Yes, yes. We know. We were on the conference call too. You guys are totally fine. Lots of credit. No problems. Just a little hitch. Nothing to fear but fear itself.
Hey, wait. What’s this…?
Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, The Wall Street Journal said on Saturday, a report Citadel denied.
Citing people familiar with the matter, the Journal said the Fed questioned the counterparties in at least two instances in recent days.
Fed questions counterparties about Citadel: report [Reuters]
In recent days, examiners with the Federal Reserve questioned Wall Street counterparties in at least two instances about their exposure to debt and other holdings of Citadel Investment Group and Sankaty Advisors LLC, the credit-investment affiliate of private-equity firm Bain Capital, said people familiar with the matter.
[...]
The rumors were so acute for Citadel that its chief Kenneth Griffin held a conference call Friday afternoon for holders of $500 million in Citadel debt. As many as 1,000 other callers jammed a listen-only line for the call, leaving Citadel scrambling to add more phone lines.
[...]
Citadel in recent days has repurchased as much as 20% of its debt held by outside investors, according to a person familiar with the transaction.
Citadel Seeks to Reassure Investors [The Wall Street Journal]
In other words:
“This firm has a history of facing adversity and delivering. We have a long track record of pulling together when times are tough and then taking advantage of global opportunities,” he continued. “We are now on the right track to put these last two quarters behind us.”
Oh, wait. That was Dick Fuld.
oh snap! first! and possibly last… drunk. but just wanted to go ahead and log on say finance (pronounced ph-eye-nance) is the f***ing s***. this s*** has been censored for the sake of the childrun b/c i know this is a family web site… anywho where else does the adrenaline run and the life get more exciting than in this industry we call home?!?!? ya’ll can cry home to ya momas but the fact of da matter is that the ups and the downs of the markets are what make this s*** (kids) worth it son. so i shall receive on that swap. cuz rates be goin down. i f you up. slut.
too obvious, couldn’t mock.
@2 u still a slut, slut.
I AM NAKED AND I HAVE A BIG DICK LIFE IS GOOD
CEOs love talking up, but where are the real numbers? Since BSC, I don’t trust anyone, no matter WHAT they say.
http://www.weeklyta.blogspot.com
FUCK YOU EP for making the LEH analogy…..inciting fear and passing on your worthless opinion from from your detached bully pulpit is of no help in the midst of everything that is taking place……….
why don’t you just take a position with Blodgett and Carney?
@6:
Ken? Gerbil boy? is that you? Don’t worry man, i’m sure you wife’s fund is still performing well she’ll support you i’m sure, as long as you don’t mind wearing a skirt.
“Posted by guest, Oct 26, 2008 3:13AM
FUCK YOU EP for making the LEH analogy…..inciting fear and passing on your worthless opinion from from your detached bully pulpit is of no help in the midst of everything that is taking place……….
why don’t you just take a position with Blodgett and Carney?”
Ken? Is that you?
You’re right, you’re right. Let’s ban mark-to-market accounting, ban CDSs, ban short selling. Let’s ban ANYTHING that gives us data that might conflict with what is said on the conference call. (I note that Federal concern with respect to counterparties wasn’t mentioned there, even though there were hints of it “on the rumor mill” but that was surely an oversight).
Yes, yes. Let’s go back to sticking our head in the sand, ignoring the fact that these firms elected to go public and subject themselves to the foibles of the market in return for accepting public money. Let’s return to the up, up, up, only up model of markets (unless its a commodity I need to buy, then we want down down down, you know).
Oh, and god forbid anyone point out similarities in the shrill, panic-stricken conference calls that have become so commonplace now that they all sound the same. Pointing out the obvious is, of course, such a serious ethical transgression that firing squad is too good for the perpetrators.
“Down 35%” is the new “killing it!” you know. Death. Death. DEATH to all who oppose the bulls!
EP
They’re down 70% if they’re down a dollar. They’re losing money on their positions AND the hedges. Down 35% only counts the positions. In other words they aren’t marking to market at all.
@ep.
you’re flattering yourself if you think ken reads dealbreaker.
@vol
wrong. the total % reflects both positions and hedges. short of factual evidence, i’m going to take your post as yet another vitriolic rant, steeped more in schadenfreude than actual knowledge.
