Get real and do your homework instead of writing such a nonsense, Ali Ettefagh. You're just making a fool of yourself. Keep in mind that your national socialist anti-American hate-propaganda has no life. Don't forget, Hitler is dead.

http://www.ft.com/cms/s/83603084-98e1-11dc-bb45-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F83603084-98e1-11dc-bb45-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Feurope

http://business.timesonline.co.uk/tol/business/markets/article2912816.ece

I know we are used to assuming that economic growth is good news and economic recession bad news, but might it just be possible that in today's Britain the opposite is true: economic growth, the curse to be dreaded and economic slow-down a blessing to be prayed for, except, of course, by the City slickers?

In the old days economic growth had to be a good thing since the Welfare State required more money to function successfully. However that no longer seems to be the case. Throwing money at schools and hospitals is proving counter-productive.

These vast amounts of new money require moneymen to manage them and the moneymen - dominated by the bottom line - are rotten at running schools, universities and hospitals.

What they are good at, supremely good at, is running the City of London, which is where most of the money now comes from, and where most of the best brains now work, to the disastrous detriment not only of the nation's health and education services, but of parliament, the judiciary and the media, all of which are now run, not by the best and brightest, as used to be the case, but by mediocrity.

A recession might start to correct this sad imbalance, returning some of the talent to where, in a civilised society, it properly belongs.

Fewer billionaires and 4x4's, less consumer mania would be no bad thing either - not to mention less inequality of wealth generally. Naturally nobody wants to tighten their belt if everybody else carries on loosening theirs, but surely a general middle-class collective tightening might come as a bit of a relief.

Not at Christmas time, perhaps, but certainly in the New Year.

The author's point about banks and capital adequacy is correct and he has pointed to a point of pain that will surface in about 3 months from now.
Two new accounting rules FAS 157 and 159 went into effect on 10 November 2007. It is not a surprise as the effective date was set 2 years ago.

These new standards rquire banks and financial institutions to clarify their capital and assets in three categories: very liquid and cash, easily tradeable and illiquid holdings.
In this sub-prime loan fiasco, these "assets" do not trade these days and rarely traded, the market value is at significant discounts (30-50% off). If a bank has $100 bil. of such paper, it must set aside about $50 bil. of its primary capital (equity) as reserve for losses. If the bank actually sells the paper, it will realise the loss. If the bank continues to hold the paper, it must make the reserve. Otherwise, the balance sheet cannot be certified by auditors. (like me!)

Now, for example, Bank of America (a big bank and heavily exposed to mortgages, directly and indirectly) has $135 bil. in total equity or primary capital (in writer's words). It made a $4 bil. profit in 2006. If BofA has exposure to a conservative sum of $30 bil. in sub-prime loans, it must reserve against its capital, about $15 bil. by end of 2007. That is just one bank and this news will not come out until February or March 2008, once initial figures for 2007 are consolidated.

In sub-prime trading, some secondary buyers have recourse to the previous seller, or hold insurance policies or sell-back put options, etc. but that does not matter, as this simply displaces the loss from one bank to the previous holder. Moreover, it is very likely that banks will "farm-out" such losses over several operating quarters to reduce the overall impact on their balance sheets. However, that is a mere delayed reaction process and the facts do not change.

Fasten your seat belts folks, it will be a bumpy ride! Enron, Worldcom and Global Crossing bankruptcies are small fry compared with this big problem. Very big problem! And unlike those bankruptcies, the accounting community will not "accommodate" their clients as Arthur Andersen went down because of being client friendly!

To "Educated In Europe":

The fact that one bank may write down $5 billion or that Citi allegedly has to replenish $30 billion over time does not support the thesis of the author that the sum of US bank capital is to be diminished by one third. These sums, although large to an individual, are tiny in comparison to total US bank capital and tiny in regard to the cash flow and earnings that US banks have enjoyed for the past few years. For persons with a good credit history or a company that cash flows and has a decent balance sheet, there is ample credit available in the US. There is no capital crisis in the US unless you have lousy credit or operate a money-losing business.

As to the departure of Italian and French car makers 15-20 years, you obviously have never repaired either unreliable make or model. Fiat means "Fix It Again Tony" and Peugeot and Renault vehicles were more expensive and less reliable than Japanese and American makes. No one was buying these lousy cars. As to VW, it now gets repeatedly hammered as to lack of quality. Other German manufacturers, who offer a quality product such as Mercedes and BMW, have seen their US market share grow.

In sum, I respectfully believe your comments are based on some inherent anti-US bias rather than facts.

As to "Gonzo":

It is up to the Germans to determine what they wish to sell and what they wish to buy. If someone wishes in Dortmund wants to buy a load of collateralized subprime debt, then wouldn't that person have rationally factored into their purchase price a credit risk of nonpayment for subprime debt? If our Dortmunder did not, then he or she is a dunderhead and should lose his or her job.

