the hedge fund business, I will certainly recommend such action to the Board should you agree to our investment proposal. Although I am the leader at Lehman, I am always open to well-reasoned perspectives.
In summary, let me again thank you for agreeing to meet with us. I believe that you’ve been presented with a unique investment opportunity, and one that is sure to be successful. Your hallmark is to invest in top-notch management teams, and I humbly submit that we’ve demonstrated that we can navigate difficult waters.

With your financial commitment to our firm, the sailing will be smooth, and the entire U.S. financial services industry will benefit from the rising tide that would surely follow a commitment from Berkshire. The positive impact that would have on the economy is clear, which would directly benefit the rest of the Berkshire Hathaway portfolio of companies. This is a sure route for America to exit the recession that you believe we are experiencing right now.

Thank you, in advance, for your time and consideration. As Senator McCain said privately to me, and I passed along to you, “the country needs you,” and we are honored that you are considering this opportunity.

Yours Sincerely,

Richard Fuld,
Chairman and CEO
Lehman Brothers Inc.

Winner: U.K. banks?

To most people, the British economy looks the most exposed to the fallout from the credit crunch. And there is a lot of truth in that view. The U.K. is experiencing a nasty slump in its property markets. Government and personal debt levels are out of control. With unemployment rising as well, a recession looks certain.

But as economies don’t always develop the way people expect, U.K. financial system may do well from the credit crunch. Besides, British retail banks made some timely deals which helped some international positions solid.

Barclays bought the North American business of Lehman Brothers Holdings Inc. for $1.75 billion. A bargain of the century. It establishes Barclays as a major force in U.S. capital markets.
Lloyds took advantage of the market chaos to merge with HBOS Plc, becoming a dominant bank in the U.K. saving-and-loan market. Lloyds paid with shares, no cash is changing hands. The 28 percent share of U.K. mortgage market will bring it huge profits once real-estate market stabilizes.

HSBC has sailed through the crunch and its shares have held their value this year. As its rivals get cut down, HSBC just looks stronger.

The capital market that emerges from the credit crunch is likely to be dominated by big retail banks, with relatively small and conservative investment banks attached to them. And the Europeans have far more experience of linking retail and investment banking than any of the U.S. lenders. U.K. banks have been doing it for generations. It also explained why I lost a bunch of money from my short position of GBP in foreign exchange market.

Mexico Bailout Mistakes

As U.S. lawmakers are under pressure to vote the $700 billion rescue plan, there is an unsuccessful government in history which may make U.S. to pay attention:

Mexico decided to buy bad debt from banks that faced failure after the currency fell as much as 65 percent in December 1994 and Treasury-bill rates shot up to more than 80 percent. The government wasn't able to ease the credit crunch, and the Mexico's bailout, which the government said was needed to protect savings and homeowners, ended up costing taxpayers an estimated 20 percent of gross domestic product and slowed growth as credit dried up for consumers and small businesses instead of being re-activated.

The government issued Treasury notes to buy the bank loans at book value and then got pennies on the dollar with they resold them. Meanwhile, Mexican banks profited on the Treasury bills they received in exchange for bad loans, giving them a steady source of income and less incentive to provide loans to small businesses and consumers. Credit plummeted for more than a decade, delaying a recovery in wages and employment. The banks' outstanding loans dropped by more than half to 1.08 trillion pesos at the end of 2004 from 2.22 trillion pesos a decade earlier. Consequently, the biggest asset in their balance sheet was government paper and made a lot of money on these instruments.

Many Mexicans stopped paying on home, car and other loans after the government announced it was bailing out the banks, creating a phenomenon that Mexican bankers at the time labeled the ``culture of not paying.'' The ridiculously lasting legacy of the Mexican crisis is that credit functions dried up because of this culture of not paying. That's what Washington needs to be the most on the lookout for.

The lack of capital in the Mexican financial system finally was resolved when foreign banks, such as Citigroup Inc., Banco Santander SA and HSBC Holdings PLC bought the country's four largest banks. It altered Mexico's financial system, eventually putting the country's four largest banks and 77 percent of all banks by assets in foreign hands.

The Mexican rescue was much more wild and disorderly than expected. Also it lent a lot to corruption because it was open-ended. Although Mexico suffered such a pain for a long period, the country did end up with tougher regulations that put the banks on more solid footing and the banks are now in very good shape.

Many of the mistakes happened in Mexico were rooted in a lack of oversight, and there's a basic similarity to U.S., in the sense that the federal government is attempting to have an extremely broad capacity to conduct all types of activities with very weak oversight by Congress. Learn from failure? Let’s see.