OK, we have done enough thinking about Citadel Situation. Its loud and clear that they are DOWN and OUT.
CAN ANY 1 SOUL HERE BELIEVES THE ENDING OF THE CALL WITH “NO QUESTIONS”
WHAT AN ABSOLUTE LIE
GOD THIS IS SUCH A SHAM
@10:
You should probably just post a list of the positions so I can look up the prices myself and THEN I might believe you.
@12 by now you should have known that the markets are rigged.
“@ep.
you’re flattering yourself if you think ken reads dealbreaker.”
How would it be a compliment that Ken reads us, exactly?
Really, we aren’t quite the Hedge Fund Star Fuckers you take us for.
(Except for Loeb. Oh, and Ackman. Oh, and Chapman. Well, Whitworth is pretty good too. And Icahn… and…)
Ok, nevermind.
DIE CITADEL DIE DIE!!!
Citadel is one, just *ONE* margin call away from failure.
They’re in so much trouble.
And anyone remember their disastrous E-Trade investment? That’s not even the one of the worse decisions they’ve made
Citadel is toast.
Next Och-Ziff. Anyone seen their stock price of late?
RIGHT NOW CITADEL IS SOFTER THAN A SHOE FULL OF SHIT.
ITS ONE BIG DISASTER. Serves Griffin right for poaching from us.
-Jamie Dimon.
CEO of JPMorgan
Serves Kenny-G damm right for being an arrogant prick. We are pulling out our prime brokerage business. Damm right for poaching ouru people
-Jamie D.
FUCK CITADEL
Now I can ring their bell
And Dude Kenny-G needs a dell
Because his positions he can’t sell.
How is that for a rhyme bitches?
Now is the time for the mantel of the top-dog Chicago Hedge-Fund to go to Balyasny Asset Management.
Screw Citadel.
http://www.bam-us.com
Balyasny is indeed the shit.
Yeah Dmitri!
Kenny-G went to Harvard right? Fuckin’ pussy
-Big Shot Yale Bulldog Guy
@23
FUCK YALE
@9
Did you pull out those figures from your ass or your head? Never mind, they’re the same.
Nevertheless, it’s pretty obvious Citadel is gone.
Maybe it’s time to ask: Who’s next?
@25:
I got them from a reliable source trying to hedge their counter party risk. I am not sure where they got their numbers on the CDS exposure but I trust them more than I trust Griffin to tell me Citadel’s losses.
#9, i don’t understand what you mean by “They’re down 70% if they’re down a dollar.”
So if they’re down $2, they’re insolvent?
get sleep. enjoy some football. if you need action take the over on the giants game. its the fucking weekend. enjoy it while you can.
not you ep, i realize you have some sort of job here and thus cannot enjoy football.
@27:
dude, its just a turn of phrase. Like saying “I’d bet dollar to doughnuts” If i say that it doesn’t mean i’d actually bet my dollar against someone else’s doughnuts.
ep gets it.
Stevie Cohen obviously knew this was going to happen and is why he shut down til 09
#29
so you’re saying they’re down 70% to date, instead of 35%?
@31
NOW WE KNOW WHO’S THE BIG GUY
COHEN 1 KEN 0
WHARTON 1 HARVARD 0
- ALLCAPS
@6 you serious?
you remind me of me, right before I lost my job. “everything is fine, it’s the damn media’s fault for perpetuating these rumors.”
get a clue, Citadel is done. and you should start thinking about a career in which bloggers don’t control your fate
I think it’s funny how Citadel probably overpayed for E*Trade’s book, when that deal looked so disasterous at the time for E*Trade.
You ain’t seen nothing yet on hedge fund implosions.
@35
When you’re getting out played by E*Trade, well there’s not much further down you can go. I wonder who will go bankrupt first ETrade or Citadel.
E*Trade would never be allowed to go bankrupt. They’ve got a decent deposit-holding bank i.e. big enough to crater the FDIC.
They also aren’t losing money quickly enough to make them go bankrupt.
So Citadel goes BK first by default.
#23 is into that whole Yale thing
@39
What Yale thing? That Yale are pussies?
@39 What’s the ‘Yale Thing’?
