Transcript Update Credit Crisis Jan 09

Update on Credit Crisis:
Daryl Montgomery
January 8, 2009
Copyright 2009, All Rights Reserved
The Biggest Ponzi Scheme in History
• Bernie Madoff admits to $50 billion hedge fund fraud
on December 11, 2008.
• Firm claimed $700 million in capital (not there).
• Authorities originally stated fraud began in 1995, now
thought to be the 1970s.
• People duped include top business and financial
execs, European banks, Hollywood celebrities, and
charities.
• SEC officials investigated Madoff 8 times in 16 years.
They found nothing wrong. Were they bribed?
• Madoff’s firm is a market maker for 350 Nasdaq
stocks. He is the former chairman of Nasdaq.
Another Big Securities Fraud
• Marc Drier, head of 250-member New York
law firm arrested for investor fraud on Dec 8.
• Accused of forgery, selling fake financial
instruments, false financial statements.
• Hedge funds bought the fake notes.
• Drier’s legal associates have allegedly been
involved in even bigger frauds.
• Escrow funds controlled by Drier firm seem to
have been lost in bad hedge fund investments.
This Months Biggest Overseas Fraud
• Satyam Computer, India’s 4th largest software
company admits to major fraud.
• It inflated cash balances by more than $1
billion (not even Enron managed to do this).
• Company had been overstating profits for
several years (used fake cash to hide this).
• Stock lost 77% of its value on Jan 7th.
• Fidelity was major stock holder.
Last Month’s Bailouts
• Auto makers bailed out in U.S. until spring;
Auto sales year over year down 53% for
Chrysler, Ford down 32%, GM down 31%.
• GMAC (chairman was a Madoff investor)
becomes bank, gets Federal money.
• Jaguar (was owned by Ford) requests bail out in
England.
• Infineon spin-off bailed out in Germany.
• Ireland bails out its major banks.
The Latest Economic News
• Retail Holiday Sales – worst in four decades.
• Employment – 3 state’s claim systems collapse
preventing claim filings (weekly reports number
can’t be trusted). Jobless report will be bad.
• PPI, CPI are approaching zero for 2008 because of
falling oil; don’t believe news claiming deflation.
• England lowers rates to 1.5% (lowest since 1694);
Japan 0.10%, Fed institutes ZIPR (Zero interest
rate policy, predicted at last meeting).
• Watch for 4th Q 2008 GDP later this month.
Adjusted Monetary Base (future inflation)Currency Plus Bank Reserves
Total Reserves –
Sum of Deposits that count for Reserve Requirements
Borrowed Reserves –
Historically, Lower Number Easier Credit
Non-Borrowed Reserves –
Total Reserves Minus Discount Window Borrowing