Hedge fund retreated to money market fund

Hedge funds charge hefty fees for sophisticated trading strategies aimed at outperforming the wider market, but according to a report from Citigroup, hedge funds are estimated to have now placed $600bn in cash, and that $100bn of this is held in simple money market funds typically used by investors seeking safe rather than spectacular returns.

Analysts say the extent of hedge fund investment in money market funds shows how scarce attractive investment opportunities and safe havens have become.

US mutual fund managers are also holding near to record levels of cash. The average actively managed stock fund has 5.4 per cent of its portfolio in cash, according to Morningstar.

However, those money funds became embroiled in the wider financial crisis to the point that the US Treasury was forced to offer a blanket guarantee on them as part of its attempts to prevent the spillover of the financial crisis into the $3,400bn sector.The extreme measures taken by the Treasury followed mounting fears that retail investors in the sector could be starting to panic and might withdraw funds on a large scale.

Asian “T-bill” bailout?

Conventional wisdom maintains that China, Japan, and other countries that run trade surpluses with the US, which means they fund our overconsumption by buying assets like US Treauries, would never restrict the flow of credit to us because it would lower their exports and hurt their growth. The fact is: the foreign funding sources aren't just lending U.S. money to buy their goods; they are also providing the funding for interest on the loans extended for past imports. At a certain point, the interest payments become so large relative to the value of the exports that such kind of deal no longer makes sense.

The day of reckoning may be approaching. And the trigger is much simpler. The Freddie/Fannie conservatorship, the Lehman bankruptcy, the rescue of fallen AIG and the coming 700 billion rescue plan has, not surprisingly, lead to a reassessment of the US's creditworthiness

“Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse,” said Yu Yongding, advisor to China Central Bank, "We are in the same boat, we must cooperate," Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.'' Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return.

New directions in asset allocation

Traditional asset allocation thinking by institutions was that equity exposure should dominate; and certainly many long-term studies pointed to the return advantages of equities versus other asset classes. However, we have seen a fundamental shift in asset allocation thinking prompted by the three-year bear market in equities from 2000 – 2002 and a substantial decline in interest rates. There is a movement away from equities as the sole source of return generation, a search for better beta diversification in the policy mix.

For all types of institutional investors, a desire to rely less on equities generated greater interest in alpha as the new source of return opportunity. Hedge funds became popular as the ultimate expression of alpha, and manager flexibility and transportable alpha emerged more prominently as a way of harnessing returns. The bear market also prompted investors to seek better beta diversification in their policy mix. In addition to alternatives like hedge funds and private equity, we are also seeing growing interest in unconstrained or “go anywhere, do anything” portfolios in a long-only format. Like “traditional” alternatives, these nonbenchmark-oriented approaches emphasize active risk to a greater degree than benchmark-focused.

I think a really pervasive decoupling of alpha and beta is still in the future. You could look at the use of hedge funds as a kind of separation of alpha and beta. A fundamental, desirable characteristic of a hedge fund is that the alpha risk taken is enough to offset the beta risk. So if the beta performance is down but the alpha risk is performing well, you can overcome the beta risk, because the alpha and beta risks are more fundamentally balanced.

As a result, there is willingness by a growing number of institutional investors to redefine their relationship with fund managers so that it’s not about beating a market-related benchmark, but rather taking on the institution’s overall investment objective. CRICO/RMF asked our fund managers to put together portfolios that target a certain level of return with the minimum risk possible and fund managers will find out that a significant amount of the total risk is active risk. It makes sense that you can get a better return-to-risk ration with a well-constructed alpha strategy than with a well constructed beta strategy.

Is high pay still worthwhile?

Can you imagine that people driving the financial sinking but they can still escape with a bag of gold? It’s time to take a closer look at pay and severance packages for CEOs at investment houses, banks and mortgage lenders, who perversely stand to benefit from the public's largesse.

Treasury Secretary Henry Paulson, today reversing his position, said he would accept limits on executive compensation in his proposed $700 billion rescue plan for the banking industry after an outcry from lawmakers. The remarks were a shift from comments yesterday, when he said introducing limits on pay would impede getting the fund started. Both Democratic and Republican legislators have insisted on some restrictions on compensation in return for the government buying devalued assets from financial companies.