Do they even have a B-School? ahahahaha
This won’t help Obama. Ken Griffin + Bill Ayers + Tony Rezko = Obama’s Chicago Underworld
http://www.pjelosangeles.com/hedge_fund.htm
Can’t be all that bad.
Hedge fund exec pays $9.4M at 15 CPW
By Adam Pincus
Joel Frank, the chief financial officer for asset manager Och-Ziff Capital Management Group, based in Midtown, paid $9.4 million for a 3,333-square-foot condominium at 15 Central Park West.
The four-bedroom sponsor unit went into contract in January 2007 and was sold on September 26, according to city records published today.
The main fund for Och-Ziff, an international firm, posted a loss of 5.35 percent in September.
“The four-bedroom sponsor unit went into contract in January 2007 and was sold on September 26, according to city records published today.
The main fund for Och-Ziff, an international firm, posted a loss of 5.35 percent in September.”
And then… there was October….
5.35% monthly loss is the new 25% monthly profit.
8 bil of untapped lines?
With who? Could be good shorts.
Who would lend any of these guys a dime?
They may have an $8 billion untapped facility, but I’d blindly guess it’s a secured facility that has pretty sharp guidelines about what can be used for collateral out of their total fund assets. That, and if they tapped it for the whole sha-bang they’d probably have to put up at least 1.5x-2.0x and as asset values continue to plummet….well, who knows.
I’d love to know who all their lenders are in the facility. $8 billion must be several banks — wonder if Wachovia and Lehman were part of it.
Off to go bury cash and gold in the backyard…
He’s probably a closet homosexual who does a lot of cocaine. That whole Yale thing.
its never good news on the weekend anymore, fuck.
Going down like the Titantic..toot, toot!
A Global Macro Weekend Moment,
It appears that the currency moves have reached the breaking point for the world commerce. The movement in the Yen and the US Dollar, as the two biggest carry trades is unwound, has had some unintended consequences.
The IMF is now in sovereign bail out mode, agreeing to run around trying to patch up the emerging markets now. The crisis in confidence, is growing not getting better.
International letters of credits don’t work for shipping large loads as counter party risk increases, and the world is shutting down its export business while it tries to figure out what the cost of something is while in long transit periods.
The huge swings in the currency rates, has exposed a nasty issue… Japan can not live with the current currency rate and the storm we are all living in is bigger then any nation. China invited a major group of Asian and European leaders to meet this weekend, before the after election international get together in DC in mid November when the new rules and regulations get handed down to the US.
I found my Chrystal ball and it gave me a view of the future… I can see the Yen and Dollar being bonded, yes PEGGED. In fact, I would not be surprise if there is some form of a currency stability pact sooner rather then later.
The Hank and Paulie show has become sublime at this stage… we are no long in Kansas Toto…
~SEG
The way on Syria/Iran has started (also means market will be up as this indicates US still has money and defense business is back). details below.
http://www.marketwarnings.com/2008/10/us-attacks-syria-october-26-2008-is.html
Ken has turned it around in the past but this time he has alot of guys that want to push him over the edge – I would get the details on the $8b – anyone on the other side of that would require a massive amount of collateral.
@54
He did himself no help by going against Dimon, the most powerful man on Wall St.
His death note was written the moment he poach Dimon’s men
@ 53 not a fricking chance the market is up on this news.
The only thing going for the us economy at this point is falling oil prices – the only thing!
If oil reverses course because of destabilization in the mideast say good bye to another 1000 points on the DJ.
The thing is the U.S. does not have money to spend on its current wars in Iraq and Afghanstain. The last thing the U.S needs at this point is to start something new with Syria and Iran.
strong men also cry
strong men also cry
Manahmanah!
Don’t know why you idiots are so excited about Citadel going tits up. This could be the event that really tips the scale towards global depression, and an out of control situation for the Fed, foreign central banks and everyone else. So yes, KG is lying out of his ass and their hubris is incredible, but be careful what you wish for.
I am not advocating that the Treasury bail them out, but I think they are acting wisely by finding out early enough what kind of a shit show they are going to face in the next couple of weeks.
If these morons go pear shaped, SAC is next, and then GLG and so on and so forth and you will be eating canned tuna and sardines for the next 5 years, sleeping with a loaded shotgun next to your bed. So cheer along idiots.
Nothing is f*#&ed here man.
