Tuesday, March 3, 2009

Nouriel Roubini Lollapalooza

Nouriel Roubini (Dr. Doom) is the face of economics for this downturn - he is now everywhere. I even sighted him on ABC's Sunday Morning political show! Having an Economics background - I love the attention to the dismal science - put down that football little Johnny, everyone wants to be a macro economist now.

We've both been on the same bandwagon but perhaps both of us could now be seen as "optimists" in retrospect? (yikes)

[Feb 6: What Would Roubini Do?]
[Jan 28: Roubini & Soros on Bad Bank]
[Dec 25: Nouriel Roubini Wishes You a Merry Christmas]
[Sep 30: Roubini on the Bailout - Thumbs Down]
[Sep 15: Nouriel Roubini with a Series of Videos on Yahoo Tech Ticker]
[Aug 20: Nouriel Roubini: "Told you So"]
[Mar 13: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses]

Below are a new series of Yahoo Tech Ticker posts (5 min videos) and at the bottom are some CNBC appearances from yesterday. Warning: these are NSFC (Not Safe For Children) ;) My favorite new revelation is the "stress tests" for the banks will be done by the banks themselves instead of a regulator. Laughable. You know what self regulation and testing has done for us so far! So we are going to tell the banks - look if you fail your test we will dilute your shareholders, create more government oversight, restrict executive pay.... BUT if you tell us you pass your own stress test, nevermind all that! What do you think the banks are going to say? Again - it's all become a sad joke.

Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted

Fed Chairman Bernanke raised eyebrows (and, briefly, the market) last week when said there's a "reasonable prospect" the economy will bottom this year and be in recovery in 2010.

But Berkshire Hathaway's Warren Buffett disagrees: The economy "will be in shambles throughout 2009 and...probably well beyond," the Oracle of Omaha declared this weekend.

In sum, Buffett and much of the rest of humanity are just now coming around to Nouriel Robuini's way of thinking, the economist known as "Dr. Doom" is upping the ante on his longstanding bearish views.

A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.

"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."

Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.

Bank Stress Tests: Design is Fine, But Concept Fundamentally Flawed

One of the hardest things about this crisis is major events are occurring almost daily so there's very little time to stop and think about what happened yesterday, much less last week.

Such appears to be the fate of the government's "stress test" of banks, which began last week but appears to have been lost a bit in the shuffle of the Dow's latest plunge, the government's latest attempt to rescue AIG, Warren Buffett's letter to shareholders and countless other headlines.

In the accompanying video, taped Friday, Nouriel Roubini of NYU's Stern School and RGE Monitor, gives his take on the mechanics of the stress test, the pending outcome from which may very well have prompted the government to decide to up its stake in Citigroup last week.

The good news: Roubini believes the government's "worst-case scenario" is bad enough, even though 10% unemployment and another 20%-drop in home prices is his baseline scenario vs. a "fat-tail" event.

The bad news: Roubini thinks the process of "stress testing" banks in order to find out how much more government capital they need to survive only delays the inevitable full nationalization and pushes out a resolution of crisis and, thus, the economy's malaise.

The ugly news: The stress tests are being conducted by the banks themselves and ripe for abuse, as Bloomberg's David Reilly reports.

Roubini: Fully Nationalizing Citi and Bank of America Would be Better

Friday's announcement the government will convert up to $25 billion of its Citigroup preferred stock into common equity represents Uncle Sam's third direct attempt to rescue the floundering bank.

The conversion would give the government up to 36% control of Citigroup stock and leave existing common shareholders with as little as 26% of the company's common stock. That explains why the stock tumbled 39% to $1.50 Friday despite CEO Vikram Pandit's strange declaration: "In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest."

Pandit's claim is "like saying you're half-pregnant," says Nouriel Roubini and economics professor at NYU's Stern School and chairman of RGE Monitor.

"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'"

Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.

Tune in Monday as we'll have more from Roubini on:

  • Why nationalization is the right course and Bill Gross is wrong.
  • Why Ben Bernanke's "reasonable prospect" for a recovery in 2010 is unreasonable.
  • What the Tresaury's ongoing "stress tests" of big banks means, and doesn't mean.

Roubini: Why Bill Gross is Wrong and I am Right About Nationalizing Banks

In the past year, "nationalization" has gone from the unthinkable to the heavily debated. From the beginning, Nouriel Roubini of NYU's Stern School has played an integral role in the discussion, having warned of its likelihood long before most people have even considered the possibility.

More recently, Roubini has publicly advocated for full nationalization of struggling banks like Citigroup, including here and in The Washington Post. This has exposed him to criticism, notably from Pimco's Bill Gross who recently wrote:

"I think Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel."

Whether or not the U.S. should adopt the so-called Swedish solution and nationalize its banks is much more than an academic debate, in the past 72 hours the government has announced plans to up its stake in Citigroup to as high as 36% and laid out its fourth attempted rescue of AIG.

Gross' critique of Roubini and nationalization focuses on these main points:

  • The Perils of Going Swedish: "Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands," Gross writes. "Regulators are overwhelmed as it is."
  • Lehman, Revisited: "If you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do," Gross warns.
  • Haircut 100: While common shareholders will suffer from further capital injections into banks, "to go further, however, and 'haircut' senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk," Gross writes. "In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions."

In the accompanying video, Roubini addresses (and refutes) each of these points and also tackles the controversial question over whether Gross, a.k.a. "the bond king", is merely talking his book and trying to influence policymakers. (Note: This video was taped Friday, prior to Bloomberg's report about Pimco, the world's largest bond manager, advising the government on Bank of America's toxic debt.)


CNBC: Nationalization Debate is Moot (2 minutes)

CNBC: Zombie Banks v Good Banks (3 Minutes)

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