Don’t forget that Mr. Paulson is former chairman of Goldman Sachs. Paulson received an $18.7 million cash bonus for the first half of 2006, and in 2005 he was the highest paid chief executive officer on Wall Street, reaping $38.3 million in salary, stock and options. He had also accumulated 3.23 million shares of Goldman's common stock worth $492 million, plus restricted shares worth $75.2 million and options to purchase 680,474 shares, according to a Goldman regulatory filing on July 2, 2006.

I believe in his mind, the investment model is and should be a win-win model for both broader economy and the genius making contribution to. This place used to be the highest average IQ area in the world and they are deserved high pay. But time changes, golden ear fades, it’s time for them to remodel Wall Street and even their compensation package. People understand pay for performance, for success but for failure-- that's the American dream.

U.S. Turning Left? China Turning Right?

Just eighteen months ago, U.S. Treasury Secretary Henry Paulson told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.
``An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,'' Paulson said.
That advice rings hollow in China as Paulson plans a $700 billion rescue for U.S. financial institutions and the Securities and Exchange Commission bans short sales of insurers, banks and securities firms.
For a long time, the U.S. financial system was regarded as a model, and the rest of word especially emerging markets tried their best to copy whatever we could. Suddenly they find their teacher is not that excellent this time.
The recent moves by Paulson, the former chief executive officer of Goldman, contradict what the U.S. told Asian governments over the past decade. Thailand, South Korea and Indonesia were urged to let unviable banks fail during the 1997-98 Asian financial crisis.
In 1989, when the Berlin Wall fell, socialism was discredited and the whole world turned right. Now financial capital has been discredited and the whole world, including the U.S., is turning left. It's ironic Paulson has become the manager of many large financial institutions. He will have to ask the Chinese leaders about their experience of managing state-owned assets. I am joking here of course.
Eventually, China's leaders will have to take a cue from the U.S. and western Europe by allowing more competition to provide cheaper funding for companies and consumers. It’s believed that China doesn't have any choice except to continue with the U.S. model because there is no competing system. More people die in cars than they did on horses, but are people going to say we should stick with horses?
Since joining the World Trade Organization in 2001, China has gradually opened its markets to foreign competition, allowing international investment banks to form joint ventures with local partners and permitting the biggest state banks to sell shares on overseas stock exchanges. In the past three years, China dropped a decade-old currency peg to the dollar, introduced foreign- exchange swaps and forwards that allow investors to hedge or bet on currency fluctuations, and expanded the bond market. Plans to introduce many financial products, including derivatives, may be shelved as China focuses on improving risk- management. Financial innovation is a two-edged sword, Chinese market can't just concentrate on product innovation and overlook the need to build the financial system.
But as financial turmoil spread, at this point, China's made it clear it won't listen to these snake-oil salesmen who come from Wall Street, even if they're wearing suits issued by the Treasury Department.

GREED IS GOOD?

We saw five largest independent security firms on Wall Street were gone with wind. Here is another case which told you why it's a highly risky industry.

Drexel Burnham Lambert, a major Wall Street investment banking firm, rose to prominence implementing the ideas of its star trader Michael Milken, who created a junk-bond market where once there was none.
On November 14, 1986 – known on Wall Street as Boesky day – federal prosecutors revealed that Ivan Boesky, a close associate of Milken, had pled guilty to charges of insider trading and was going to cooperate with the government in its investigations. A few years later, Milken was indicated on 98 counts that included stock manipulation, insider trading and racketeering. In a plea bargain, Milken pled guilty to six charges and was sentenced to 10 years in prison.
Without him, Drexel Burnham Lambert’s business began to fall apart, and as the company was driven by its involvement in illegal junk bond activities into bankruptcy, the U.S. economy stumbled toward a recession. In 1990, default rates on junk bond skyrocketed.
Ironically, the junk-bond market rebounded shortly thereafter, and many mutual funds have been established that invest exclusively in high-yield bonds. However, in 2007 and 2008, investor appetite for junk bonds vanished amid mounting fallout from a global credit crisis, including the near-collapse of Lehman Brothers.
Boesky in part was inspiration for Oliver Stone’s “Wall Street”, and its famous line, “Greed is good,” echoed an actual comment made by Boesky in a commencement address at Berkeley’s School of Business. Boesky said to the students, “Greed is all right, by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.”

Open Introduction

We witnessed the reshape of Wall Street.
We experienced the fast-changing market.
We saw the credit crisis stemmed from 2007 summer subprime mortgage crisis.

But,
There are still a lot of investment opportunity out there in market.
Ending of an era means a new start of era.
More international connection is expected for China financial market.

I have to write down some of my thoughts.