Nothing is fu#%ed?!
The god da#% plane has crashed into the mountain!!!!
#59 and the others defending Citadel, what exactly is the problem with them going down?
If, the problem is liquidity but the assets they have borrowed against do in fact have value, that value will simply transfer to the new holder. Why do global markets collapse when they go under?
If, the problem is insolvency – they hold assets worth nothing, isn’t it better to cut them off now rather than let them keep running the charade which risks more “healthy” institutions such as the money-center banks going down?
There’s going to be a day of reckoning no matter what – either this month (or quarter or year) or 2-3 years down the line. Why not take your lumps all at once and clean up the system once and for all (or at least until the next bubble)?
http://indefence.is/
THoughts EP, you seem to love this topic
Que pasa calabaza
Where the hell is “Chicken is in the oven. Cook it!” guy? Front and center dude.
Kenny G dropped like a prom dress
Buttnaked and sticky 50’s to make him hollar
Ring-a-ding-ding bitches
http://www.youtube.com/watch?v=ZOtC-xvmFJI
ep have you seen Bess? She didn’t come home last night and I’m a little worried. She has been having a lot of girl’s night out lately. I’m sure it’s just my imagination after all we have a long track record of pulling together when times are tough. We’re solid now that we’ve put the past behind us. You always cheer me up Kenny when I’m singing the blues. There’s no way this angel will break my heart.
http://www.youtube.com/watch?v=GUu_iZYsK6k
SEG, I don’t think there’s a crisis in confidence. I’m quite confident we’re fucked. Oceania has was always been at war with Eurasia… I’d rather put my head up this bull’s ass to get a better look at a T-bone, the butchers word comes from the ministry of bullshit. Your favorite Bess, starts at 7 and hey, there’s even a fridge! You could put six packs of be – soda in here.
Shout out to #58
Hasta pasta
SPODE
http://www.youtube.com/watch?v=zQ_u48_fmDc&feature=related
61,
Apart from whoever is tied up with them for an enormous amount of money that we don’t know about…
Citadel essentially makes the options markets (30% of the daily volume). I would call that a minor dislocation if they vaporized. We certainly don’t need that.
If Citadel implodes, it will also accelerate the run on hedge funds, who will then accelerate asset dumping in order to meet redemptions and margin calls. We don’t need this either. Citadel being considered in trouble – and let’s be honest, the Wall Street Journal didn’t make that up just to tweek Kenny – is alone probably going to increase runs on hedge funds.
This isn’t a good situation at all.
How do I buy a bunch of credit default swaps on Citadel from my E*Trade account? Is there some other company which offers that type of product for retail consumers? Thanks.
@65
Hi-Larious!
@ 65 — that’s great!
http://www.nytimes.com/2008/10/27/business/27views_ready.html
What number am I bitches?
Hell yea!
SPODE
@65, I am the manager of a large hedge fund. What are credit default swaps?
@65, Instant Classic… ~SEG
@69 do it with Dick F.
@70 – @65 here. Okay maybe I want to *short* credit default swaps on Citadel. Who the fuck knows? How does retail bet on Citadel’s supposed imminent demise? That is a big market question. Certainly there is some captain of industry somewhere willing to make money on providing the vehicle, however gay.
Where are the securities that allow E*Trade customers to bet on that on Monday open?
@73 SDS
Everything will go to hell when that happens.
DXD SDS QID
EEV if most emerging markets weren’t already at total garbage value. If anything, the US market has some catching up to do, if we’re retracing to 2002.
Dear SEG,
What are your thoughts going into this week ? particularly on Asian Markets. they started to bleed more than US/EU ?
Its just a matter of time.
Citadel is going to get margin called the shit out of them. Screw Citadel. & Eddie Lampert. Stevie Cohen remains the *undisputed* Hedge FUnd KIng!!!
FUCK KENNY-GRIFF
FUCK EDDIE LAMPERT
YAY FOR STEVIE COHEN!!!
And these pussies thought they could share the #1 equity analyst rankings with SAC. SAC is where the action is. SAC is where I’m joining soon. Down with Citadel.
@77
Not Citadel nor SAC. But Force Capital Management is the shit among Hedge Funds dude.
In all seriousness I have a few questions:
- What are the risks from a Citadel implosion?