Last, exporters of goods and services to the US are not holding their prices to "help out America". I believe that exporters are a breed of people who are called "capitalists". Every capitalist that I have known tries to increase revenues and maximize profits. I think that a simpler explanation for holding down prices is called "competition in the free market" with American producers.

Again, like "Educated in Europe", I respectfully believe that your comments are based on anti-Americanism rather than facts. The US sells more to Germany than subprime debt. Lufthansa buys Boeing jets and Microsoft seems to have a monopoly in the fatherland. Hey, so loosen up. It is never too late to turn in your brown shirt for some colorful cotton Ts made by American Apparel in downtown LA.

Regards

It is going to be difficult and it needs leadership and clarity of mind amongst our leaders. But again, we are used to Enron, Worldcom, Global Crossing, etc.
What worries me is the large numbers this time, the sub-prime mess is about 2 million homes, that is the population of a large city or a country like Holland or Austria!!!!! Bad deal...

To Ben Graham

You exemplify the typical American hard-headed nationalist that thinks if they raise their voice in English, the rest of the world understands them!

Assuming good faith in trading, are you really proud that you import goods from, say, Europe in form of BMWs and Mercedes and export bad, sub-prime debt in return (which caused the collapse of the German IKB bank)? And Do you think the Germans will keep on repeating the same mistake?

And do you think that foreigners will keep on keeping their prices steady to help out America and its devalued USD? I think not.

And it doesn't matter whether or not people trade with you if your finances are not in good shape. Eventually, you will "max out" your credit limit.

BEN GRAHAM
When one bank announces that it will write-down about $5 bil. in bad assets, where does that cash come from? Basic accounting here.
When Wall Street analysts say that Citibank needs to raise $30 bil. to replenish its capital adequacy ratio, and that is just one bank, then the author is probably right.

Secondly, and for your information, European companies are less dependent on the American market. French and Italian car makers, amongst the top 5, left America 20 years ago (except Renault's Nissan part-owned subsidiary). Why? Because the can do business elsewhere. Half of Volkswagon's revenues and profits come from China, not America.

Actually, why am I wasting my breath tell you the facts. You Americans are right, always right! Keep on sticking your head in the sand and congratulate yourselves. The reason of a massive devaluation of American currency is, most of all, people like yourselves.

This article is embarrassingly bad.

For example, "the economies of heartland Europe and other parts of the world have decoupled from the American economy over the last decade". Really? I guess that we in the U.S. have not been importing European cars, Chinese toys, and Indian tech support and have not been exporting planes, medical equipment, and technology.

The irony of the author's remark is that our economies are more interdependent or, to borrow from his terminology, increasingly coupled. The proof is that with the declining dollar, relative to other currencies, these exporters of goods and services have not raised their prices (read yesterday's Wall Street Journal on this point); they want to maintain their position in the U.S. market rather than decouple from it.

The EU "being the top economic producer in the world"? Perhaps if you believe in growth by merger (picking up countries every few years) and include the value of government services based on Airbus-type accounting methods. Instead, EU growth, when examined country-by-country, shows a growth rate far less than the U.S. over the past 10 years in terms of production of goods, services, and employment.

Increases in grain and other food-commodity prices is a U.S. econonic problem alone? So, if we were to believe the author, then when one of us walks or flies out of the U.S., all laws of supply and demand for commodities are suspended. We then enter another world, evoked by the author, where market prices for these commodities are stable.

Finally, the author states that the subprime collateralized-loan losses will equal about 1/3rd of U.S. banking capital, and implies that there will be no capital available for businesses to borrow to pay for capital improvements. Making arguments that are bereft of proof and logic befit the propagandist, stoke the alarmist, and terrify schoolchildren. However, let's be calm here. There are no facts to support this claim. 1/3rd of U.S. banking capital is not about to disappear. Furthermore, U.S. corporate profits and cash reserves are at record levels and with the declining dollar, exports are booming as are the foreign business actvities of U.S. multi-national companies, of which there are a few.

Yes, the U.S. economy is in transition. However, so is everyone else's.

Interesting comments.
Donald Rumsfeld used to say that there are known unkowns and then there are unknown unkowns. The author has tried to point out both categories here. I guess we have to fasten our seatbelts for a bumpy ride ahead.

Clear thinking. We must be ready for a big storm ahead, even though the storm might not be as big as our expectations. What is clear is the fact of many unknowns is still ahead of us.

Thanks.

I truly enjoyed the frank discussion and the warnings of Mr. Ettefagh in this article. It is a big problem and it must be managed with a cool head.