Roubini Sees ‘Nowhere to Hide’ From Global Slowdown

Stock market declines globally are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to 9 percent, Roubini said.

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.”

Roubini said the U.S. government should nationalize the biggest banks and absorb their bad holdings because losses will exceed assets, threatening to push them into bankruptcy. The banks could be privatized again in two or three years, Roubini said. The professor reiterated his previous prediction that U.S. financial losses may reach $3.6 trillion.

“Nobody’s in favor of long-term ownership of the U.S. banking system by the government, but if you don’t do it this way you end up like Japan where you kept alive for decade zombie banks that were never restructured,” he said. “That’s going to be much worse. It’s better to clean it up, nationalize it and sell it to the private sector.”

‘Lost Decade’

Japanese policy makers hesitated in addressing a banking crisis in the 1990s and then struggled to revive growth as deflation and recessions stranded the nation in what is known as the “Lost Decade.”

In July 2006, Roubini predicted the financial crisis. In February of last year, he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.

The world’s biggest economies are sliding deeper into recession as the fall-out from the global financial crisis hobbles manufacturing output and punctures consumer spending from New York to Beijing. The U.S. economy probably contracted at 5.5 percent pace in the fourth quarter, the fastest in 26 years, a survey of economists showed.

26-Year High

Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 77,000 job cuts yesterday as sales withered while U.S. jobless claims touched a 26-year high of 589,000 in the week ended Jan. 17. President Barack Obama is pushing congress to approve an $825 billion stimulus package to create 3 million to 4 million new jobs.

In China, the urban unemployment rate, which doesn’t include millions of migrant workers, rose for the first time since 2003 in the fourth quarter. The government is targeting a rate of 4.6 percent for the year, which would be the highest since 1980. The slowdown may destabilize the country’s communist government, Albert Edwards, a strategist at Societe Generale in London, said in a Jan. 15 research note.

Cosmo, Accused of Ponzi Scheme, Raised $370 Million, U.S. Says

Nicholas Cosmo, founder of Agape World Inc. in Hauppauge, New York, was charged with defrauding 1,500 investors of more than $370 million, U.S. authorities said.

Cosmo operated a Ponzi scheme at least between October 2003 and December 2008 that raised more than $370 million from more than 1,500 individual investors and deposited that money into Agape World bank accounts, according to a 51-page affidavit by U.S. Postal Inspector Richard Cinnamo detailing the allegations against Cosmo.

Cosmo, arrested after he surrendered yesterday in Hicksville, New York, claimed he was putting investors’ money into bridge loans to businesses, according to the Cinnamo affidavit, which was unsealed today. Just $746,000 of the money was found in the bank accounts last week, Cinnamo said. Less than $10 million was loaned out, the alleged business of Agape World.

Instead, more than $100 million was invested in commodity futures trading accounts, with losses of about $80 million, according to Cinnamo.

Cosmo was expected to be arraigned later today before U.S. Magistrate Judge E. Thomas Boyle in U.S. District Court in Central Islip, New York.

The case is U.S. v. Cosmo, U.S. District Court, Eastern District of New York (Brooklyn).

Japan Bank's Crisis Triple Whammy

The fourth-quarter loss was reported as the Japanese government threw a £12bn lifeline to companies threatened by the global financial crisis.
Nomura bought the Asian, European and Middle East operations of failed Wall Street bank Lehman Brothers last year, aiming to expand its business outside its domestic market.
But it has been forced to pay out large sums to keep key Lehman employees and absorb other costs at a time when the financial crisis has triggered losses on its own business.
Nomura announced last month that it had a £225m exposure to Madoff, the Wall Street trader accused of running a £35bn worldwide fraud.
The bank's bad news comes amid turmoil in Japan, which the government is seeking to turn around with a plan to shield the shrinking economy from more job losses and bankruptcies.
Under the scheme, Japanese state banks will buy shares in non-financial companies threatened by collapsing demand and frozen credit markets.
This will compound efforts by the Bank of Japan to make funds available by buying corporate debt from lenders.
The government share buying would support small- and medium-sized firms, which employ 70% of Japan's workforce and are critical suppliers to the major manufacturers at the heart of Japan's economy.
Japanese bankruptcies jumped 24% in December from a year earlier.