- Who gets hurt and how bad?
- Does Citadel get a bailout?
I think a Citadel implosion will give us what we were all expecting on Friday.
I hate all you “Hedge Fund” fuckers. You guys with your Harvard MBA and no commen sense. You guys lived a dream and now it’s about to crash right in front of you. Have a nice life you fucking morons. You guys deserve all the pain you get. Greed is what drove you and Greed is what will ultimately get you up the ass. How does it feel to give up your soul for no bonus? Hahaha.
80,
The only reason we didn’t get what we were expecting on Friday is that someone had to sell out of massive positions and didn’t want to do it into a black hole.
Look at the weak volume and the prop-ups, capped with those enormous sell orders at the end of the day that dropped the market 200 points on a dime. I’m thinking mutual funds.
Some hedge fund needs cash. Phillippines down 12% per Bloomberg.
Let’s do the Argentine Debt Default Mark II this week as well.
why is there so much bitterness out there today? someone wake up on the wrong side of the bunk bed?
@82 – are you concurring with the wsj article from last week?
http://online.wsj.com/article/SB122445525957248373.html
What does Wall Street build, anyway? It seems like they just sell a trillion angels to each other daily. That’s it.
WHICH HEDGE FUND IS NEXT?
Let’s start a poll here right here right now. Now accepting suggestions. Answer back to me.
@86
ATTICUS is going down. In fact it might wrap up before Citadel. But Atticus is mostly a stock picking fund, so no chance to see big fire-works / histrionics / explosions and sparks with their implosion. It’ll just give a lot of pain to Barakat his Lt. Watkin and other jock assholes there.
Mwahahahahahah.
@76,
I feel a shift in the structure of the game, and it appears to be different then first expected. I am starting to wonder, and I will put it in those terms, that while we have all been focused on the specific fire we see in the financial markets of the US, we have not noticed that the world has caught on fire, and is in worse condition then we are.
I am sitting here pondering the implications of the third and second world nations imploding before the meeting in the US where they lay down the law to us. I am starting to wonder if we in fact will not be the house of power, equity markets aside… in these negotiations.
However, I still think we could have a bankers holiday any time now, ie weeks to months… So who knows how this all plays out.
Asia… is a house of cards based on exporting to the growth based importing economy’s. They have not developed their own localized demand enough, and are just realizing that if the US does catch a cold, they are beyond fucked…
Welcome to real capitalism. I have a funny feeling, we are not actually as stupid or weak as we appear… everyone else just faked it longer then we thought, but their drop will be even worse then ours. I expect that we could see a once in a multi-century shit show…
When that happens… watch the international shit show… its going to be a gas…
~SEG
@86
Apart from Citadel I’d say that Fortress is the next one to bite the dust. Look at their stokc price for starters. And in Fortres’s case it’s not just their Hedge Fund in trouble, their PE arm is in even more trouble.
Same with Cerberus — Big trouble with Chrysler, GMAC etc. They’re going down. Eat shit Steve Feinberg.
So those are my two picks for funds to go under – Fortress & Cerberus.
@SEG Too your point,
from Stratfor:
By George Friedman and Peter Zeihan
French President Nicolas Sarkozy and U.S. President George W. Bush met Oct. 18 to discuss the possibility of a global financial summit. The meeting ended with an American offer to host a global summit in December modeled on the 1944 Bretton Woods system that founded the modern economic system.
The Bretton Woods framework is one of the more misunderstood developments in human history. The conventional wisdom is that Bretton Woods crafted the modern international economic architecture, lashing the trading and currency systems to the gold standard to achieve global stability. To a certain degree, that is true. But the form that Bretton Woods took in the public mind is only a veneer. The real implications and meaning of Bretton Woods are a different story altogether.
Conventional Wisdom: The Depression and Bretton Woods
The origin of Bretton Woods lies in the Great Depression. As economic output dropped in the 1930s, governments worldwide adopted a swathe of protectionist, populist policies — import tariffs were particularly in vogue — that enervated international trade. In order to maintain employment, governments and firms alike encouraged ongoing production of goods even though mutual tariff walls prevented the sale of those goods abroad. As a result, prices for these goods dropped and deflation set in. Soon firms found that the prices they could reasonably charge for their goods had dropped below the costs of producing them.
