Mythbusting Wall Street. One of the most influential bankers in the world JP Morgan boss, Jamie Dimon, dismissed one of the great recent myths of Wall Street — that is, large investment banks (like Bear Sterns) are “too big to fail’. Under the “too big to fail” principle, the US Federal Reserve would bail out any investment bank which has a large number and quantum of open positions to prevent a series of cascading failures across the financial world.

The absurdity of the “too big to fail” concept is that it allows foolish and greedy investment banks to take untold risks with the confidence that the American taxpayer will effectively stand behind them should all go wrong. If all goes right, executives receive massive cash bonuses, when all goes awry, executives receive handsome termination payments. Bear Sterns, under the guidance of disgraced Chairman and CEO, the cigar-chomping, bridge-playing Jimmy Cayne, took massive risks with minimal capital and huge leverage until being bailed out by the Fed (and Dimon’s JP Morgan) at a price of US$30 billion. Even more absurdly, Bear shareholders (including Cayne) received US$10 per share from JP Morgan.

According to Reuters, Dimon supports an idea floated by banking regulators to allow the government to act as a receiver for a failing investment bank and set up a so-called bridge bank to liquidate it in an orderly manner. A similar model currently exists for U.S. commercial banks. Dimon stated that “the government can take over the institution, wipe out the equity holders and then deal with secured debt in a way that’s appropriate…it’s complicated, but we need that option. They’re not too big to fail.” — Adam Schwab

Billionaire’s Club to lose a member? Yesterday’s 20% fall in Asciano’s share price had an especially detrimental effect on the wealth of major shareholder and CEO, Mark Rowsthorn. Asciano was spun-out of Toll last year and consists primarily of port and rail assets acquired through Toll’s purchase of Patricks and its Pacific National rail business.

In May, the BRW Rich 200 assessed Rowsthorn’s wealth at $1.09 billion (up from $925 million the previous year). To outsiders, the increase seemed surprising given that Rowsthorn’s wealth had largely consisted of Asciano shares (which had fallen by 60% last year) and Toll shares (which were down around 24%), as well as horse-stable interests in Queensland. Rowsthorn is also believed to own an equity position in iron-ore market darling, Fortescue.

However, we suspect BRW’s optimism may be short-lived. Rowsthorn owns around 70 million Asciano shares, and according to the Financial Review’s Rear Window column, has a $50 million debt facility attached to the holding. By our calculations, Rowsthorn’s net position in Asciano is now valued by the market at $136 million. While the Rowsthorns would no doubt have other, less public assets, we suspect their membership of the exclusive Billionaire’s Club may be fleeting. — Adam Schwab

Emissions trading is the new GST.

There’s a paradox at the heart of Kevin Rudd’s efforts to halt climate change. At one level, global warming is the biggest social and economic threat to face humankind since time immemorial. Our need to convert the global economy to one that doesn’t rely on fossil fuels is a remarkably tall order. As Professor Ross Garnaut says, it’s a “diabolical” policy problem. At another level, however, the emissions trading scheme the Rudd Government has promised to introduce in two years’ time isn’t the big deal many people imagine. The media have a greatly exaggerated view of the political risks this will involve for Labor. They have overestimated the unpopularity of the scheme because of all the fuss people have been making lately over the leap in petrol prices, because of the Government’s lily-livered response to that fuss and because, in their efforts to persuade the Government to give them special treatment, various industry lobby groups have been making the scheme sound far more draconian than it is. — Ross Gittins, Sydney Morning Herald

Let’s shoot the speculators. Tired of high gasoline prices and rising food costs? Well, here’s a solution. Let’s shoot the “speculators.” A chorus of politicians, including John McCain, Barack Obama and Sen. Joe Lieberman, blames these financial slimeballs for piling into commodities markets and pushing prices to artificial and unconscionable levels. Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don’t understand what’s happening or don’t want to acknowledge their complicity. Granted, raw-material prices have exploded across the board. Look at the table below. It shows price increases for eight major commodities from 2002 to 2007. Oil rose 177%, corn 70% and copper 360%. But that’s just the point. Did “speculators” really cause all these increases? If so, why did some prices go up more than others? And what about steel? It rose 117% — and continued increasing in 2008 — even though it’s not traded on commodities futures markets. — Robert J. Samuelson, Newsweek

On bankruptcy. The Australian Financial Review reported this morning that the number of bankruptcies hit the highest level in 10 years, with the headline saying “The little blokes bite the dust in bigger numbers’. Higher petrol, mortgage stress and the stockmarket downturn were blamed.

There were 25,981 people bankrupted last financial year, the second highest on record(just 400 short of 1998-99) the paper reported.  The biggest increase was on the consumer side with non business bankruptcies accounting for more than 82% of the total. Include debt agreements, a less formal alternative to bankruptcy (prevalent since 2003) and the total hits 32,909.”

Sound terrible, but its not quite as bad as painted in the AFR, or on Bloomberg which picked up the AFR report. Brokers Goldman Sachs JBWere reported this morning to their clients on the “personal insolvency data”:

Distressed individuals up +7.0% on pcp to 9,201 (600 people).” That’s right, an extra 600 people in personal bankruptcy in the year to June. Over the June quarter the increase was larger at 17%, however this is misleading with significant seasonality in June Quarter data. Distressed individuals now account for 0.43% of the Australian population, which is only marginally up from 0.41% in June 2007. Bankruptcy the largest increase, up 7.0% on pcp, while debt agreements were only up 2.0%. Personal Insolvency agreements were up 124%; however that only reflected 45 people. NSW continued to show the largest increase in distressed individuals, up 13% on pcp, while QLD and SA had the lowest, +1.0% and -4.0% respectively.

While the increase will be bad for banks’ sentiment, in reality the increase is relatively small at only 600 new impairments over 12 months. — Glenn Dyer

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Peter Fray
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