The reduction in profitability led to layoffs, which reduced demand for products in general, further reducing prices. Firms went out of business en masse, workers in the millions lost their jobs, demand withered, and prices followed suit. An effort designed originally to protect jobs (the tariffs) resulted in a deep, self-reinforcing deflationary spiral, and the variety of measures adopted to combat it — the New Deal included — could not seem to right the system.
Economically, World War II was a godsend. The military effort generated demand for goods and labor. The goods part is pretty straightforward, but the labor issue is what really allowed the global economy to turn the corner. Obviously, the war effort required more workers to craft goods, whether bars of soap or aircraft carriers, but “workers” were also called upon to serve as soldiers. The war removed tens of millions of men from the labor force, shipping them off to — economically speaking — nonproductive endeavors. Sustained demand for goods combined with labor shortages raised prices, and as expectations for inflation rather than deflation set in, consumers became more willing to spend their money for fear it would be worth less in the future. The deflationary spiral was broken; supply and demand came back into balance.
Policymakers of the time realized that the prosecution of the war had suspended the depression, but few were confident that the war had actually ended the conditions that made the depression possible. So in July 1944, 730 representatives from 44 different countries converged on a small ski village in New Hampshire to cobble together a system that would prevent additional depressions and — were one to occur — come up with a means of ending it shy of depending upon a world war.
When all was said and done, the delegates agreed to a system of exchangeable currencies and broadly open rules of trade. The system would be based on the gold standard to prevent currency fluctuations, and a pair of institutions — what would become known as the International Monetary Fund (IMF) and the World Bank — would serve as guardians of the system’s financial and fiduciary particulars.
The conventional wisdom is that Bretton Woods worked for a time, but that since the entire system was linked to gold, the limited availability of gold put an upper limit on what the new system could handle. As postwar economic activity expanded — but the supply of gold did not — that problem became so mammoth that the United States abandoned the gold standard in 1971. Most point to that period as the end of the Bretton Woods system. In fact, we are still using Bretton Woods, and while nothing that has been discussed to this point is wrong exactly, it is only part of the story.
A Deeper Understanding: World War II and Bretton Woods
Think back to July 1944. The Normandy invasion was in its first month. The United Kingdom served as the staging ground, but with London exhausted, its military commitment to the operation was modest. While the tide of the war had clearly turned, there was much slogging ahead. It had become apparent that launching the invasion of Europe — much less sustaining it — was impossible without large-scale U.S. involvement. Similarly, the balance of forces on the Eastern Front radically favored the Soviets. While the particulars were, of course, open to debate, no one was so idealistic to think that after suffering at Nazi hands, the Soviets were simply going to withdraw from territory captured on their way to Berlin.
The shape of the Cold War was already beginning to unfold. Between the United States and the Soviet Union, the rest of the modern world — namely, Europe — was going to either experience Soviet occupation or become a U.S. protectorate.
At the core of that realization were twin challenges. For the Europeans, any hope they had of rebuilding was totally dependent upon U.S. willingness to remain engaged. Issues of Soviet attack aside, the war had decimated Europe, and the damage was only becoming worse with each inch of Nazi territory the Americans or Soviets conquered. The Continental states — and even the United Kingdom — were not simply economically spent and indebted but were, to be perfectly blunt, destitute. This was not World War I, where most of the fighting had occurred along a single series of trenches. This was blitzkrieg and saturation bombings, which left the Continent in ruins, and there was almost nothing left from which to rebuild. Simply avoiding mass starvation would be a challenge, and any rebuilding effort would be utterly dependent upon U.S. financing. The Europeans were willing to accept nearly whatever was on offer.
For the United States, the issue was one of seizing a historic opportunity. Historically, the United States thought of the United Kingdom and France — with their maritime traditions — as more of a threat to U.S. interests than the largely land-based Soviet Union and Germany. Even World War I did not fully dispel this concern. (Japan, for its part, was always viewed as a hostile power.) The United States entered World War II late and the war did not occur on U.S. soil. So — uniquely among all the world’s major powers of the day — U.S. infrastructure and industrial capacity would emerge from the war larger (far, far larger) than when it entered. With its traditional rivals either already greatly weakened or well on their way to being so, the United States had the opportunity to set itself up as the core of the new order.
In this, the United States faced the challenges of defending against the Soviet Union. The United States could not occupy Western Europe as it expected the Soviets to occupy Eastern Europe; it lacked the troops and was on the wrong side of the ocean. The United States had to have not just the participation of the Western Europeans in holding back the Soviet tide, it needed the Europeans to defer to American political and military demands — and to do so willingly. Considering the desperation and destitution of the Europeans, and the unprecedented and unparalleled U.S. economic strength, economic carrots were the obvious way to go.
Put another way, Bretton Woods was part of a broader American effort to extend the wartime alliance — sans the Soviets — beyond Germany’s surrender. After all wars, there is the hope that alliances that have defeated a common enemy will continue to function to administer and maintain the peace. This happened at the Congress of Vienna and Versailles as well. Bretton Woods was more than an attempt to shape the global economic system, it was an effort to grow a military alliance into a broader U.S.-led and -dominated bloc to counter the Soviets.
At Bretton Woods, the United States made itself the core of the new system, agreeing to become the trading partner of first and last resort. The United States would allow Europe near tariff-free access to its markets, and turn a blind eye to Europe’s own tariffs so long as they did not become too egregious — something that at least in part flew in the face of the Great Depression’s lessons. The sale of European goods in the United States would help Europe develop economically, and, in exchange, the United States would receive deference on political and military matters: NATO — the ultimate hedge against Soviet invasion — was born.
The “free world” alliance would not consist of a series of equal states. Instead, it would consist of the United States and everyone else. The “everyone else” included shattered European economies, their impoverished colonies, independent successor states and so on. The truth was that Bretton Woods was less a compact of equals than a framework for economic relations within an unequal alliance against the Soviet Union. The foundation of Bretton Woods was American economic power — and the American interest in strengthening the economies of the rest of the world to immunize them from communism and build the containment of the Soviet Union.
Almost immediately after the war, the United States began acting in ways that indicated that Bretton Woods was not — for itself at least — an economic program. When loans to fund Western Europe’s redevelopment failed to stimulate growth, those loans became grants, aka the Marshall Plan. Shortly thereafter, the United States — certainly to its economic loss — almost absentmindedly extended the benefits of Bretton Woods to any state involved on the American side of the Cold War, with Japan, South Korea and Taiwan signing up as its most enthusiastic participants.
And fast-forwarding to when the world went off of the gold standard and Bretton Woods supposedly died, gold was actually replaced by the U.S. dollar. Far from dying, the political/military understanding that underpinned Bretton Woods had only become more entrenched. Whereas before, the greatest limiter was on the availability of gold, now it became — and remains — the whim of the U.S. government’s monetary authorities.
Toward Bretton Woods II
For many of the states that will be attending what is already being dubbed Bretton Woods II, having this American centrality as such a key pillar of the system is the core of the problem.
The fundamental principle of Bretton Woods was national sovereignty within a framework of relationships, ultimately guaranteed not just by American political power but by American economic power. Bretton Woods was not so much a system as a reality. American economic power dwarfed the rest of the noncommunist world, and guaranteed the stability of the international financial system.
What the September financial crisis has shown is not that the basic financial system has changed, but what happens when the guarantor of the financial system itself undergoes a crisis. When the economic bubble in Japan — the world’s second-largest economy — burst in 1990-1991, it did not infect the rest of the world. Neither did the East Asian crisis in 1997, nor the ruble crisis of 1998. A crisis in France or the United Kingdom would similarly remain a local one. But a crisis in the U.S. economy becomes global. The fundamental reality of Bretton Woods remains unchanged: The U.S. economy remains the largest, and dysfunctions there affect the world. That is the reality of the international system, and that is ultimately what the French call for a new Bretton Woods is about.
There has been talk of a meeting at which the United States gives up its place as the world’s reserve currency and primacy of the economic system. That is not what this meeting will be about, and certainly not what the French are after. The use of the dollar as world reserve currency is not based on an aggrandizing fiat, but the reality that the dollar alone has a global presence and trust. The euro, after all, is only a decade old, and is not backed either by sovereign taxing powers or by a central bank with vast authority. The European Central Bank (ECB) certainly steadies the European financial system, but it is the sovereign countries that define economic policies. As we have seen in the recent crisis, the ECB actually lacks the authority to regulate Europe’s banks. Relying on a currency that is not in the hands of a sovereign taxing power, but dependent on the political will of (so far) 15 countries with very different interests, does not make for a reliable reserve currency.
The Europeans are not looking to challenge the reality of American power, they are looking to increase the degree to which the rest of the world can influence the dynamics of the American economy, with an eye toward limiting the ability of the Americans to accidentally destabilize the international financial system again. The French in particular look at the current crisis as the result of a failure in the U.S. regulatory system.
And the Europeans certainly have a point. If fault is to be pinned, it is on the United States for letting the problem grow and grow until it triggered a liquidity crisis. The Bretton Woods institutions — specifically the IMF, which is supposed to serve the role of financial lighthouse and crisis manager — proved irrelevant to the problems the world is currently passing through. Indeed, all multinational institutions failed or, more precisely, have little to do with the financial system that was operating in 2008. The 64-year-old Bretton Woods agreement simply didn’t have anything to do with the current reality.
Ultimately, the Europeans would like to see a shift in focus in the world of international economic interactions from strengthening the international trading system to controlling the international financial system. In practical terms, they want an oversight body that can guarantee that there won’t be a repeat of the current crisis. This would involve everything from regulations on accounting methods, to restrictions on what can and cannot be traded and by whom (offshore financial havens and hedge funds would definitely find their worlds circumscribed), to frameworks for global interventions. The net effect would be to create an international bureaucracy to oversee global financial markets.
Fundamentally, the Europeans are not simply hoping to modernize Bretton Woods, but instead to Europeanize the American financial markets. This is ultimately not a financial question, but a political one. The French are trying to flip Bretton Woods from a system where the United States is the buttress of the international system to a situation where the United States remains the buttress but is more constrained by the broader international system. The European view is that this will help everybody. The American position is not yet framed and won’t be until the new president is in office.
But it will be a very tough sell. For one, at its core the American problem is “simply” a liquidity freeze and one that is already thawing. Europe’s and East Asia’s recessions are bound to be deeper and longer lasting. So the United States is sure — no matter who takes over in January — to be less than keen about revamps of international processes in general. Far more important, any international system that oversees aspects of American finance would, by definition, not be under full American control, but under some sort of quasi-Brussels-like organization. And no American president is going to engage gleefully on that sort of topic.
Unless something else is on offer.
Bretton Woods was ultimately about the United States trading access to its economic might for political and military deference. The reality of American economic might remains. The question, then, is simple: What will the Europeans bring to the table with which to bargain?
Dow now has a 7 handle… ~SEG
@SEG Please learn when to use “than” and when to use “then”. I am smarter than those people… It was a better time then when …
Talk to Mrs. Wilson in Prep Boarding School in the US. After I returned from my year in Europe at 16… When I returned, I lasted 7 days at home before I was shipped off to prep school.
She is the one who told me to please stop abusing her language, actually the Deutsches instructor asked me to not return to her class first, so technically she was the first instructor to give up on me as a student. But her class was German to you.
Honest, I don’t intend to hurt your eyes with single letter mistakes when I could make significantly larger ones for show… ;-)
~SEG
I will see if I can remember to think about then verse than, while trying remember what I was thinking about…
SEG Perhaps i should summarize with just this last paragraph:
“Bretton Woods was ultimately about the United States trading access to its economic might for political and military deference. The reality of American economic might remains. The question, then, is simple: What will the Europeans bring to the table with which to bargain?”
Morgan Stanley is fucked.
Did anyone hear this? $46 bn in MONEY MARKET redemptions, Mitsubishi can’t save them now, they can’t even raise enough capital themselves.
@95
Nope. Never heard of it. What’s the big deal? They’ll just ask Fed for the handout.
Trust me. Money market redemptions is no big deal. The Fed will take over the risk.
@96:
Ok but that ate $23bn in cash flow.
How about all the PE firms? how far would they be down if they had to mark their books honestly? These guys will lose their shirts in any investment made since 2003
What is the word with OZ and Fortress? Their stocks trading like they’re going out of business?
98 They do mark their books, when they calc quarterly returns for investors. Diff is that they dont have to maintain liquidity. Its just a mark.
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